The race for cold cash

Arctic mining is suddenly hot. Aggressive investors should stake their claims now.



From the May 2007 issue of the magazine.


A 50-year quest to open the Canadian Arctic to large-scale mining is finally showing signs of success. For investors, there’s no time like now to stake your claim.

By doing so, you’ll be following in the footsteps of global mining companies such as Zinifex of Australia and Agnico-Eagle of Canada. In February and March, the two companies made huge bets on the future of mining in the high north. They plunked down $1.06 billion in cash and stock to acquire Wolfden Resources of Thunder Bay, Ont., and Cumberland Resources of Vancouver, respectively. Both of the acquired firms have promising projects in Nunavut.

If you missed out on these takeovers, don’t worry. The Arctic development game is still in its early innings, both in Canada and around the world. Russia sees the mineral potential of its Arctic region approaching $2 trillion and the most recent U.S. Geological Survey estimates that Arctic regions around the globe may contain 25% of the world’s undiscovered oil and gas. Until now the harsh weather and remote locations of these deposits discouraged firms from developing them. But today the world needs all of these resources — and more — to help meet the nearly insatiable demand from the emerging Asian consumer class.

Asian demand has fueled today’s high mineral prices and those prices, in turn, have encouraged an outburst of Arctic exploration. Yellowknife is already a major staging area for projects further north thanks to large-scale diamond mining at Ekati and Diavik in the Northwest Territories. Meanwhile, global warming is expanding the shipping season and encouraging the development of points even further north. The Nunavut government is spearheading an initiative to construct a new dock and more than 200 km of all-weather road at Bathurst Inlet. The project will slash the costs of trucking and flying in supplies, and bring down the bill for developing the silver, zinc, and copper finds in that area.

If you’re an aggressive, long-term investor, you may wish to focus on buying stocks in companies that are likely targets for future consolidation. These typically will be junior and midtier exploration companies that have a large base of proven resources, but need the skills and the wallet of a larger player to bring the resource into production.

Fitting that bill perfectly is Sabina Silver (TSX Venture: SBB). Its Hackett River property in Nunavut, which it acquired from Teck Cominco for a few million dollars back in 2004, is located only 75 km southwest of the proposed Bathurst Inlet port and could turn into a world-class silver and zinc mine if things develop as the company hopes. Sabina has embarked on an aggressive drilling program and figures it is now sitting on a resource worth billions of dollars at current metal prices. But Sabina was still trading recently around $3.33 a share, less than 25% of the in-ground resource value of similar companies operating in Canada and South America. Silver Wheaton Corp. of Vancouver recently acquired a 14% interest in Sabina and will work with Sabina to help advance the Hackett River project.

Another way to play exploration in the far north is to invest in companies supplying the “picks and shovels” for the miners doing the exploration and development work. A good example is Horizon North Logistics of Calgary (TSX Venture: HNL). Horizon North provides all the support systems a mining company needs, from marine services, catering and camp services to docking and staging facilities. It’s particularly well positioned in the Mackenzie Valley region of the Northwest Territories, which is rich with natural gas. Horizon North is generating about $33 million of earnings before interest, taxes and depreciation from its core “southern” business; it has earnings of about 14 cents a share. As exploration continues to move north, I expect Horizon to benefit from higher pricing and volumes for its northern services. At its recent share price of $3.30, you’re paying very little for Horizon’s Arctic assets. In effect, you have a free option on the potential development of the Mackenzie Valley pipeline. And given the rapid pace of development in the high Arctic, that could become a very nice option to have.

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