Unlike most junior explorers, POS has created leverage by obtaining an option to acquire an 85% interest in the about-to-be-commissioned Chepica mine three hours drive south of Santiago. The property covers the Cerro Chepica high grade copper-gold mining district and is readily accessible by paved and good gravel road from the city of Talca 20 kilometers to the east. If the option is exercised and the mine acquired, it will provide the company with production capability and positive cash flows at relatively low cost within a time frame of as little as 3 to 4 months. Concurrently, because the Chepica property has never been drilled before, the comprehensive drilling program the Company has begun will enable them to define a mineral resource at the property.
The Company’s three point plan for capitalizing on the Chepica opportunity is to:
Commission the mine up to good working condition
Drill the reserves off to produce a NI 43-101 report
Exercise the option and complete the acquisition
The mine commissioning process has begun and completion is expected within the next three to four months. Positive cash flows should begin soon after that. The plant is designed to operate at 300 tons per day, which based on planned production grades equates to roughly 4-1/2million pounds of copper per year. This should yield cash flows of as much as $1M+ after tax per month under current commodity prices. The cost to exercise the option is approximately US$5 million for the 85% interest, and is exercisable at any time until April, 2009.
The second step in the Company’s plan is to begin a drilling program on the property. Drilling recently commenced with one truck mounted diamond drill on June 24. Additional drills are expected to be added over the next 6 week. The drill program will be the foundation for a NI 43-101 report that will support the current production level and a planned doubling in 2009. The Company’s confidence is based on the nature of the Chepica property which has several epithermal veins, and lies in the same Coastal Mountain Belt as Yamana Gold’s Minera Florida to the north. By way of comparison, Yamana spent $100 million to buy their property after drilling it for a year, indicating the presence of very robust systems.
Mineralization at Chepica is copper and gold. There were two mineralizing events on the property, which is probably why the grade and tonnage potential is particularly promising. The mine is going forward on the expectation that the property will deliver grades of approximately 2-1/2% copper, and 3 grams per ton of gold. If that assumption is correct, it essentially means that the gold will pay for the extraction of the copper at today's prices.
The Company believes the Chepica opportunity will provide a lot of upside shareholder value by:
Quickly expanding the Company’s activities beyond exploration, into production that will generate positive cash flows to offset the cost of exploration
Generating a measured mineral resource
Providing the Company with the ability to finance exploration out of cash flow, minimizing dilution to current and future shareholders.
The world of junior mining is all about the big find, the blue sky, the option value. The intriguing part of the Polar Star story is the fairly significant land package the Company has just to the south of Chuquicamata, the largest mine operated by Codelco, the state-owned National Copper Corporation of Chile. Codelco is the largest copper mining company in the world and produced 1.78 million tons of the metal in 2006. Chuquicamata is one of the largest, if not the largest, open pit mine in the world. It’s been mined since 1911, and the main pit is now approximately 4 km long, 2 km wide and about 900 m deep. The mine has extraordinarily high production capability, on the order of 900,000+ tons of copper per year. Reserves are estimated at 18 1/2 billion tons of ˝% copper, among the largest in the world.
Chuquicamata is on a structure called the West Fissure fault system which goes up and down the spine of northern Chile. Polar Star’s Montezuma property covers about 20 km of strike of the West Fissure Fault System, so the property is highly prospective for porphyry copper deposits. The property is located 1,380 kilometers north of Santiago in the Sierra Limon Verde oxide copper mining district and is readily accessible by paved and good gravel road from the city of Calama 20 kilometers to the north.
The current work program defined for the property includes; an IP survey that will begin in July to establish drill targets; a soil sampling program that is underway; and a mapping program that is also underway. The work program should lead to some very interesting drill targets, based on the belief that if the program hits something, it will probably be fairly significant in size. If that occurs, Codelco has excess production capacity so production scenarios could be fairly fast.
From an investor standpoint, discovering something so close to Chuquicamata is particularly intriguing because of the high visibility of the famous mine. This would in turn create visibility for Polar Star that would attract investors.
Polar Star is not just a one or two trick pony. They have an inventory of about 20 projects and are seeing lots of other opportunities come along. They have acquired a number of properties with evident mineralization of copper, uranium, as well as gold and other precious metals. The company’s projects include properties such as:
Los Azules - a copper/moly breccia for which the initial drill program has been completed
Yoanca – up to 200 million ton open pit copper porphyry deposit target
Chulacao – copper porphyry target
Nancagua - an epithermal gold – silver system
All properties are constantly evaluated to determine which ones are advancing on their plans. Projects that are going well are supported. But if there's disappointment, there is no hesitation to drop the project to focus on those that are moving forward. The Company’s philosophy is that it's extremely important for a junior not to get caught with a millstone around its neck, because it can kill the Company. Polar Star’s objective is to grow the Company and build shareholder value, and it believes the only way to do that is to have a broad portfolio of solid opportunities, and then focus resources and energy on the opportunities the Company feels have the potential and performance to become winners.
The purpose of Polar Star Mining is to seize the initiative in Chile in the exploration and development of mineral opportunities. Chile is the world's premier mining jurisdiction and there are tremendous opportunities yet to be realized. Polar Star is realizing them by doing grassroots exploration as well as advancing projects into production.
The Company currently has three main projects. The first one is Chepica, a 3 hour drive south of Santiago, where they are looking to put a mine into production, and currently completing the due diligence required by drilling off the reserves to generate 43-101 report. The second project is at Calama, at the property known as Montezuma. This covers 20 km of the West Fissure fault system and is directly south of Chuquicamata, the world’s largest open pit copper mine. The Company believes Calama offers tremendous potential for a large copper porphyry discovery. The third opportunity is the Company’s existing list of about 20 ongoing projects to see which ones they want to advance. Right now, the focus is getting Chepica into production.
One of those people is Terry Walker, the Company’s Senior Geologist with 40 years international experience, who has spent the last 15 years on the ground in Chile and has a thorough knowledge and understanding of not just the geology and the opportunities, but also the people and the processes you need to adopt in Chile to be successful.
As part of that process, there are now about 20 people now working for Polar in Chile. They range from Geologists and Geotechnicians to Landmen. Landmen are particularly important in a fast paced mining environment like Chile because they keep an eye on what properties the Company has, and also maintain a constant lookout for the opportunities that become available as land comes open. One such opportunity was the Calama property. As soon as it came open, the Polar team was on it in a matter of days, leading to what may be one of the Company’s great success stories going forward.
CEO Doug Willock is an investment banker by background, and he's come to the mineral industry over the last 10 to 15 years. Doug understands what the market wants and also how to realize and structure opportunities so that both parties feel they're being treated fairly and can have successful transactions. Doug believes the mining business in Chile is very much about building relationships because they are looking for people they can respect and trust and do business with. Doug says they’ve worked really hard in Chile since they’ve been there to make sure that happens.
The Company’s Board of Directors, including people such as Executive Chairman Stephen Roman are key to the Company’s success because they understand the mining business, the technical issues, and can propose solutions or access a network of people that can work with the Company. Derek Rance, a Senior Board member is another one of those. Derek is the chairman of Behre-Dolbear, a worldwide consulting firm that specializes in doing financial, technical and due diligence reports on behalf of banks and other investment organizations looking for guidance and direction on whether they should invest in a particular mining project. He provides invaluable advice in helping POS on technical issues and as a sounding board. Other members include Perry Dellelce, a well-known Toronto securities lawyer who understands the mining industry; David Speck who provides understanding of the investment community after spending most of his career in that industry; and Douglas Scharf, the Company’s former CFO. In the past, Doug was CFO of Dome Mines and Inmet Mining and brings the company a wealth of financial expertise.
A lot of strengths have been brought together to make sure Polar Star can go the distance.
Polar Star has been built on the principle of seizing opportunity where and when you find it, and being quick and decisive has enabled them to seize extraordinary opportunity in Chile. The country is still largely undiscovered by juniors but well-known and well loved by majors. For example, BHP and RTZ are currently generating about $1 million an hour with their Escondida mine. Chile is the world's largest copper producer, and copper mining contributes about 45% of the country's revenue. If you're a copper Company and you're not in Chile, chances are you'll be coming to Chile soon, because it's difficult to be a major player in copper without being in Chile. Nearly a third of the world's copper is produced in Chile and a third of the world's proven reserves are in Chile.
Polar Star feels Chile is one of the premier mining jurisdictions in the world. The country has a long relationship with mining. Mining is the dominant industry in the country, and mining analysts rate the country third in geopolitical stability for investment, behind only Australia and Canada. This is a country with virtually minimal political risk as compared to other jurisdictions which may have significant mineral potential but whose values are degraded by the substantial political risk associated with extracting that potential. In Chile, they're very familiar with the dynamics of the industry and understand the importance of such things as title, and fiscal matters such as not overtaxing. Mining requires certain levels of investment and security, and Chile understands that.
Infrastructure and logistical support for mining is excellent throughout the country. There are beautiful four and six lane highways that are toll operated and in perfect condition. In a multitude of ways Chile has oriented itself towards the growth and development of mining, and as a result, the country is a major mining player.
The Company’s strategic objective is to grow production and to significantly increase cash flows. That can be achieved at Chepica by bringing on additional deposits into production. The Company feels this should be fairly easy to do because they've identified the structures and will now start drilling them to confirm the structure and the size of the deposits. After that task is accomplished, the next step will be to obtain and install the equipment necessary to get the mine producing. The costs to do this are not expected to be large, with estimates in the range of $2-3M to put in another 300 ton a day operation standalone. Increasing current capacity from 300 to 600 tons a day could be done for as little as $1M. These are fairly low capital costs to create a large amount of increased production capability.
From a strategic standpoint, the Company has been set up with three separate subsidiaries which focus on specific commodities: copper, precious metals and copper, and uranium. The Company believes there are several economic uranium deposits types in Chile and right now they are evaluating which of those might be the most significant. Whatever geological model is selected, they suspect it will be a combination of uranium plus other minerals. They Company is in the early stages of evaluation on this front.
A side benefit of pursuing that investment thesis is the way it has generated other interesting projects, some of which were nearer term in terms of realizing economic value for shareholders. Chepica was a recent example of one of those opportunities. Chepica is important for two reasons: it is a production scenario which will provide funding to work out the grass-roots targets they have; and it will also provide the Company with credibility in Chile, because it will have an operating mining team as well as a very effective exploration team.
Polar Star’s track record should be looked at from the time the Company first came to Chile at the beginning of 2007. At the time, the Company had one property under option and was looking for other opportunities in Chile. Since then they have:
Completed an RTO six months later in July, 2007 which allowed the Company to increase its treasury to about $5 million.
Assembled a team of 20 people on the ground in Chile
Assembled 20 projects covering approximately 141,000 hectares that the Company feel present very interesting and promising opportunities. Not all these projects will go forward for various reasons, but all will be thoroughly evaluated for their potential in realizing shareholder value.
Successfully obtained an option to acquire an operating mine at Chepica, which they hope to acquire and have commissioned later this year. The Company feels this accomplishment is fundamental to proving to people that they're not just talking about mining, they are mining.
On the exploration side, they have successfully capitalized on the potential discoveries in the Calama region which they consider a top rank project in terms of the recognition it will bring the Company.
In a short, the company feels it has accomplished a great deal it can be proud of over the last year and a half. The company began as an explorer, and very shortly will be a producer that will start generating positive cash flows. They will continue to explore for future opportunities, and have an inventory of good drill prospects.
Polar Star’s power comes from the two groups most involved with financing and advancing the Company’s business: management and the people who have made money with the team in the past on other projects, such as the Gold Eagle Mines project which saw Exall combined with Southern Star. Investors who did well on the Gold Eagle Mines venture see Polar Star as a similarly interesting opportunity. Management has a third of the Company’s shares, so its interests are very much aligned with shareholders in wanting to see the Company advance as quickly and profitably as possible.
The company has over $5M of cash in the bank after the recent financing, so is well capitalized to fund its next stage of growth.
But the company’s biggest strength is the power of focus. As Stephen Roman, Polar Star’s Executive Chairman says: “We absolutely want to build a mine. That's what differentiates us from the other juniors out there. We have the capability to go right from exploration into production. We've done it before, and we can do it again.”
