SEARCHLIGHT MINERALS CORP. (OTC: SRCH-$1.91)
(103mm Primary, 127mm FD Shares, 30% Mgmt Owned, 47mm, $90mm Float)
July 28, 2008
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|Now (Real Estate)
|Potential Cash Flow/Share at 2,000 TPD
RECOMMENDATION AND SUMMARY
We recommend SRCH as a timely, high-potential gold play since:
1. Its Clarkdale, AZ Slag Recovery Project is a unique, high-grade, uniform 20mm ton slag pile with 0.5 oz/ton gold, 80% or 8mm oz-E. recoverable; at a recent $380/oz. paid for NV reserves potentially worth $24-30/share, perhaps realizable in 4-6 months;
2. Following three years from lab to bench-scale to 2 ton/hour mini plant, this Feb. SRCH raised $22mm for a 100- 250 ton per day (TPD) demo plant, with startup within 1-2 months, full output in 4Q, then modular scaleup to 2,000 TPD, or more likely a sellout;
3. A second, follow-on Searchlight, NV placer gold project, requiring off-the-shelf though high capital cost autoclaves, at an earlier stage, will comprise SRCH's "second life" after Clarkdale;
4. While its approaches are new, management is a "Who's Who of Mining," with an in-depth technical army of 60+ consultants and employees of unprecedented caliber for any mining company, let alone a small one. This together with its methodical, focused management approach leads us to have full confidence it will succeed.
CLARKDALE, AZ SLAG RECOVERY PROJECT
Clarkdale combines an amazingly rich old waste slag pile with a new configuration of essentially conventional milling processes, to yield a potential 8mm oz. gold from 20mm tons of waste slag. The mill is about to start up--the grand payoff of methodical development--potentially proving the 8mm oz. economically recoverable.
The Ore: The slag pile is a unique resource in five respects:
First, its source, the famed historical AZ Jerome mine, was one of the richest copper deposits in North America, a huge sulfide deposit in an entire mountain, with up to 30% copper (Cu) when it began.
Second, Jerome ore's smelter, once one of the world's largest, never got hot enough to fully remove the Cu and other metals. A lot of the slag is bubbly, like volcanic rock, indicating undigested ore, vs. the smooth glass-like slag of most other smelter slags.
As a result, the slag has an unusually rich 0.5 oz./ton gold (Au)--an extremely high grade for new mines today, which routinely have grades down to 0.01 oz./ton. Of some 10-12 other slag piles tested, none had these grades, making this a very unique resource.
Third, whereas most smelters access ore from multiple mines, this one accessed only Jerome mine ore, giving a uniform yield of metals. Forth, the ore was concentrated at the smelter site to a uniform grade, so that assaying the slag pile gave such uniform results that just 18 holes proved the slag pile's reserves. Finally, Jerome tailings are elsewhere, leaving no EPA liabilities.
For assaying, the ferrosilicate (iron and glass) substrate was given a complete digestion in harsh chemicals, then AA (atomic absorption) assayed, in 2 1/2 foot intervals (10-20' at depth).
To confirm these AA assays, Mountain States took 5 750-pound samples, milled them, fire assayed and AA assayed them. The chain-of-custody verified 0.5 oz./ton gives 10mm oz. in place, of which it appears that 80% or 0.4 oz./ton or 8mm oz. recoverable, 1mm oz.-equivalent of Cu and Zn, and possibly 1mm oz. eq. cement additive.
The Process: There is no question the metals are there; the question is, can they be economically recovered? A methodical application of basic processes and equipment suggest it can.
The key process is crushing and grinding, as the slag is very abrasive. After the slag is scooped off the pile, a low- tech jaw crusher reduces it to 1/4". An impact mill next reduces it to sand. A vibratory mill, adding water, reduces it still further to a watery paste. This three-step grinding is key to its working.
It is then put in leach tanks, with a very benign halide leach, or chloride and bromide--swimming pool chemicals. Permitting of them is extremely simple, vs., say, cyanide leach, and permits are already in hand. Conveniently today, the "nasties" went up the smelter stack back in the early days of operations pre-qualifications.
The leach puts all four metals in solution at once: gold (Au), silver (Ag), copper (Cu), and zinc (Zn). The iron, fortunately does not go into the solution, as it would interfere with the ion exchange recovery of the metals. Controlling thePh is the trick.
The solution is filtered, separating the liquids and solids. After being washed, the iron and glass solids by-product is relatively inert and does not have to be encased for protection, and in fact may be sold as high-value cement additive. If so,it could equal the Cu and Zn in value; interested cement plants are nearby.
The liquids are put through an ion exchange extraction, which uses resins, vs. solvent extraction, which uses more combustible chemicals. The resins for Cu and Zn are recycled after their metals are removed. Au and Ag, in resins, are simply loaded onto a Brinks truck at the door. The refiners charge 3%-E. to remove the metals.
The first series of resins pick up the gold and silver, the second resins the Cu, and the third the Zn. The Cu and Zn ar then put back in high concentrate solutions for electrowinning.
The Cu uses an Australian-developed alternative to the standard open bath electrowinning in which copper sheets are hung in an open solution bath for electroplating, then shipped to a refiner. Called EMEW, it uses 4" tubes for electroplating, which are shipped to refiners. A closed system, it is simpler, less complex than hanging starter sheets, environmentally friendlier with less fumes than an open system, and 90% cheaper in power, most of the cost. The copper tubes are preferred by refiners, being easier to melt. Cu and Zn costs $0.10 and $0.50/lb; the solids just shipping.
The Zn is conventionally electrowinned. Electrowinning, a simple, low-cost, low-tech, on-site refining, vs. mining- milling, is an established process, developed in 1963 by Ranchers Exploration, to process a 1-2 orebody; this analyst recommended Ranchers for that innovative process (U308) back then.
The Au and Ag have 80% of the profits but just 20% of the capital, as their loaded resins are just carried out the door to Brinks. But while the onsite refining of the Cu and Zn takes capital, they are salable, leaving no disposal problem to make the operation extremely licensable, and give profits equal to $95/oz. of gold produced. If credited against gold, gold costs drop from $140/oz. to $45/oz. Sale of the rest as cement additive may add $95/oz. more to profit.
Upon modular scaleup to 2,000 TPD, the 8mm oz. of gold may be recoverable at a gold cost of $140/oz., vs. typical industry costs of $300-500/oz. or more. Barrick (NYSE: ABX-$48) recently paid $1.6B for 4.2mm of gold at Cortez, NV,or $380/oz. And Cortez had est. costs of $290/oz., vs. under half-E. that for SRCH--15%E with Cu-Zn--as its ore is already mined and must just be processed.
The Barrick transaction would value SRCH's 8mm oz. at $3.04B, or on 127mm FD shares, $24/share ($30/share primary). If SRCH can demonstrate costs just half that of the ABX deal, it could get a higher price. And if the process is proven out in the next 4-6 months, this price might be realize in this near-term time frame.
DEVELOPING THE PROCESS
Does SRCH have a commercial process? Will the grinders wear out in six months due to the abrasive slag? Can the chemicals be permitted? (Yes.) Is the leaching effective? What are the costs?
Methodical 3-year+ approach: To answer these questions, under the direction of Dr. Richard Hewlett in Phoenix starting in '05, slag recovery methods were developed and proven first in lab scale, then bench scale, then a 2 ton per hour (TPH) mini-plant. That was the biggest leap, a 7-fold scaleup, giving confidence for the demo.
At this point, an outside prefeasibility engineering study would be made if this were a conventional operation. But since the nonconventional operation would still leave doubts, SRCH elected to do its own in-house prefeasibility study under direction of Dr. Hewlett; and in 2/08 raised $22mm to build its first demo, on its big 800 acres, all industrially/ residentially zoned.
The first demo unit will be modularly scalable to 2-4,000 TPD. At this point there should be no scaleup risk to full scale. SRCH would bring in independent engineers to certify first 2,000 TPD.
The 100-250 TPD likely starting up Aug. will answer:
1. Grinding Circuit: Can the slag be ground without destroying the equipment? The three sequential stages of mining; ceramic linings; and ceramic balls in the mill have been proven effective in the benchscale unit. And the larger tonnage of the demo unit should do still more crushing, SRCH's milling consultants say.
2. Permitting: Critically, and uniquely for the size and stage of operation, all the key, critical permits (e.g. air, water) are in hand for the 250 TPD demo plant, plus conditionally for up to 2,000 TPD, and likely amendable to go to economically optimum of 4,000 TPD. Permits are in hand for all the chemicals. Clarkdale occupancy permits, routine, are being obtained now for the demo plant.
3. Leaching: The 25-30% iron is awful for the leach; it fouls the resins and impedes the gold recovery. The method used to leach pulls out the metals and leaves the iron in--an elegant solution.
Timing of startup: A decision was made to change from one to two buildings, so the plant is starting up in two stages: the Au and Ag via ion exchange in the main module building in Aug.-E, and Cu and Zn via electrowinning in Oct.- Nov.-E. in a second building.
The main building has the grinders, leaching, filter, and ion exchange circuit, starting up in the next 3 weeks. The lion's share of startup procedures, tweaking of grinding, etc. will likely be worked out by the time the second building starts up Oct.-Nov.-E.
The second building has the electrowinning circuits for the Cu and Zn. No large runs will occur until it starts up in Oct.-Nov., since there is too much solution. The electrowinning both takes out the Cu and Zn and regenerates the acid for recirculating back into the resin circuit for stripping resins of more Cu and Zn.
Whether the demo unit runs at 100 or 250 TPD is a function of the effectiveness of grinding, retention time in the grinder, and the ratio of solids and solutions in the grinder. During startup these will be tweaked. Indeed, the second-step impact grinder may be replaced by a vertical gravity-fed roll grinder now being tested, which may give more uniform and quality particle size, making more effective the third grinder, and then possibly the leach too.
These questions may collectively verify an estimated cost of $140/oz., and pave the way for scaleup to 2-4,000 TPD, or sellout.
Will it work? Bottom line: if the slag can be ground, it can be leached. Since this is purely a mechanical issue, not a chemical one, and workable solutions have already been found, with each step tested, verified, and optimized using off-the-shelf equipment, using dozens of consultants including those of the manufacturers, the process is now proven, and the question is really only one of cost. Since our estimated cost of $140/oz. is half industry costs, the question likely reduces further to just how economic it is.
As it seems likely to work, the other remaining question is startup problems and time--a big one for investors. SRCH's team of experts suggests the estimated full startup by yearend is likely.
End Game: While the project would likely then be of interest to any of the majors, such as ABX which is now buying an oil and gas company for lack of gold opportunities, SRCH will then most likely pursue a two-track approach on startup--as soon as yearend:
1. Commission an independent study by a major engineering firm, such as SRK, The Washington Group, etc. Use this study to elicit potential offers from the majors, angling for a tax-advantaged event (e.g. equity vs. cash offer);
2. Put its head down and prepare a debt-financed 2,000+ TPD scaleup. A 13-acre parcel is now being graded, giving the required room; and major lending institutions on three continents have been contacted. If this route were pursued, a small equity might occur, if the price justified it. This might be followed by 4,000 TPD, for a 15-16 year mine life.
The first is more likely; if all goes well, by yearend.
Were the second to occur, incremental capex to 2,000 TPD might be $50-70mm. At 350 days/year, .04 oz. per ton, this would give 280,000 oz./year; at $900-140 or $760/oz. margins giving $213mm ($1.67/sh). Cu/Zn at $0.10 and $.50/lb cost, add $27mm profits ($0.21/share) for $1.89/F.D. share total--or $2.10/share if the solids are sold.
In sum, the Clarkdale project is unique in that:
-the "ore" is already mined, on the surface and stockpiled;
-all key permits are in hand;
-no blasting, no tailings, no complex pre-mining required;
-extremely unusual 0.5 oz./ton grade, 0.4 oz./ton recoverable;
-operating costs estimated at half industry averages;
-Low capital costs, totalling for 2,000 TPD $50-75mm;
-400% IRR at $240mm/$60mm, making debt financing feasible.
SEARCHLIGHT, NV GOLD PROJECT
A second project is in the works, to follow up Clarkdale; an unconsolidated basin-fill placer deposit at Searchlight, southern NV. The key again is, is there an extraction process?
Here, the problem is leaching, not grinding--the opposite of Clarkdale. SRCH can show good grades, 0.5 oz./ton assayed over wide areas of the surface of the deposit; over 0.37 oz./ton consistently into solution; but to date only 0.1 oz./ ton out of solution as recoverable, about economic breakeven.
Bulk samples have and are being sent to Arrakis Inc of Denver, a well-known mining consulting firm. Work in '07 showed consistent results with an autoclave, a high capital-cost item (a large-scale pressure cooker/leacher), but now an off-the-shelf item developed by ABX and the other Carlin players for the Carlin, NV gold trend. Additional tests are now underway, aiming at boosting extraction.
Leaching: Samples of ore may assay at 0.5 oz./ton using a miniature autoclave and instruments. An electron microscope shows the gold in 10-30 micron-size particles, made up of smaller particles with a coating which hold them together, but inhibits leaching. The pressure of autoclaving forces the leach into tiny micropores, breaks these particles into their smaller parts and leaches their protective coating, putting 0.37 oz./ton in solution.
Extraction: Extraction from the solution has been challenging. Arrakis is now working on a number of standard methods; e.g., electrowinning, resins, activated carbon, or precipitation.
The famed Carlin, NV trend is likewise all autoclaved, with coatings too, of pyrite and dissolved clay. SRCH is perhaps handicapping itself by not using cyanide leach, but rather a benign leach needing no special permitting, costly tailings ponds, etc.
Will it work? The current series of tests is aimed at solving the leach extraction step. Arrakis feels the metallurgy is now far enough resolved to begin drilling; we est. 70% of the way solved.
Can it be financed? Drilling to perhaps 200 feet should not be too costly. After Clarkdale success, investors' credibility and financing of Searchlight should be possible, and far easier.
Ore Resource: Affirming Arrakis's above optimism, SRCH hasn't wanted to drill until it has an extraction process in hand. After resolving a BLM issue, SRCH now plans drilling in 4Q08-1Q09.
Unlike promotional companies that will drill and then research recovery methods, SRCH will not even talk about possible reserves. However, it has 3,200 acres in the unconsolidated placer deposit; gold has been seen across the surface in electron microscope; and the placer is fed from below, so it is mineralized to depth.
3,200 acres has about 260mm tons to 200 ft. depth; at current 0.1 oz./ton, potentially 26mm oz., but not yet economically; at double that, recoverable, 55mm oz.--perhaps in some higher--and some lower-grade places. Generally, 10mm oz. is a viable project, so these guesstimates seem in the ballpark. We value it at $25/oz.
Hopefully, by the time Clarkdale is up up and proven, a Searchlight recovery method will also be proved, and Searchlight will become a solid "two stage" for this company.
MANAGEMENT: A GOLD R&D MACHINE
SRCH has grown from a small family company to 15-20 people plus an array of consulting experts. It is extremely focused, with most of its effort now on Clarkdale, with Searchlight to follow.
SRCH is headed by Ian McNeil, CEO, President, and a Director, an outstanding organizing executive. He waspreviously President and a director of private Nanominerals ("AGN"), a major SRCH stockholder with 16mm SRCH shares, defining much of AGN's corporate strategy, raising money, and running day to day operations.
Dr. Charles Ager, consultant to SRCH, is Chairman and head of Nanominerals, providing services to SRCH. Dr. Ager has credits similar to Dr. Hewlett (below), including both academics and 38 years' experience in all phases of the industry from discovery to production to finance. Credits include patents for gravity surveys in mountains (2 discoveries); discovery, permitting, constructing, financing and operating a 40,000 TPD gold mine in Mother Lode, CA (with 2 discoveries), and developing a unique satellite/electron microscope technology identifying a new class of gold deposits in the SW US (2 discoveries). Drs. Ager and Hewlett are both well-known industry names with many mine startups.
Dr. Richard Hewlett is technical director of the Clarkdale management team, which includes: a head of the small array of contractors now finishing the demo plant; a head of permitting; and the top world electrowinning expert. Dr. Hewlett is a well seasoned and forward thinking Geological/Metallurgical Engineer, combining an impressive academic background with over 40 years of practical industry experience in ore reserve studies, mine planning, mine design, production scheduling, and mine management, including many mine startups. Credits include 26 papers, 4 commercial mines for himself and involvement in over 30 more for others, and 4 patents issued and one pending for environmentally friendly leach methods. "Doc" is a "calling card," attracting many experts to Clarkdale.
Ager/Nanomaterials ("AGN"), of which Dr. Ager is now the sole officer/director, brings projects to the development stage, then vends them to other smaller companies for stock, trying to have each such company have two projects; as is the case with SRCH. It is an incubator; SRCH is one of AGN's first "hatchlings."
Dr. Ager and McNeil both worked at AGN before SRCH. Dr. Ager and his wife each own 17.5%, and McNeil and SRCH's VP also each own 17.5% of AGN (70% total), which in turn owns 66mm shares of SRCH. AGN uses new science and technology to find and develop new types of deposits. At AGN, Dr. Ager and McNeil found the Clarkdale project and vended it to SRCH; with AGN and Clarkdale's original real estate owners, VRIC, each receiving 16mm SRCHshares and 2.5% net smelter royalty (NSR), the total 5% typical for mining. Buyout of the second 50% from VRIC has/will total cash of $20mm.
SRCH's management has raised $35mm since '05, high for a small bulletin board company. It has $13mm cash and $5-600,000/month burn after the second building, enough to get through yearend and a 12-month run rate. As it grows from high net worth to institutional investors and proves Searchlight, financing should be still easier.
David G. Snow July 28, 2008
The information contained in this report has been derived from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. This report is for informational purposes only and is not intended to be an offer to buy or sell the securities mentioned herein. David G. Snow, the President of Energy Equities, Inc., has positions in GWMGF and QSURF, may have positions in the other securities mentioned herein and may buy or sell such securities at any time. All rights reserved. This report may not be reproduced or distributed without prior written consent.