Abitibi Royalties is on a roll

Mining operations at the Canadian Malartic gold project in Quebec. Credit: Osisko MiningMining operations at the Canadian Malartic gold project in Quebec. Credit: Osisko Mining

Shares of Abitibi Royalties (TSXV: RZZ) are up 168% since April 2016 — surpassing the XAU Index, which in Canadian dollars was up by about 90% in 2016.

The company’s shares were trading at a 52-week low in April last year of $3.45 and touched a 52-week high of $10.75 in February 2017, and are currently trading at around $9.24 apiece.

Ian Ball, the company’s president and CEO, believes the junior’s outperformance was due to exploration results at the Odyssey deposit, which is about 1.5 km due east of the current limit of the Canadian Malartic open-pit mine.

Abitibi holds a 3% net smelter return royalty on the Odyssey North Zone, within the Canadian Malartic mine property, which has been jointly owned by Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Yamana Gold (TSX: YRI; NYSE: AUY) since 2014.

“The clear out-performance of our stock was due to Odyssey,” Ball says in an telephone, noting that Agnico Eagle and Yamana started off with a $3 million exploration budget at Odyssey for a 25,000-metre drill program in 2015, and drilled 119,395 metres (155 holes) in 2016.

The Odyssey property is made up of the Odyssey North and Odyssey South zones, which strike east-southeast and dip steeply south. Odyssey North has been traced from a depth of 600 metres to 1,300 metres below surface along a strike length of about 1.5 km, while Odyssey South currently has a strike length of 0.5 km and has been located between about 200 metres and 550 metres below surface.

In mid-February, Agnico and Yamana completed an initial inferred resource on the two Odyssey zones of 20.7 million tonnes grading 2.15 grams gold per tonne for 1.43 million ounces of gold.

The companies also announced that they had found a new zone at the Odyssey deposit called the Internal Zone, which was not included in the resource estimate, but returned promising intersections including 3.10 grams gold over 91.5 metres; 4.24 grams gold over 12.5 metres; and 3.23 grams gold over 10.5 metres.

A gold dor pour at Agnico Eagle Mines and Yamana Gold's Canadian Malartic gold mine in Quebec. Abitibi Royalties holds a 2% net smelter return royalty on the Gouldie deposit and Charlie zone at Canadian Malartic. Credit: Osisko Mining

A gold dor pour at Agnico Eagle Mines and Yamana Gold’s Canadian Malartic gold mine in Quebec. Abitibi Royalties holds a 2% net smelter return royalty on the Gouldie deposit and Charlie zone at Canadian Malartic. Credit: Osisko Mining

“There are certain parts of the Odyssey deposit our royalty does not cover but it covers the majority of it,” Ball says, adding that “they’re continuing to make new discoveries … [and] it seems like Odyssey could become a larger deposit.”

Ball notes that Abitibi’s royalty on Odyssey covers 1.04 million of the 1.43 million ounce inferred resource and is hopeful that the new Internal Zone could add to those numbers.

“We don’t know how this is going to ultimately impact us until they come out with a new resource,” he says. “The Internal zone is right in the middle of the Odyssey deposit. It’s a cross-structure going north-south versus the main deposit, which runs east-west.”

In addition to the 3% NSR on Odyssey North, Abitibi holds NSRs on other near pit zones that were previously outlined by the mine operators, which include the eastern portion of the Gouldie Zone (2% NSR); Charlie Zone (2% NSR), the eastern portion of the Barnat extension/Barnat South Wall Contact (3% NSR); and the Sheehan Zone (3%).

Ball, who joined Abitibi in 2014, says another factor in the company’s success is its business philosophy. The company has no debt, tries to keep it share count low by buying back shares, and rarely raising money.

“One of the things we have told our shareholders is that only under rare conditions would you ever see us issue shares,” he says. “When I joined in 2014 we had no money, so we did do a financing with Rob McEwen, but since that time we haven’t done any financings or issued any new shares for acquisitions. It’s been the exact opposite — we’ve been buying back shares.”

Since 2015, Abitibi has spent roughly $630,000 repurchasing about 120,000 of its own shares at an average of about $5.25 per share, and management’s goal is to get the share count down from the current 11.2 million down to approximately 10 million, Ball says.

“We don’t have a firm date on that. We’ll be opportunistic when we repurchase the shares,” he says, adding “there’s not too many juniors I know who have a $100 million market cap at a $9 share price.”

“For us the whole idea has been to keep the business model very simple,” he adds. “I think that’s how we’ve gone about things differently. There’s going to be no new share issues. We will continue to do buybacks, and we have our cash flow coming from our investment portfolio in addition to royalties, which will add to our cash flow starting from next year, and on top of that you have the exciting growth coming from Odyssey.”

Currently Abitibi owns about 3.5 million shares in Yamana and roughly 335,000 shares in Agnico Eagle and holds about $8 million in cash.

Since setting up its Royalty Search portal — an online platform that junior mining companies and prospectors can use to  pitch their properties to Abitibi — the company has acquired 18 royalties at a cost of around $195,000.

In the last two months alone, Abitibi has purchased four new royalties through the search engine.

Two of them, unveiled in February, are near existing mines in Ontario and Manitoba. The first agreement, in partnership with AuRico Metals (TSX: AMI), gives each company a 0.75% NSR on nine exploration properties throughout the Rainy River district in Ontario, near New Gold’s (TSX: NGD; NYSE: NGD) Rainy River development project, 65 km northwest of Fort Frances.

“The one thing I really like about the Rainy River royalties and that district is that you don’t see a lot of companies active there, mainly because New Gold and Rubicon have most of the land and neither of them are focused on district opportunities,” Ball says. “What attracted us was there was some limited prospecting on those claims, and there were positive signs of higher grades in some of the rock samples taken historically, and so we said, ‘Okay, there’s been little exploration and New Gold’s Rainy River mine is going through teething problems and that’s when you probably want to acquire claims, when no one else is in the area.”

The second NSR Abitibi picked up is an additional 1% royalty on Nordic Minerals Ltd.’s exploration property, about 5 km southwest of Hudbay Minerals Inc.’s (TSX: HBM; NYSE: HBM) 777 mine in Manitoba. The royalty near the 777 mine was one of the first royalties Abitibi ever acquired (a 2% NSR), and the latest acquisition brings its total royalty interest on the property to 3%.

“It appeared, based on historic documents, that Hudbay had drilled close to the property and were hitting mineralization similar to their 777 mine,” Ball says. “It’s hard to know whether the thicknesses is economic, but there was mineralization of a reasonable quality, and we liked what we saw when we looked at the drill assays.”

Ball adds that Nordic Minerals, a private exploration company that is involved in oil and gas as well as minerals, is expected to raise flow-through this year to do some exploration work on the property.

In March, Abitibi acquired a new royalty adjacent to Goldcorp’s (TSX: G; NYSE: GG) Red Lake mine, in partnership with AuRico Metals. Under the agreement, each company has acquired a 1% NSR on two exploration properties about 6 km east and 8 km south, respectively, of the Red Lake mine.

One set of claims attaches to the historic Madsen mine. “When you look at where the claims are and you look at where the historic underground workings from Madsen are located, our royalty is not far from the property boundary,” Ball says. “It seemed to us that there was the possibility, at some point, that Pure Gold, which owns the Madsen mine, would begin to drill ever closer to that property boundary, which seems to be the case. That was one of the biggest producers of gold in Red Lake.”

The other royalty, closer to the Red Lake mine, Ball says, was acquired because there is a geological fold east of the Red Lake mine and the claims are just off the fold. Says Ball: “From a geological perspective, it is pretty prospective.”

At the end of the day, Ball says, Abitibi wants to capitalize on what it knows: North America and precious metals.

“We want to stay 80% in North America and 80% in precious metals,” he says. “We are not going to venture into new areas where we have no expertise or commodities where we have no skill set — that’s probably a quick way to lose money.”

Large shareholders in the company are Golden Valley Mines, which holds a 49.9% stake, and McEwen, who has a 12.3% interest.

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