KAT Exploration Inc (KATX)

[Rick-UK]

Current and Future Thoughts for KAT Exploration


For long investors, two questions probably present themselves right now.

1. What is our current status?
2. Where do we go from here?

I’d like to explore these two questions a little and present some ideas which may possibly be at least somewhere near to the truth.

There has been so much happening recently that I think it is worth listing all this activity before discussing it. Here are the facts:

• A PR announcing the initiation of a drilling programme on our gold property Handcamp Hiring a highly experienced geologist James Weick
• Engaging Gusrae, Kaplan, Bruno & Nusbaum, the top notch Wall Street law firm specialising in mergers, acquisitions and exchange uplistings
• Buying an OTC/BB shell KATG (BVIG) and filing an 8K to change ownership
• A PR announcing that Handcamp will be moved from KATX to KATG with a corresponding dividend to KATX shareholders of 1 restricted KATG share for every 4 KATX shares held
• A PR announcing that an option agreement has been signed with VALE to first explore our Lucky claim, with VALE financing this exploration followed by a full JV partnership if the results of this exploration are positive
• A PR announcing the initiation of a drilling programme on our copper and REE property Rusty Ridge
• The provision of a chart outlining the company’s intended changes to its corporate structure
• A dip in share price of around 50% from previous highs of around .24 to our current level of around .12

Now here is my speculation. Let me say straight off that this is indeed just speculation. I am not a mining expert, this is just one investor doing some “back of an envelope” calculations, so please do not base your investment decisions on it. If anyone has any constructive criticism to help me shape and hone the model to make it more accurate then please do let me know.

Firstly I think we are in very good shape overall. We have achieved a number of very important milestones for the company and we are moving forwards very fast. It’s easy to forget, but in the last few months a lot has happened. We are seeing a transition occurring from KAT Exploration being a very small exploration company with just two full time employees plus one or two family members acting as part time staff to help with admin, owning a handful of claims that were yet to be proven and trading on the pinksheets to being a fully fledged corporate entity trading on a full exchange with part ownership of one or more copper, REE and gold mines. Of course, we are only part of the way along this road as yet, but my belief is that since engaging our new law firm, our CEO Ken Stead now has a strategy mapped out that takes us to this destination. I see no reason why this destination should not be worth multiple $ per share for investors, and I’ll explain why.

Let’s do a little basic maths on the potential value of our properties and let’s start with the five KATX properties Lucky, Rusty Ridge, Shaylee, Clifton and Colliers.

Firstly Lucky. As we know from the recent PR, we have signed a 3 years option agreement on Lucky with VALE, the world’s second largest mining company. The summarised version of the PR is that VALE will pay the exploration costs and assuming the results of that exploration are positive, they will enter a joint venture with us to build the mine and extract the minerals. They will take an 80% ownership and we will take a 20% ownership.

In an email to an iHub poster siljie, Ken Stead told us: ”A copper/silver deposit such as could possibly be on the Lucky property has the potential to be valued at $5 billion and much more.” Of course assuming the JV option with VALE is taken up, we would get 20% of that value, or $1bn, from which I believe we would also have to pay (or at least pay back to VALE if they front it on our behalf) our share of all costs, because it’s not a 20% royalty, it’s a 20% ownership. Depending upon what is in the ground, how much it costs to extract and the details of the JV contract, we could get substantially more, we could get substantially less, we could even get nothing, but $1bn is a nice round sum and it seems to me it is what Ken has in mind, so I’m going to use it.

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=51220992
http://www.marketwire.com/press-release/KAT-Exploration-Signs-Three-Year-Option-Agreement-Contract-With-Vale-1274884.htm

Secondly Rusty Ridge. Those who have been following events with KAT Exploration over the last six months or so will know very well that Rusty Ridge is the jewel in KAT Exploration’s crown. Just to explain that Ken Stead has explored the Rusty Ridge area for many years and probably knows it better than anyone. With his previous company, Ken spent years and hundreds of thousands of dollars exploring and even drilling the area and he knows that entire location like the back of his hand. Ken is convinced there’s something big at Rusty Ridge and if you look at the evidence on the KAT Exploration web site you can see why. Here’re a few snippets from Ken. Firstly from his CEO/CFO interview back in July last year: “There was an interpretation done by an independent geophysics company from Vancouver, on the other side of Canada, who likened many of the signatures that we are finding to that of the Olympic Dam in Australia.”. Secondly in an email to me in April this year: “…we have made a few new and unexpected discoveries on the RR during our last period of sampling so we will continue with a program summers program of the same and spend some time on the Shaylee right next door.” and finally in a more recent email to me at the beginning of June: ”A portion of the write-up on the RR is posted on our website. It’s difficult to elaborate as you would have to research the Olympic Dam deposit and to see the similarities. You can compared also the 3D model of the OD to the one we have on our website. Plus, the Uranium, gold, Rare Earth Elements along with base metals and the geological environment(rock types) hosting these minerals, all give it similar signatures to the OD.”.

There have been conflicting thoughts about just how far we can carry this comparison between Olympic Dam (the world’s fourth largest copper mine worth perhaps AU$1 trillion (US$850bn) in total and producing $US5.5bn of revenue per annum). In another post I went into more detail about this, but Ken has made the following comparisons:

~ 3D Model
~ Gold
~ Uranium
~ REEs
~ Base Metals
~ Geological Environment

All of the comparisons are qualitative and not quantitative and Ken has never (to my knowledge anyway) made a comparison in terms of scale. But let’s see if we can do some intelligent guesswork. We know that Olympic Dam is huge, an estimate for the total size of the pit required to extract the entire ore body is 4.1km x 3.5km x 1km deep, i.e. 14.35 cubic kilometres. From the meagre information we have on the KAT Exploration website, the same area for Rusty Ridge might be as much as 2km x 1km x 1km deep, ie 3 cubic kilometres, or approximately one fifth the size of Olympic Dam. If it really was this big this would of course be incredible. So let’s say it’s actually half that size, ie 1.5 cubic kilometres, or 10% of the size of Olympic Dam. Assuming the quality is equal and assuming the size is one tenth, that would make Rusty Ridge worth around $8.5bn. I’m going with that figure. It’s plucked out of the air, but what the hell, you have to go with something! Let’s say for the sake of argument that because we are drilling and proving Rusty Ridge ourselves we manage to get a 50:50 JV deal with a mining company. That would give us an asset worth around $4.25bn, but let’s keep it simple and call it $4bn.

We don’t know enough about the remaining properties to say much about their value. One or more of them might be worth far more than either Lucky or Rusty, but the truth is that Ken is probably exploring and proving up his best properties first, so let’s assume that Clifton, Shaylee and Colliers between them amount to perhaps another $1bn in value to us – that’s $0.33bn each if you want to look at it that way.

So that gives us a grand total of assets worth $6bn. Let’s say it costs us $1bn to extract the minerals, so that gives us a net worth (assets minus liabilities) of $5bn. If KATX’s net worth is $5bn, and assuming our O/S remains the same at 640m then for our market cap to equal our net worth (which in theory it should do) would mean our share price would be around $7.50 to $8.

http://www.moneymorning.com.au/20070927/bhp-billiton.html
http://yourbusnews.blogspot.com/2010/06/fw-olympic-dams-vanishing-value.html
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=51359948
http://antinuclear.info/2009/09/05/huge-size-of-olympic-dam-uranium-mine/
http://www.marketwire.com/press-release/KAT-Exploration-Signs-Three-Year-Option-Agreement-Contract-With-Vale-1274884.htm
http://www.katexploration.com/

Meanwhile back at the ranch, we now have to consider KATG – our gold holdings company. Here of course we need to consider just two properties, Handcamp and TwiLite.

Unfortunately for both of these we do not as yet have enough data about their size or the quality of their seams to really say much. We know that Handcamp has a very special and unique type of gold deposit known as a "Felsic" VMS deposit. World wide there are only something like 800 VMS deposits and only the best of these are "Felsic". According to the USGS, Handcamp is the highest grade VMS gold site in all of Newfoundland. Surface rock and soil samples show a level of gold FAR higher than any of the surrounding mining sites owned by other companies and to find these levels of gold in just the surface rocks implies FAR more gold in deeper deposits.

The full soil sample analyses results from the independent lab have been digitally plotted onto a map which can be seen here. These results are very exciting as they show up to 158g/t of gold as well as extensive deposits of zinc and copper. To put this in perspective, even 3g/t is considered a good find. Drilling (which starts any moment now) will tell us much more.

For the time being, we can however take a look at other gold mines. The “standard comparison” that has been made before is with US Gold. One year ago an exploration company called US Gold (UXG) were in a similar position to where KAT is now, with a similar share structure. They were trading at around 0.30 and were waiting on the results of test drilling so they could file their 43-101. Within weeks of filing their 43-101 the PPS went from 0.30 to $1.20 and a few months later hit $3.00. UXG’s best results were 2.9 g/t Au. By comparison, Handcamp’s sample analysis indicates 158g/t Au, 94g/t Au and 82g/t Au and TwiLite’s samples have show up to 202g/t Au.

Let’s reverse engineer a share price here. Let’s assume that the final O/S for KATG is going to be somewhere around 200m. This allows for the 1:4 divvy for KATX shareholders plus a healthy float. Let’s assume a net worth value of Handcamp of $1.5bn, which doesn’t seem unreasonable. Let’s say TwiLite (and any other gold properties that we find and add in) adds a further $500m to round up the net worth of KATG to a nice $2bn. At 200m O/S that gives us a share price of around $10

So in summary KATX could be worth around $8.00 and KATG could be worth around $10 without massively unrealistic market caps, based upon the following assumptions:

1. Lucky is worth a total of $1bn or more to us as per Ken Stead’s valuation
2. Rusty Ridge is similar to Olympic Dan but one tenth the size and KATX secures a 50:50 split with a mining company, giving us roughly $4bn
3. Shaylee, Clifton and Colliers are combined worth $1bn
4. Handcamp is worth $1.5bn
5. TwiLite is worth $500m

I fully realise that anyone at all could completely pick apart these assumptions, but what I have tried to do is show that what I, Daggfish, 911, Er0ck, Sterling, Relikwie, Bio and many others have been saying about the potential share price is actually very achievable. I have consistently said $3 to $5 by end of the year. If you add everything up, it could be a lot more. Of course all sorts of things could happen, including increased O/S and not finding the big deposits, but that of course is what investment is all about!

I’ve run out of time and I realise I’ve more answered the “where are we going?” part of my question than the “where are we now?” part. I have a theory, dreamed up between myself and Relikwie and agreeing with much of what Daggfish and Jim Bishop have been saying, that would explain why we have gone down not up in the last few days. I’ll work a bit more on that and post it soon (… if it still seems relevant!). Meanwhile can I just say that my theory does NOT have anything to do with NITE, with naked shorting or with stock market manipulation by bashers. These theories to my mind are plain wrong.

Rick