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Kaiser Research Online’s John Kaiser on Why Midas Gold’s Stibnite Gold Project Could be a Huge Winner

July 10, 2017

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the founder and editor of Kaiser Research Online, Mr. John Kaiser. John, thank you for joining me this afternoon.

John Kaiser: Gerardo, it's a pleasure.

Gerardo Del Real: Well, I had the pleasure of meeting you about a week or so ago, at the Stibnite Gold Project, Midas Gold's gold project. It was great to be able to sit down and get to know you a bit better and it was quite an interesting site visit. I had been there about a year ago and I would love to hear your take. I would love to know why you decided to visit the project, despite the fact that there's tons of technical reports available, a lot of information. And I know it's a company and a project that you've followed for years. What was your take on it? Why did you decide to get out there?

John Kaiser: Well, Midas Gold has been a top gold recommendation in my Spec Value Hunter pick portfolio for several years now and you're right, I based it largely on interviews with the CEO, Stephen Quin. Going through the technical reports, first the PEA, then the 500-page pre-feasibility study. But the knock against the company has always been, this is in Idaho, it's surrounded by a wilderness area, it will never get permitted. What is the point? It's not truly an optionality play on gold. It's just a big waste of time. And I've heard the stuff about, you know, Stephen Quin has this line, "This is really a reclamation project funded by a gold and antimony mine." I really wanted to see what kind of mess had the previous operators in the first case of supplying the United States defense effort during World War II and during the Korean War with antimony and then later on, several gold operators, what had they done to this area and why would there be opposition to cleaning this up and restoring the mine?

Going there was really, really valuable for me to actually see what this place looks like, what it might have been, and what it could become if this mine gets approved.

Gerardo Del Real: Excellent. One of my first takeaways when I visited last year was just the scale of it. And it's hard to articulate the scale of the project, but the other takeaway was just how much work there is to do. I believe there is approximately $100 million dollars in cleanup to do before you can actually get to mining. What were your thoughts on that, John? What opportunities did you see on the reclamation side?

John Kaiser: Well, we landed on the airstrip and drove up to the upper part of the valley and it was just staggering to see that there's about five to ten meters of tailings from the old antimony mines that were just paved. They paved the floor of the valley right to the very end. And then the gold miners came in later and they created big heap leaches and when the ore was spent, they hauled it all up and spread it on top of the tailings. I mean, this is the old-fashioned disposal method. Now, the spent ore is benign because all the sulfides and the gold and the antimony, all that has been leached out of it. But the tailings from the earlier operation, they sit underneath this layer of spent rock and when the water seeps through it, it continues to leach, it oozes out the side, right into the Salmon Creek east fork and the arsenic levels and the antimony levels are way too high for what is allowable for any sort of salmon migration system.

Also, the way they had dug this pit and altered the whole landscape, they steepened the Salmon Creek so that in the fall, when the salmon are supposed to go upstream, they can't. There isn't enough water. It's too steep. And so the whole plan that Midas Gold has come up with is to basically dig up all the spent rock, use it to build basically the dam and that for a proper tailing storage facility with proper liner and all that and then reprocess the old tailings because they had inefficient metallurgy back in those days, and then even recover some of the gold that's still in there, which could end up even repaying part of the cost of reclaiming this.

And then, they're obviously going to dig a very big pit in the Yellow Pine area where the existing pit is, so they cannot restore the Salmon Creek until that mine is finished and then flooded, but in the meantime, they're going to build a tunnel for the salmon to bypass this whole area, so even before mining begins, they'll have enabled salmon to go back upstream, into this area, the valley to the north where the lay of the land is just right for the salmon to be able to spawn and also Blowout Creek, which is another valley that goes off to the east. There used to be a hydroelectric dam up there which blew a long time ago, but it's still there. Every spring, a lot of water comes through there and sediment comes through and it wrecks the salmon. So they even have to clean up that. It is a massive exercise. But when this is done, this will be a really, really good thing.

Gerardo Del Real: Well, you mentioned that critics of the project always point to the permitting and they say it will never be permitted. Now just to be clear, are there other funding solutions for the reclamation? Are there other options? Is there a government option that is feasible and reasonable and that a reasonable person could expect for them to come in and actually do this within a decent amount of time? Or is this one of those situations where if Midas doesn't do it, it just won't get cleaned up?

John Kaiser: Well, it doesn't quite qualify for Superfund status, in which case the government ends up paying to clean it up. And it's in between where government cannot justify spending taxpayer money to restore this area and in terms of economic gains, well, yes, the salmon will be able to go further upstream and recreational users will be able to get into this area again, but it doesn't have an economic return to restore this using taxpayer funding. So, it really is something that's going to stay that way forever. And you know, I mentioned the wilderness area that surrounds it almost completely. Originally, they were going to include the property itself. But then they remembered, ah. This was critical supply of antimony during World War II when the Japanese had invaded China and most of the world's antimony comes from China, and so, of course once China was occupied, there was no more antimony being exported to the United States. Some smart people in the government said, we can't turn this only significant supply of antimony for the United States into a wilderness park area, so let's carve out this area.

This messed up area, which still has significant antimony potential, will just sit there, this hole in this wilderness park that can't really function as a wilderness, and of course, if it's not developed, will never be able to play a critical role if we ever get into a crunch where Chinese antimony is no longer being supplied.

Gerardo Del Real: Now you mentioned the antimony and I've read your work for years on critical metals. You are probably the leading writer that I follow as far as the critical metal space, going back to the rare earth crisis back in the days and, by the way, a crisis that now seems to be bubbling up possibly. But back to the antimony, why is that important? The vulnerability to Chinese supply, how do you see that playing out? Where do you see the potential for conflict there and the potential for this to be a possible solution in the event of an emergency or a crisis?

John Kaiser: Well, you can look at the antimony problem from two perspectives. One, there is the geopolitical risk where it's possible that, say, this North Korean situation spins out of control, China becomes very hostile to the United States, and simply says, we're not exporting any antimony to you because you are now enemies. You've created a mess in our backyard. You're bothering us about our efforts to secure our backyard by developing the South China Sea Islands. So, that's the one scenario.

The other scenario, which is not talked about so much, is that China knows it has an environmental problem. And Donald Trump, when he pulled out of the Paris Climate Change Accord, he basically gave Xi Jinping a gift. He gave China ownership of taking the anti-pollution stance, of becoming the leader in mitigating carbon dioxide emissions. And China, of course, is the biggest emitter. It's also the biggest polluter. So many metals come out of China because China has been willing to be the world's toilet to subsidize cheap metals for everybody else. But that is now causing a huge problem in China, because, as the people go from being subsistence-oriented to suddenly becoming a middle class and wanting to breathe clean air and eat food that doesn't have heavy metals in it because all the crops are irrigated with river water, into which, of course, all the factories, all the smelters, all the mines, they dump all their emissions. Kind of the way the United States used to do in the 30s and 40s when they operated the Stibnite Mine in Idaho.

They are now implementing significant environmental changes. Part of this anti-corruption drive that's underway is an attempt by Beijing to restore control all the way down the chain to the local level, where of course, the local factory operators have done deals with the local officials to continue to pollute and not actually enforce the rules. All this is changing. And in the case of antimony, it's a whole bunch of mines in one particular area supporting one facility. There's a number of smaller facilities. Smaller ones are being shut down. Apparently, last year production declined 50% as they clean up these operations. So, there's another scenario where simply depletion of Chinese antimony mines and the cleaning up of the operations will significantly reduce the output from China, which could create a problem. Because if China, in the name of cleaning up its environment, suddenly has shortages of materials, of antimony for its own industry and, of course, antimony is a flame retardant, so it goes into clothing, but it also is used in ammunition and a number of obscure emerging uses. It could simply say, we are not going to export antimony because we need to support our domestic industries.

For reasons that have nothing to do with geopolitical conflict, all the sudden the United States could say, where are we going to get our 20,000 tonnes a year out of the 200,000 that the world consumes, that we need. Now, the Stibnite Mine is not going to be the solution to this problem in its entirety, because it's only going to produce about 8,000 tonnes. But one of the things that really came out during the trip was they've realized that these veins, these higher grade veins which are a later stage in the evolution of the deposit, they radiate out beyond the gold mineralization and that they could end up developing tunnels in addition to the open pit mines that they're contemplating that could chase these high-grade antimony veins in a pinch.

So, developing this project for the gold production and the base load 8,000 tonnes a year antimony, it also puts in place infrastructure for emergency mining of antimony if we end up in a crisis where the United States does not have the supplies from the rest of the world to feed its antimony needs.

Gerardo Del Real: Interesting. Interesting. Now you mentioned geopolitics and I believe, I'm a firm believer, that the next few years, the gold price will be largely in favor, it's headed higher basically. Gold will become largely in favor because of geopolitical consequences, among other things, the bond markets overseas and other factors. But how do you see geopolitics playing into the importance of the Stibnite project and China's emergence and the possible decline of US importance and influence throughout the world?

John Kaiser: Well, one of the consequences of Donald Trump's America First policy is that there's a push away from globalized trade, more of an inwards, a retreat into the country itself, making the United States irrelevant on a global stage, except in terms of dealing with any potential threats to itself. And the threats to the United States directly are not that significant because we are surrounded by ocean. Kim Jong-un is working very hard to try to get a missile to go all the way across the ocean, but even if he lobs one, what exactly does that accomplish? That would result in nuclear annihilation of North Korea. So, the United States has the ability to withdraw into itself. But the longer-term consequence of this is that the US dollar will not remain the world's reserve currency. Now that trend is already in place because China is growing. China has embraced Western capitalist methods. It's the second largest economy. In about 15 years, the United States will not be the world's largest economy anymore. It's simple arithmetic. 350 million people versus, say, a billion and a half in China. Unless there's some sort of train wreck in China, it's going to be a much different power balance down the road.

Anybody looking at this long term and who has accumulated wealth will have to think, I should own some gold. The other thing about gold is, in 1980, you take $400 gold and inflation-adjust it to the present using the US CPI, you get a number of about $1,200. Well, that is where gold is right now and in those intervening 30, 35 years, there's been over 3 billion ounces mined courtesy of that higher $400 gold price. And what a lot of people are confused about is, not too long ago gold was down there at $260 and it's been as high as $1900. Now it's hovering $1,200 to $1,300, and people wonder, wow, you should all be happy. Gold is up four times what it was less than 10 years ago. But, when you think that it's the same as $400 35 years ago inflation-adjusted and that low-hanging fruit has all been harvested, if the world wants more than the 6.5 billion ounces that exist in above ground form, it's going to have to mine more.

But, at the current price, not an awful lot of deposits are worth mining. Even the Stibnite project, they needed $1,350 gold as a base case price in the pre-feasibility study in order to be close to justifying a development decision. It's questionable that unless something changes in the work they're doing now, at $1,200 gold, even if they have a permit, this project might not go forward. However, a simple $300 move to $1,500, $1,600, has a profound impact on the economics of the Stibnite mine.

Gerardo Del Real: Well, you touched on the economics and let's talk about that. We talked during the site visit about the antimony which wasn't included in the latest study, and some gold, frankly, that also wasn't included. Gold that Stephen Quin and the team at Midas are very confident about its location and so, reworking that back into a study, which I believe is in progress now, should have a pretty positive effect on the net present value. Can we touch on that a bit, because I know that you've been looking at that as possible upside. And then I'd love to segue into the exploration, which of course, as we've seen when we were there, is absolutely world-class. But can we talk about the potential upside in economics just working the antimony back in and recovering some of those lost gold ounces?

John Kaiser: There's two dimensions to this. Right now, I'm treating the project as an optionality play and not one that requires $2,000, $3,000 gold such as NOVAGOLD's Donlin Creek project, where you really need a massive real move in the price of gold. And by the way, I emphasize a real move. This is one where it isn't caused by inflation, hyper-inflation or the US dollar collapsing in a so-called fiat currency debasement. Those things don't help projects that are marginal right now, because costs are going to go up along with the price of gold. What you were referring to earlier about the geopolitical demand, that could result in $1,500 to $2,000 gold just in the next few years as the world becomes more nervous about the United States' relationship to the rest of the world, its abdication of its responsibility as the global superpower.

But those types of gains for a project like this are huge. Now stock's trading around 70 cents right now. At the base case price that they used $1,350, the stock should be about $2 to $3.50. But if you jump it up to $1,600, the range goes up to $3 to $5 as a target. And if you get up there to $2,000, which is not inconceivable, then you're talking about a $5 to $8 price. Now, that's with the assumptions in the pre-feasibility study.

Gerardo Del Real: Right.

John Kaiser: The other thing that is potentially significant is that they will recover the antimony and the gold that they lost in using the stricter standards of the pre-feasibility study. The consultant decided that historic holes were not allowable, so under the PEA terms, this project would deserve to go into production right now. But because of the rules 43-101 rules, they said we can't do this. So they lost 50 million pounds of antimony and they lost a bunch of gold in the early years. So, this is a 12-year mine which is going to produce about 4 million ounces of gold. The work they're doing now, the infill drilling, they are having success recovering those lost ounces and lost pounds. And one of the things that's not well understood by the public is that by the end of this year, when they publish an updated resource, we will get back those lost ounces and lost antimony pounds and they happen to be in locations where they will be mined in the early years. They will be higher grade material so that you get that blast of cash flow up front and that affects the net present value importantly.

Now, the project has a capex of $1 billion. The NPV at 5% at the base case price of $1,350 was about $873 million using 5% and $500 million using 10%. The mining industry probably uses 8 to 10% in its calculations. Midas Gold is not going to build this project by itself. Its challenge now is to get the feasibility study done, get the permit, and then one of the big producers, Newmont, Barrick, ones with experience with autoclaves and roasting refractory. One of them will take them out and develop this project.

Gerardo Del Real: Well, we talked a bit about the exploration and I joked with Stephen Quin, the CEO of Midas Gold, that he literally has more gold than he knows what to do with and I think a great example of that is the proposed mill site has been relocated several times because they happened to go and drill a hole to see if there's mineralization and every time they've done that, they return some pretty incredible intercepts. Do you think that 12-year mine plan that's proposed in the latest study can be extended? Do you see the potential for that just from your recent visit and seeing the different zones and the different structures, do you see the potential for a longer mine life?

John Kaiser: You know, this is what I love about this project. First, we have the leverage to a modest increase in the price of gold, increasing the value substantially. Then, two, we have this mechanical process of bringing lost ounces back into the mining plan with this 12-year plan that we have, which could make the stock be worth $1.50 to $3.00 at the metal price that we have today, which is a sad $1,220 or something like that. And the third is the enormous potential. This is not just a 12-year mine, but you have to start somewhere. They're going to operate an open pit at 20,000 tonnes per day. And they're obviously starting with the richest one, the Yellow Pine, first, but there is enormous exploration potential for additional ounces, especially in the west end zone which comes in in the last three, four years, where they haven't done the work needed to increase the grade of this material.

One of the interesting things about this system is that if you don't understand the controls of the mineralization and don't drill it from the correct angle, you may end up with understated resources. And they're starting, as they do more and more work, they're starting to understand the angles of the different vein sets within this system and realizing, you know, if we start drilling it from this direction, we may get a bump in the grade. Now it's not going to be an enormous bump, like 100, 200%, anything crazy like that, but you can get a 15, 20% bump, you can start increasing the ounces. The thing that Stephen talked about that impressed me is these other areas, well removed from the main zones, which could be developed as new pits where they're now poking holes, basically geological scout holes where they're just saying, let's show what's here. Where is there mineralization? Where is there not? We don't want to develop more ounces. More ounces don't help this project if it doesn't have a permit and isn't going into production.

But, for a future owner, showing that once you've depleted those 4 million ounces in those first 12 years from the easy pit, there is potentially another 4, 6 million ounces, maybe even more to be found and developed, so that this thing could operate for many, many years beyond that 12-year mine life. It's difficult to quantify that, but it's important when you think, who wants to own this? Because again, once you're finished with the mine, you still have to reclaim it and there's always something that goes wrong, so you have a reclamation liability. But if you can keep this thing going forever and ever and ever, then for a big company, that is an asset worth pursuing. And that's also a reason why Franco-Nevada bought a royalty in this company several years ago when they were dealing with the bear market consequences and making sure that they're going to be funded for going forward.

Gerardo Del Real: Well, I think their confidence in the investment as well, if I recall correctly, they invested at a point where the project was at a PEA stage and if anybody knows about the due diligence that goes into a royalty investment by Franco, they know it's pretty rigorous. So, I think that speaks volumes to the exploration upside and just the potential to get this permitted here within the next couple of years. John, I've taken up a lot of your time. Is there anything else that you'd like to add?

John Kaiser: No. I would just say that this is a project that needs to be developed for multiple reasons. It restores this valley to being a salmon spawning area. It gets rid of the strategic vulnerability the United States has for antimony supply, and of course, it's an opportunity to make money, to have an entrepreneurial operation fund reclamation work. These are three important points and one needs to emphasize that. And, of course, the tremendous upside that I see, as an investment, with any one of those fronts working, this is a reason to own this stock and if you see all of them coming together, then this is going to be a huge winner.

Gerardo Del Real: And I'll leave one last point. I was listening to a recent speech that you gave at a conference and you mentioned that you thought that we were in a discovery cycle here or we will be within the next couple of years. And I think the upside, exploration-wise, is just absolutely phenomenal. So, when you have a world-class resource with world-class upside in terms of exploration potential, I think it's definitely something to keep on the radar.

John, thank you so much for your time. I hope to have you back on soon. I have about 100 other questions about 100 other things but hopefully we'll leave that for another day and hopefully join us soon.

John Kaiser: All right. Thank you.

Gerardo Del Real: Thank you, John.

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