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NAG - Molybdenum - xref Uranium Haven Board.
NAG - xref:Molybdenum Board.
NAG: roger on that reply. Nag holding 4 properties which contain gold, copper, molybdenum, and of couse uranium. Its uranium properties also in close proximity to UEX's. All properties look productive, but not in operation yet. $.020 looks good value ?
CA:NAG (North American Gem Inc) - anyone know if this is a reasonable stock to hold ??
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
North American Gem Inc. (TSX-V: NAG) –Initiating Coverage at BUY (Risk 5: Highly Speculative)
Sector/Industry: Junior Mining www.northamericangem.com
Market Data (as of September 13, 2006)
Current Price $ 0.22
Fair Value $2.00
Rating* BUY
Risk* 5 –Highly Spec
52 Week Range $ 0.095 - $ 0.325
Shares O/S 46,671,161
Market Cap $10.27 mm
Current Yield N/A
P/E (forward) N/A
P/B 4.32
YoY Return 109.5%
YoY TSX-V 31.1%
INVESTMENT HIGHLIGHTS
North American Gem Inc. holds properties in British Columbia
and Alberta, Canada, targeting gold, copper, molybdenum,
uranium and other base metals.
One of the company’s properties, The Louise Lake Property, in
British Columbia, Canada, has 43-101 compliant Indicated
resources of 6.0 million tonnes and Inferred Resources of 141
million tonnes.
The main target minerals are gold, copper, molybdenum and
uranium. Among metal prices, we expect gold and uranium prices
to stay high in the long-term and positively impact NAG’s value.
The company’s stock is undervalued based on our valuation
model.
RISKS
NAG does not have any operating mines and hence, does not
generate revenues or cash flows.
Some of our assumptions, such as operating costs, are based on
our best estimates, though a feasibility study is needed for proper
determination.
Except one property, all the properties of NAG are in early
exploration stages.
Future operations and exploration activities are dependant on the
company’s ability to raise sufficient funding through share
issuance or exercise of options.
Key Financial Data (FYE - December 31)
(C $) 2003 2004 2005 2006
6 mo
Cash 6,080 121,103 449,461 594,498
W ork ing Capital (72,499) 44,977 445,458 738,897
Resource Properties (Mineral Assets) 293,609 13,052 718,707 1,636,176
T otal Assets 318,339 174,307 1,261,485 2,388,138
LT Debt 19,697 - - -
Net Loss (197,872) (598,151) (479,792) (513,760)
Loss per Share (0.02) (0.04) (0.02) (0.01)
North American Gem Inc. (NAG: TSX-V), a junior exploration company based out of Vancouver, British Columbia,
holds various properties in B.C and Alberta, targeting Uranium, Molybdenum, Gold, Copper and other Base metals. The
company’s flagship property, The Louise Lake Property in British Columbia, has 43-101 compliant resource estimates.
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 2
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
COMPANY
OVERVIEW
PROPERTIES
North American Gem Inc. (NAG: TSX-V) is a junior exploration company based in
Vancouver, British Columbia. The company holds various properties and is exploring for
uranium, molybdenum, gold, copper and other base metals. The company is actively
pursuing several opportunities, including the company's Louise Lake Property and the Mt.
Ogden Property located in British Columbia, Canada, and its uranium and multimineral
deposit properties, which are the Del Bonita, the Western Basin, the Bonny Fault, and the
Whiskey Gap, all located in Alberta, Canada.
Louise Lake Property, British Columbia, Canada
Commodities: Copper-Gold-Molybdenum-Silver
The Louise Lake property is an advanced stage exploration property. The property consists
of high level porphyry style copper-gold-molybdenum-silver deposits. The “Main Zone” of
the Louise Lake project is located 35 km west of Smithers, British Columbia, Canada. North
American Gem Inc. currently holds a 100% interest in the property. An annual assessment
work totaling $4.00/Ha is required to maintain the current claim of approximately 2,662.6
Ha.
The property was initially drilled in 1970 with a 17 hold diamond drill program by Canadian
Superior. Corona Gold Corporation drilled an additional 5 holes and reanalyzed the core
drilled in 1970 by Canadian Superior. Equity Silver Mines drilled 13 drill holes in 1992 and
found the “Main Zone”of the property. Firestone Ventures Inc. drilled an additional 6 holes
to further expand the main zone. NAG drilled a total of 19 holes to further expand the “Main
Zone”.
The geology of the Main Zone consists of copper-molybdenum-gold-silver. NAG contracted
SRK Consulting Ltd. Canada to complete the first independent, CIM-compliant estimate of
the copper-gold-molybdenum-silver resources on the Louise Lake Property. SRK released a
NI 43-101 compliant report and indicates an Indicated Resource of 6.0 million tonnes and an
Inferred Resource of 141 million tonnes.
Mineral
Resource
s
Tonnes Cu Eq
(%)
Cu
(%)
Mo
(%)
Au
(g/t)
Ag
(g/t)
Indicated 6,000,000 0.369 0.214 0.006 0.20 0.98
Inferred 141,000,000 0.426 0.234 0.009 0.23 0.94
All resources quoted at 0.25% CuEq Cut-off. CuEq calculated using the following metal prices: Cu
US$1.20/lb, Mo US$8/lb, Au US$450/oz, Ag US$7/oz. [1]
Metallurgical tests were conducted by Equity Silver and showed promising results, reporting
copper and gold recoveries of 95% and 90% respectively. Furthermore, the SRK report also
made recommendations on further exploration to better define the “Main Zone” and the
property shows a potential of more mineralization. We believe that the sizeable nature of this
resource deposit and its location near all infrastructures, makes it an ideal candidate to be
further explored.
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The location map for the Louise Lake property is as shown below.
Source: Technical Report (SRK Consulting Inc.)
Mt. Ogden Molybdenum Project, British Columbia, Canada
Commodity: Molybdenum
The Mt. Ogden property is located in the Atlin Mining District, about 60 km east of Juneau,
Alaska, and 130 km south of Atlin, B.C along the Alaska - British Columbia border.
Currently, NAG has entered into an option agreement to acquire a 100% undivided interest
in the Mt. Ogden Molybdenum deposit, located in northwestern British Columbia.
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This is an early stage exploration property for which Omni Resources (previous owners)
carried out preliminary sampling by means of chip sampling and trenching in 1978. This
resulted in identification of three zones as shown in the table below.
Results from preliminary sampling
Zone M 0.31% MoS2 from 24 samples across 43 m
Zone N 0.32% MoS2 from 26 samples across 26 m
Zone Z 10 samples taken along 300m averaged 0.24% MoS2
Source: 1979 Assessment Report, Omni Resources Inc.
Omni Resources further carried out underground development and drilling at the N and Z
zones. This resulted in a small high-grade vein; termed the ‘Serious Vein’, where a
preliminary estimate of 30,000 tons of 1.85% MoS2 was provided, based on drilling and
underground exploration results. These estimates were produced prior to the implementation
of modern resource standards, contained within National Instrument 43-101, which does not
distinguish between resource categories, and should not be relied on to necessarily represent
accurate estimates under modern standards. NAG is currently conducting further preliminary
exploration on the property.
Whiskey Gap Project- Del Bonita Project, Southern Alberta, Canada
Commodity: Uranium
NAG is currently in a joint venture with International Ranger Corp. on its 44,400 acre
Whiskey Gap uranium property located in southern Alberta along the Canada / U.S.A
border. The company has staked approximately 250,000 acres of ground prospective for
rollfront uranium. Preliminary sampling of domestic water sources by International Ranger
has shown several very strong radon and uranium anomalies in the water.
The Whiskey Gap property is contiguous with the company’s 200,000 acre Del Bonita
property and underlain by a series of fluvial sandstones of Cretaceous age. These are the
same deposits that have are analogous to sandstones in parts of Wyoming that host
significant roll front uranium deposits.
The Del Bonita property consists of four major formations comprising more than 200,000
acres of prospective uranium land in southern Alberta. The four target formations are known
as Willow Creek, Milk River, St. Mary River and Ravenscrag.
Reconnaissance sampling programs carried out in 1981 and 1982, including samples taken
from a roll-front exposed in a river bank, returned up to 2,000 parts per million uranium
(0.2% U3O8). The technique used to analyze the reconnaissance samples had an upper
detection limit of 2,000 parts per million uranium.
The initial drilling conducted by NAG resulted in anomalous radioactivity. NAG is currently
conducting more drilling and further exploring this property.
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The map below shows the location map of the Del Bonita Project.
Source: The Del Bonita Uranium Project, G.S. Hartley P.Geol.
Western Basin Property -Bonny Fault Project, Northeastern Alberta, Canada
Commodity: Uranium
NAG has two projects in northeastern Alberta, the Bonny Fault and the Western Basin
properties.
The Western Basin property lies just inside the Alberta-Saskatchewan border, just five kms
from Cameco’s(TSX: CCO) Maurice Bay Project on the shores of Lake Athabasca. The
Western Basin has 4 mineral permits totaling 92,000 acres. The property covers exposed
intrusions of Precambrian Shield rocks that underlie the sandstone units within the
Athabasca Basin and are important components of uranium mineralization. The property
covers exposed Precambrian shield rocks mapped as the Wylie Lake and Fishing Creek
Granitoids. These Precambrian rock units underlie the Athabasca Sandstone units within the
Basin and are important components of uranium mineralization. This geology is similar to
the geology which hosts some of the world class, high-grade uranium deposits found in the
Athabasca uranium district, such as the Colette, Anne, Key Lake and Maurice Bay Deposits.
Historically, uranium exploration programs in the Athabasca Basin have been hampered by
the high costs associated with deep (+300m) drilling programs needed to reach and test the
targeted Athabasca unconformity. An Alberta Geological Survey Bulletin (No. 55)
documents several historic drill holes, which map the Athabasca Unconformity on NAG’s
Western Basin Property, between 10 m and 95 m from surface. The eastern edge of the
property is the Alberta / Saskatchewan border, 5 kms from Cameco Corporation’s Maurice
Bay project. The Maurice Bay uranium deposit is located within the northwest margin of the
Athabasca Basin. It has 600 tonnes containing uranium at a grade of 0.5% U. The Maurice
Bay deposit includes structurally controlled mineralization within altered basement rocks
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 6
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INDUSTRY
ANALYSIS
and an Athabasca unconformity-style of uranium mineralization. Due to this deposits close
proximity to, and shared fault structure and geology with NAG’s Western Basin Property,
the Maurice Bay Deposit Model has become the company’s geological exploration model for
its Western Basin Property.
The Bonny Fault property consists of five mineral claims comprising approximately 117,000
contiguous acres. Fieldwork during 2005 located several zones of strong surface
radioactivity, and grab samples from the project have yielded up to 3.93% U308 and 1.03%
molybdenum. The geology and faulting is similar to economic uranium deposits within the
Precambrian Shield in the Uranium City area of north-central Saskatchewan, 100 miles to
the east. The Bonny Fault property consists of five mineral claims comprising approximately
117,000 contiguous acres (468 sq. km). Local geology within the property consists of a wide
range of massive to foliated granitoids, metasedimentaries and metavolcanic rocks. Several
major faults affect most of the rock units; these faults include the northwesterly-trending
Bonny Fault, and several subsidiary faults that complicate the structural setting. Faults in this
region are expressed as early shear zones that are characterized by mylonites, as well as by
later more shallowly seated ductilebrittle and brittle fault zones. Retrograde greenschist
facies minerals indicate a Palo- Proterozoic to possibly Meso-Proterozoic age for this large
scale faulting, which has been favourable for other economic uranium deposits within the
Precambrian Shield in the Uranium City area of north-central Saskatchewan. One mineral
showing of note discussed in the April 5th press release is the AGS documented: West Arm
of Andrew Lake showing with a 3.93% U3O8 and 1.03% Mo sample.
As the commodity markets are very volatile, one of the better strategies to reduce risks, we
believe, is to diversify. NAG has a good diversity in its portfolio of properties, as they focus
on different metals like, gold, silver, copper, uranium, molybdenum and other base metals.
The company has proven assets in the ground as suggested by the 43-101 compliant resource
estimates of the company’s Louise Lake property in B.C. Louise Lake deposit offers mining
companies to invest in a property that is located in a safe country and with the entire
infrastructure present to support mining. NAG’s uranium properties in Alberta are also of
major interest, as they allow the company to diversify and also increase its upside potential.
NAG is currently focused on gold, copper, molybdenum and uranium mineralization.
Although, current market conditions for all of these commodities are favorable, we do not
base the value of the company’s properties on short-term price forecasts, as none of the
company’s properties expects to commence production in 2006 and 2007. A long-term
perspective of the commodities market will help in identifying the effects of commodity
prices on the value of NAG. The next section illustrates a study on the long-term market
conditions (+2008) of the company’s target minerals.
GOLD
Unlike other commodities, gold prices are not driven by physical supply and demand
forecasts, but also reflect certain macro-economic factors. We now discuss additional factors
which we believe drive gold prices.
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Gold –hedge against inflation: Gold is traditionally viewed as a safe-haven asset and
regarded as a better hedge against the U.S. dollar and inflation than any other commodity.
The chart below shows the relationship between gold prices and inflation. It can be noted
from the chart that the price of gold is higher when inflation is higher, which indicates the
risk-averse tendency of investors to move towards gold when the other assets are volatile and
more risky.
GoldPrices Vs Inflation
0
100
200
300
400
500
600
700
800
Jan-73 May-81 Sep-89 Jan-98 May-06
Gold Prices (US$/oz)
0%
2%
4%
6%
8%
10%
12%
14%
16%
Inflation
Gold Inflation
Projected depreciation of the U.S. dollar: Historically, gold prices have been negatively
correlated to the U.S. dollar (as shown in the chart below).
Gold Price Vs US$
0
20
40
60
80
100
120
140
160
Jan-73 Mar-77 May-81 Jul-85 Sep-89 Nov-93 Jan-98 Mar-02 May-06
US$
0
100
200
300
400
500
600
700
800
Gold Price (US$ / oz)
Source: KITCO US$ Gold
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Based on the Federal Reserve’srecent decision (August 8, 2006) to pause U.S. interest rate
hikes, rising global interest rates (U.K, Japan, Europe, Korea, and India) and a projected
slowdown in the U.S. economy, the U.S. dollar is forecasted to depreciate with respect to
other major global currencies. The chart below shows a U.S. dollar forecast against other
major global currencies. As shown in the chart, the U.S. dollar is expected to depreciate
against all major currencies except the Canadian dollar. We believe the forecasted
depreciation of the U.S. dollar indicates gold prices will likely stay high in the future.
U.S. DOLLAR
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1.600
1.800
2.000
Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07
US$/ 100Yen US$/Source:BMO, TD, FRC C$ US$/Euro US$/GBP
Geopolitical tensions: Investors turn to gold as a capital preservation asset due to an
increase in global geopolitical tensions. The recent hikes in gold prices, as a result of
increasing geopolitical tensions related to Korea, Iran and Israel, asserts the impact of global
tensions on the price of gold. Although geopolitical tensions are short-term gold price drivers
and difficult to predict, we believe that there will always be sufficient events to provide
additional short-term price spikes in the long-term that will benefit gold investors.
Forecast: We believe that gold prices will stay high as long as gold is perceived as a capital
preservation asset (safe haven asset). We do not expect any other commodity to substitute
gold, as a capital preservation asset, because gold is a non-perishable asset that bears no
credit risk and has a high value to volume ratio, which makes it easily transferable, with low
transport and storage costs. Based on a forecasted depreciation of the U.S. dollar and
continued long-term demand for gold as a capital preservation asset, we believe that gold
prices will be high in the future and stay above its historical average of $338/oz. The average
forecasts of gold prices as of July 2006, are $640/oz in 2006 and $700/oz in 2007.
The chart on the next page shows gold prices since January 1973. As of August 10, 2006,
gold was trading at $644.75/oz compared to $65.14/oz in January 1973, a whopping increase
of 890%. Current prices represent an increase of 571% since the beginning of the century,
and 2.8% since the beginning of the year. It can be noted from the chart that gold prices have
been increasing since January 2001. Prices have not dropped below the historical average
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been increasing since January 2001. Prices have not dropped below the historical average
price of $338/oz since May 2003.
COPPER
The chart below shows the price of Copper throughout 2006. As of September 8, 2006,
copper was trading at $3.57/lb (cash), which represents an increase of 73.3% since the
beginning of 2006. As shown in the chart, LME inventory levels have not changed
significantly since the beginning of the year.
Copper - Price Vs Stocks
Jan 3, 2006 - Aug 10, 2006
4,000
5,500
7,000
8,500
10,000
3-Jan 14-Mar 26-May 8-Aug
US$ / Tonnes
70,000
90,000
110,000
130,000
150,000
Tonnes
Stocks Cash YTD Avg
Source: LME
Increasing short-term demand: The demand for copper in China, the world’s biggest
consumer of copper, has been the biggest driver of the metal’sprice this year. We believe the
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consumer of copper, has been the biggest driver of the metal’sprice this year. We believe the
price increase has been mainly due to increasing demand for the metal in China, as the
country’s GDP grew at 10.2% yoy in the first quarter of 2006, the strongest growth rate since
Q1-2003. The Chinese economy grew 11.3% in Q2-2006, and it is expected to grow at 8%
per annum from 2006 to 2010 (according to the State Council Development Research
Centre, China). According to the Beijing Antaike Information Development Co Ltd
(consultants based out of China), China is estimated to have consumed about 3.65 million
tons of refined copper in 2005, and the figure is expected to hit 3.9 million in 2006.
Long-term global demand could decrease as a result of global economic slowdown: We
believe a slowdown of the global economy is looming as a result of rising global interest
rates. To keep inflation under control, the Central Banks of the U.S., EU, Japan (1st hike in 6
years), U.K., S.Korea (5 –yr high), etc. have raised rates. There is also an indication that
China’s central bank will increase interest rates to slow down its economic growth to keep a
check on inflation. The average forecasted increase in global GDP in 2006 is 4.6%, while it
is only 4.3% in 2007. We believe that rising global interest rates will slow down global
economic growth starting in 2007, which will soften the demand growth of all base metals.
A slowdown in the global economy could lead to softening of demand for copper used in
cars, appliances and homes.
However, we believe that as long as rates are not raised too high, fundamentals are still in
place to support above average prices.
Forecasts: We feel that growth in the Chinese economy will keep demand for copper high in
the short-term. However, as higher interest rates eventually lead to slower global economic
growth, we expect reduced demand in the long-term. The average forecasted prices for
copper are $2.94/lb in 2006, and $2.7/lb in 2007. Based on a forecasted increase in supply
and decrease in global demand in the long-term, we believe that prices will slightly soften
after 2007.
MOLYBDENUM (Mo)
Based on Mo production in 2004, Canada was ranked 5th in the world behind the U.S, Chile,
China and Peru. Canada’ production was 6% of the global production. The unique physical
characteristic of Molybdenum is that it has a very high melting point (fifth highest melting
point among all elements), of about 2,610 degrees celsius, making it ideal for alloys used in
aircraft engines, missiles and petrochemical plants.
Global Demand: Demand for molybdenum comes primarily from the steel industry, which
on a global basis, accounts for about 75% of total consumption. Within this sector, the
largest single application is in stainless and specialty steels, but consumption in low alloy
steels is not far behind. Demand for molybdenum has also increased because of its use as a
reducer of sulfur in crude oil. According to Roskill (Roskill Information Services provides
information on international metals and minerals markets), The global market for
molybdenum is estimated to have grown from about 100kt in 1990, to 181kt in 2005, an
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average yoy growth rate of 4.3%, compared to a world GDP growth rate of 2.9% per year.
The chart below shows historic world molybdenum supply and demand for the period 2000
to 2004, along with CRU’s projections. As shown in the chart, demand exceeds supply in
2008 and 2009. CRU projects a molybdenum deficit of 6million lb by 2009 in its base case
scenario.
Source: http://www.internationalmolybdenum.com/
Chinese stainless steel demand: China is scheduled to significantly expand its stainless
steel capability by at least 2.4 million tones in 2006. The rapid growth in stainless production
in China is expected to push the demand for nickel higher. According to Goldman Sachs,
stainless steel production in China will increase by 32%, 33% and 23% in 2006, 2007 and
2008 respectively. As mentioned earlier in the report, we expect demand for stainless steel to
soften as well, based on the forecasted slowdown in global economy. Since demand from
China looks very promising, we do not expect Mo demand to soften as much as copper.
Molybdenum Prices: The chart on the next page shows the drastic increase of Molybdenum
prices since 2004. The prices peaked in June 2005 (average price in June: $37.611/lb) and
have dropped since then, but they are still well above the 5-year average price of $13.18/lb.
As of September 11, 2006, Molybdenum was trading at $28.5 / lb.
Price forecasts: Based on our review of the above factors, we believe that Mo prices, though
expected to gradually decline throughout our forecast period, will stay higher than historical
lows due to the following:
Strong demand from China and the global market for stainless steel which we have
shown to have a positive correlation to Mo prices.
Increasing demand from the oil sector
Longer lead times to build new molybdenum mines
Limited roaster capacity
Not easily substitutable due to its unique characteristics, availability and versatility
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URANIUM
According to WNA, Canada has known recoverable resources of 0.44 million tonnes of
Uranium, third largest in the world, after Australia and Kazakhstan. Uranium exploration
was not very active during 1985 and 2005, so a significant increase in exploration could
easily increase the known economic resources of uranium. The world's power reactors have a
capacity of some 370 Gwe and require about 68,000 tonnes of uranium every year from
mines. Although this capacity is being run more productively, with higher capacity factors
and reactor power levels, global annual uranium demand is not expected to grow
significantly until 2010. The main reason is that the industry at this point in time is not
concentrating on increasing the quantity but on increasing the efficiency of fuel generated
from uranium.
As of September 11, 2006, uranium was trading at $52.00/lb compared to $37.5/lb on
January 30, 2006, an increase of 38.7%.
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Increasing Nuclear Consumption: The chart below clearly shows the rising global demand
for nuclear energy.
Nuclear Consumption
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
Million Tonnes
Source:BP Statistical Review
Uranium is considered to be the next major alternative source of energy, and the table below
shows estimates of nuclear generating capacity increasing to 2030.
The projected cost of generating nuclear electricity indicates that it is much cheaper than
other modes of electricity generation as shown below.
Long-term prices depend on SWU’s prices: Currently, global consumption of uranium is
about 180 million tonnes a year of which only 90 million tones is produced annually. The
deficit is filled up by stockpiles. Among Uranium isotopes, the U-235 isotope is used in
nuclear reactors, as fission reaction of U-235 generates a relatively larger amount of energy.
Uranium in the natural state contains only 0.7% of U-235, so natural uranium, normally,
cannot be used in nuclear power plants. In order to increase U-235 concentration in the fuel,
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MANAGEMENT
PROFILE
FINANCIAL
ANALYSIS
usually to about 3%-5%, the fuel has to be enriched by Separative Work Units (SWU). We
believe that uranium prices will depend on the prices of these SWUs in the future.
Forecasts: Although we do not foresee any significant short-term increase in prices, based
on a strong demand for nuclear energy in the long-term, we believe that uranium prices will
have high upside potential in the long run.
Summary
Among NAG’s focus metals, we are most bullish on long-term gold and uranium prices. As
for the other metals, although we expect prices to soften in the future, we expect them to stay
close to their historical averages and thereby maintain the values of NAG’s properties.
Charles Desjardins, President, Director
North American Gem Inc. is headed by Charles Desjardins who is the president and a
director of the company. Mr. Desjardins has almost 20 years of public company experience
in the areas of finance and public company management. He is the President and CEO of
Tandem Capital Group Inc., which was active in the investor relations field during the mid
1990's. Mr Desjardins was also the past President of Victory Ventures Inc, which began as a
mineral exploration company, and subsequently became Global Investment.Com Financial
Inc.
Bruce Lock, Director
Mr. Lock has over ten years experience in the public markets and has been a director or
officer of a number of other public companies.
Egil Livgard, P. Eng., Director
Mr. Livgard is a graduate of the University of British Columbia in geology and has 45 years
of experience, ranging from exploration, property evaluation, and mining geology to mine
management. Mr. Livgard has consulted for numerous companies requiring regulatory
reports for B.C., Alberta and Ontario. His other interests include the related field of
hydrometallurgy and bio-leaching.
At this time, the company does not own any operating mines and has no operating
income/sales from mineral production.
During the first 6 months of FY2006, the company had a net loss of $513,760, compared to a
net loss of $303,131 during the same period last year. The higher loss in 2006 was due to
the higher stock-based compensation of $258,284 in the year, compared to $114,478 during
the same period last year. NAG’ expenses excluding stock based compensation were
$268,199 for the first 6 months of FY2006, compared to $188,653 during the same period
last year.
Cash at the end of Q2-2006 was $594,498, compared to $449,461 at the end of FY2005.
Higher current assets and lower current liabilities led to higher working capital of $738,897
and a quick ratio of 57.6 by the end of Q2-2006, compared to $445,458 and 5.58 at the end
of FY2005.
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 15
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
VALUATION
2003 2004 2005 2006
6 mo
Working Capital (72,499) 44,977 445,458 738,897
Current Ratio 0.25 1.39 5.58 57.56
LT Debt / Assets 0.06 - - -
Burn Rate 31,635 20,529 88,854 216,558
As a result of the progress in the company’s Louise Lake property, the company spent
$917,469 on its properties during the first 6 months of FY2006, while expenses during the
whole of FY2005 were only $576,594. The higher expenses were due to the increase in
expenses on Louise Lake from $343,044 for the FY2005 to $506,876 for the 6 months of
FY2006.
As shown in the table above, NAG does not currently have any long-term debt. In FY2005,
the company’s operations were primarily financed through share issuances and the exercise
of warrants and options. The company raised $1,487,400 through share issuance in FY2005,
and during the first 6 months of FY2006, the company raised $1,466,384 through share
issuance. On July 5, 2006, NAG issued 150,000 common shares at a price of $0.24 per share
pursuant to a purchase agreement to acquire a 100% interest in the Mount Ogden claims in
Northern British Columbia.
The burn rate (negative cash flows) for the first 6 months of FY2006, was $216,558 per
month, compared to $88,854 per month during FY2005. From the table, it can be seen that,
burn rates per month were considerably lower prior to 2005. The burn rate was higher in
2006 due to higher expenses on the Louise Lake property. We believe that burn rates will be
lower for the latter half of the year.
Based on our conversations with management, we understand that management expects to
spend a total of $1.4 million for the FY2006. During the first 6 months of FY2006, the
company has already spent $0.92 million, which means that the company intends to spend
another $0.48 million for the rest of the year.
We believe that NAG’s current cash position and working capital will be enough to fund its
proposed capex and general and administrative expenses for the FY2006.
Valuation Overview
We value NAG by determining the values of the Louise Lake property in B.C and the
uranium properties in Alberta, separately and then adding up the values to get the total value
of the company.
Although, the Louise Lake property has 43-101 compliant resources estimates, we cannot
perform a DCF analysis, as the project is in a very early pre-production stage. Hence, we
adopt the real options valuation model to value the Louise Lake property. The real options
valuation model is more appropriate for companies like NAG (companies which have
resources estimates and are in pre-production stages), as it takes into account the value of
management’s flexibility to make and change decisions.
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 16
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
We value the uranium properties in Alberta using a comparables valuation model. The sum
of the values of the Louise Lake property and the uranium properties make the value of
NAG.
Valuation of the Louise Lake Property - Real Options Valuation Model
The table below shows the real options valuation model, which values the Louise Lake
property at $1.94 per share.
162,039,800
$1,086,098,928
26%
$2,147,769,855
20
Riskfree Rate 4.26%
Stock Price $1,086,098,928 T.Bond rate 4.30%
Strike Price $2,147,769,855 Variance 0.0676
Expiration (in years) 20 Annualized div yield 5.00%
d1 = -0.1254
N(d1) = 0.4501
d2 = -1.2882
N(d2) = 0.0988
$90,003,783
Working Capital $738,897
Debt $0
46,671,161
Value per Share $1.94
Estd. Mineral Resources (short tonnes)
Estd.Value of Minerals if extracted today
Annualized Standard Deviation of Mineral prices
Capital Investment
Estd. Mine Life (years)
No of outstanding shares
Value of Option
Inputs relating the underlying asset
Output
Louise Lake property - Real Options Valuation Model
The following section describes how the inputs of the real option model were obtained:
1. Estimated value of minerals if extracted today - The table below shows how we
determined the value of minerals if extracted today.
Resource Category Tonnes Grade Price(USD) Price(CDN) Value
6,000,000 0.214% Cu 28,300,000 lbs Cu 1.90 2.2 55,651,950
6,000,000 0.006% Mo 780,000 lbs Mo 12 13.8 9,687,600
6,000,000 0.20g/t Au 39,000 oz Au 550 633 22,200,750
6,000,000 0.98 g/t Ag 189,000 oz Ag 8.5 9.8 1,662,728
141,000,000 0.234% Cu 727,600,000 lbs Cu 1.9 2.2 1,430,825,400
141,000,000 0.009% Mo 27,900,000 lbs Mo 12.0 13.8 346,518,000
141,000,000 0.23g/t Au 1,040,000 oz Au 550 633 592,020,000
141,000,000 0.94 g/t Ag 4,260,000 oz Ag 8.5 9.8 37,477,350
Recovery 90% Total Value $2,496,043,778
Operating Costs 1,409,944,850
Net Value $1,086,098,928
Louise Lake Property - Value of Resources
Contained Metal
Indicated
Inferred
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 17
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
100% of the 43-101 compliant Indicated and Inferred resources have been used in
this calculation.
Even though this model allows us to use current commodity prices, we prefer to use
conservative estimates, as it can be seen from the table.
Assumed a recovery rate of 90%.
2. Annualized standard deviation of Mineral prices –Since copper and gold are the
primary metals (based on value) among the four target metals, we use a blend of the
annualized standard deviation of gold and copper prices.
3. Capital Investment –It is the present value of all the capital investment required
throughout the mine life, which we estimated from comparable mines.
4. Mine Life –Estimated from comparable mines
5. Risk free rate –It is the yield of 20 year bonds issued by the Canadian government.
Valuation of the uranium properties in Alberta –Comparables Valuation
The table below shows the comparables valuation model, which values the company’s
properties in Alberta at $0.13 per share.
SYM Price Shares Market Cap Mineral Ratio Properties
Assets
1 Northern Continental Resources Inc. TSXV: NCR 0.22 38,604,392 8,299,944 1,042,487 8 Athabasca -
Russel Lake
2 North American Gem Inc.1 TSXV: NAG 0.22 46,671,161 10,267,655 694,246 - Alberta
3 Universal Uranium Ltd.2 TSXV: UUL 0.40 32,174,493 12,869,797 5,195,692 2 Labrador (Can),
Utah, Arizona
4 Purepoint Uranium Group TSXV: PTU 0.32 50,013,306 16,004,258 4,340,682 4 Athabasca
5 Rampart Ventures Ltd. TSXV: RPT 0.29 63,099,136 17,983,254 3,661,030 5 Ontario and
Sasketchewan
6 Pitchstone Exploration Ltd.3 TSXV: PXP 1.29 25,979,761 33,513,892 1,811,545 19 Athabasca, Nunavut
& W.Africa
7 Titan Uranium Incorporated TSXV: TUE 1.69 27,363,205 46,243,816 3,017,912 15 Athabasca
& Thelon
Average 9
$0.13
1 - CAPEX of only the Uranium properties
2 - Mineral Assets in Labrador (Canada) is very low compared to other properties
3 - Mineral Assets in W.Africa is very low compared to other properties
Implied Stock Value (from the Uranium Properties)
The relative market value of NAG’s uranium properties in Alberta was determined using the
average of the ratio of market capitalization to mineral assets of comparable companies. All
the six comparable companies that we picked for this model, focus only on uranium and
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 18
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
RATING
RISKS
the six comparable companies that we picked for this model, focus only on uranium and
have properties in Canada. All the companies, except Universal Uranium Ltd. (TSXV –
UUL), have most of its properties in Canada. The average of the ratios is 9 and by
multiplying it with the total uranium assets of NAG, which is $0.69 million, we obtain the
relative market value of the properties as $0.13 per share.
Valuation Summary
The table below summarizes the valuation model. By adding up the value of the Louise Lake
property (based on real options valuation model) and the uranium properties in Alberta
(based on comparables valuation model), we obtain the value of NAG stock per share as
$2.08.
Valuation Summary
Value of the Louise Lake Property $1.94
Value of the uranium Properties in Alberta $0.13
Value of NAG stock per share $2.08
Our valuation model indicates that the company’s stock is undervalued. The valuation model
was strictly based on the information we have with regard to the properties at this time.
Taking into consideration the potential of the company’s properties, the expectation of high
gold and uranium prices in the long-run, and the ongoing exploration activities of the
company, we are initiating coverage of North American Gem Inc. with a BUY rating of
fair value $2.00.
The company is exposed to all the risks associated with any other mineral exploration
company. The following risks, though not exhaustive, will cause our estimates to differ from
actual results:
The company has only one property with 43-101 compliant resource estimates.
Like any other exploration company, NAG does not have any operating mines and
hence does not generate any revenues or positive cash flows.
NAG’s success is dependent on the management and development of its exploration
projects
The success of drilling, expansion and increasing favorable resource estimates are very
important factors of company’s future prospects.
The value of the company depends heavily on commodity prices (mainly gold, copper
molybdenum and uranium.
The company is forced to raise capital frequently. Its capacity to raise cash in the stock
market will depend on the value of its stock; the lower the stock price the lesser the
capital raised and/or more dilution.
Some of our estimates, such as operating costs, are our best estimates based on
comparable projects though only a feasibility study can make a proper determination.
NA Gem Inc is considered a high-risk investment opportunity, as are all exploration stage
projects. At this stage, we therefore rate the shares Risk 5: Highly Speculative.
Brian Tang, BBA, CFA North American Gem Inc. (TSX-V: NAG) –Initiating Coverage Page 19
2006 Fundamental Research Corp. www.fundamentalresearchcorp.com Brian Tang, BBA, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Fundamental Research Corp. Equity Rating Scale:
Buy –Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold –Annual expected rate of return is between 5% and 12%
Sell –Annual expected rate of return is below 5% or the expected return is not commensurate with risk
Suspended, Under Review or Rating N/A— Coverage and ratings suspended until more information can be obtained regarding recent events.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated
industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure
is conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less
sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free
cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are
sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages,
and coverage ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a
turnaround situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.
Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.
These stocks are considered highly speculative.
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Ok, thanks for that Dumbas. Quite thorough !! Will execute a "buy" 2moro.
Hey dumbas, what is it in the chart that makes you think sumthing is up ?
Ok, nice 1. Thanks for that mate......
does anyone know what is happening with MSRM shares in regars to the Global Resources buyout ?
anybody know whats happening with GBU. It has failed its recent support levels