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May 19, 2015
Stanley Cutler
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Thar's Gold (And Silver Too) In Them Thar Hills: Discover Clifton Mining Company
Must Read | May 19, 2015 10:30 AM ET | 1 comment | About: Clifton Mining Co. (CFTN) by: Stanley Cutler Subscribers to SA PRO had an early look at this article. Learn more about PRO »
Disclosure: The author is long CFTN. (More...)The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Summary
• Clifton Mining Company is a gold nugget waiting to be discovered by the investing community.
• CFTN is a micro-cap penny stock (stock price is $0.19, market cap is $11 million) that has a high probability of increasing in value to $0.43 in the near future.
• CFTN’s Royalty Payment agreement with Desert Hawk calls for a 5% royalty payment for the Kiewit Property and up to 15% for the Clifton Shear Veins.
• Industry standard for royalty payments is between 1% and 3%. CFTN’s favorable Royalty Payment percentages further enhance the value of CFTN.
• The highly probable amount of one billion ounces of silver on CFTN’s property justifies a much higher valuation of 18 times the current value, or $3.40 per share.
Company Background and History
Clifton Mining Company (OTCPK:CFTN) is a natural resource company focused on the production of precious metals. With its headquarters in Alpine, Utah, it was founded in 1993. Clifton Mining Company's property contains both patented and lode claims, and the Company has a 250 tons/day production mill facility. It has a joint venture property located at the Utah-Nevada border with an area of 33 square miles. Its resource base is mainly confined to Clifton Shear Zones (sometimes referred to as Clifton Shear Veins), Mineral Deposits, Skarn Deposits, Bedded Replacement Deposits and Porphyry Deposits. The Company's major products include silver, gold and lead. Some of its exploration sites show copper or copper-molybdenum and tungsten deposits. For a detailed description of CFTN and its 19.7% owned affiliate, ABL, see CFTN's webpage.
CFTN management has been very conservative in spending, which has resulted in CFTN having a very strong balance sheet with no debt. CFTN has no need to spend cash for exploration, and there is no cash burn for mining operations. Desert Hawk incurs all of the exploration costs and pays CFTN a royalty for minerals it extracts from CFTN's properties. CFTN has $382,000 cash, total assets of $3.7 million, and Shareholders' equity is $3 million. Readers are invited to read CFTN's financial statements.
CFTN trades on the OTC. At market close on Friday, May 15, 2015 the shares were at $0.19.
Description of Mining Properties and Precious Metals in the Properties
I am not a geologist or mineralogist. What I present in this section is the knowledge I have gleaned from being a shareholder of CFTN for the past 5 years. I have had many interviews with Bill Moeller, Chairman of CFTN. I have attended the annual shareholder meetings. I have interviewed geologists and Ken Friedman, CFTN's President. In July 2014, I visited the mining properties with Bill Moeller and was very impressed with the scale of the mining being done by Desert Hawk, and the very large heap leach Desert Hawk has constructed, from which it is collecting gold and silver. In a later section, I will discuss Desert Hawk and its mining of the Kiewit Property, which is owned by CFTN, and the agreement between CFTN and Desert Hawk.
I have taken the following description of the veins and deposits directly from an entry in the Wikipedia's description of CFTN. The description corresponds closely, if not exactly, with what Bill Moeller described to me in my interviews with him and with the discussion I had with him during our tour of the mining properties. This description is also verified by the conversations I have had with geologists and what I have heard from management, and a University of Utah professor of mineralogy, who gave a presentation at one of the shareholders meeting I attended. I feel confident that this description is substantially accurate.
The veins are a rich source of silver, lead and gold. The Shear Veins are unique in the fact that they come right to the surface. This vein structure is visible for distances of up to 6,000 ft. Approximately 100 mine workings penetrate the shear veins and give access into the veins for distances of over 400 ft. The old workings are located on all sides of the Shear Vein property at varying elevations, enabling the Company to show consistent silver, gold, and lead values throughout the shear vein system.
Two additional types of mineral deposits have been discovered within Clifton Mining's property boundaries, and there is strong evidence of a third. They are skarn deposits, bedded replacement deposits, and the probable third is a porphyry deposit.
Skarn deposits system is a two-mile-long system with numerous surface exposures. Historical records in the area report some gold values associated with these skarns to be in the multiple-ounce gold category. Copper, which is also associated with the Clifton skarns, can exceed 10%. Samples taken within Clifton Mining's skarn system have values in excess of 0.3 oz. /ton gold. Further drill work and sampling will be necessary to delineate exact boundaries and tonnage potentials; however, it is currently estimated that Clifton's skarn system may hold as much mineral value potential as the Shear Zones.
Clifton Mining has already discovered and assayed numerous Bedded replacement deposits within the Clifton claim block. The assay values associated with these deposits have typically been very high-grade. Assay work completed on the surface and within accessible mine workings, shows value ranges from 0.014 to 0.50 oz./ton gold, 8.0 to 50.0 oz./ton silver, 1 to 30% copper (Monocco bedding), and lead values from 7 to 34%. Current information shows average values within the bedded replacement deposits of approximately 0.04 oz. /ton gold, 12 oz. /ton silver, and 10% lead. The Clifton Cabin bedding, which was core drilled (see announcement 11/3/97), showed average values of 28.11 oz/ton silver, 17.6% lead, and 0.013 oz/ton gold.
There is also strong evidence that a large mineralized porphyry system intrudes the property from the east side, holding promise for a large deep-seated copper or copper-molybdenum deposit. It is expected that this porphyry deposit will be similar to the Ruth (Robinson) deposit, located only 70 miles south of Clifton Mining's property. The Ruth deposit has produced 320 million tons of ore to date, including 2.7 million tons of copper and 90 tons of gold.
When one reads the description of the property in Note 3 "Mineral Properties" contained in CFTN's Financial Statements, one would reach the conclusion there is not enough gold and silver to get really excited about. CFTN's management has chosen not to spend a large amount of money for drilling core samples, and therefore the extent of the depth of the veins and magnitude of the deposits of silver in the veins is not proven and, therefore, cannot be stated in the audited financial statements. Management has told me that CFTN would need to spend approximately $15 million to determine how deep the veins go and how many ounces of silver per ton is contained in the Clifton Shear Veins.
You will note that I mostly discuss silver in the Clifton Shear Veins in this report. There are also known deposits of silver, gold, tungsten, lead and other minerals at other locations on the property owned by CFTN. But it is the magnitude and the richness of the probable silver deposits in the Clifton Shear Veins that gets me excited.
From my discussions with Bill Moeller, I have learned that in the Clifton Shear Veins the known ounces per ton of silver range from 8 ounces to 40 ounces per ton with an average of 15 ounces per ton. This is a very rich deposit of silver. These measurements of ounces per ton come from what can be observed from the surface and from old mine workings. Bill Moeller was of the opinion there is a high probability that there are in excess of one billion ounces of silver in the Clifton Shear Veins. In the November 12, 2014 Shareholders' Meeting, I asked management if they believed there were one billion ounces of silver in the Clifton Shear Veins. No one in management or on the Board of Directors denied that there are one billion ounces of silver. The answer to my question was given by Keith Moeller, who told us there is a big difference between a billion ounces of silver in the ground and a billion ounces of silver on the surface, refined.
Sometime after the meeting, I asked the geologist who has done extensive work for CFTN if he believed there could be a billion ounces of silver. His answer was he believed there was a high probability of there being that much silver. However, he said there is also a high amount of arsenic in the ore. He told me, because of the arsenic, it is difficult to get permits to mine the silver.
All gold and silver mines that have rich deposits of gold and silver also have high levels of arsenic. Since large gold mining operations in Nevada have been given permits, it is reasonable to expect CFTN's mine can obtain the necessary permits. A very good solution to the arsenic problem is to put it back in the ground where it came from. Also, if you look at the property, it is one of the most desolate places in Utah. It is hard to understand why it would be so difficult to get mining permits in such a remote desert of Utah. Desert Hawk has obtained a permit to build a large heap leach and is currently mining gold from the Kiewit Property, which proves it is possible to obtain a permit.
As I have stated, I will cover current mining operations in a later section; however, in order to understand what is discussed in this section, readers may want to read Desert Hawk's current Form 10-K filed with the SEC. To understand the royalty arrangement between CFTN and Desert Hawk, it is necessary to read the "Amended and Restated Lease and Sublease Agreement effective July 24, 2009, with Clifton Mining Company and Woodman Mining Company" (the "Lease Agreement") filed as Exhibit 10.4 to the Form 10-K. The royalty payments are discussed in Article IV of that agreement on page 6 and page 7.
In a way, it is unfortunate that CFTN or Desert Hawk has not done the necessary core drilling to determine how many ounces of silver there are in the Clifton Shear Veins. However, if you look at the financial resources of the two companies, you can see neither company currently has the resources to spend the necessary amount of money to determine the extent of the veins and the richness of the silver in the veins and how deep into the earth the veins reach.
Per the Lease Agreement with Desert Hawk, CFTN is to receive a Net Smelter Return Royalty (the "Royalty Payment") based on a sliding scale, which is dependent upon the price of silver. The Royalty Payment ranges from 2% to 15% for precious metals situated in the Clifton Shear Veins. If we assume the price of silver is $17.50 per ounce, the closing price of silver on May 15, 2015, then the Royalty Payment would be 8% payable to CFTN. This 8% Royalty Payment amounts to $1.4 billion of revenues over time to CFTN, assuming the price remains at $17.50 per ounce of silver and there are in fact one billion ounces of silver in the Clifton Shear Veins. If the price of silver is $25 or greater, the Royalty Payment is 15%. Silver has been as high as $48 in 2011. I, and many others, expect the price of silver to again reach this price or to exceed $48 per ounce of silver. But let us be conservative and use a price of $30. At the $30 price, the Royalty Payment amounts to $4.5 billion of revenues over time to CFTN.
CFTN management has negotiated an extremely favorable rate for the Royalty Payments. Industry standard for royalty payments is between 1% and 3%. CFTN's Royalty Payment agreement with Desert Hawk calls for a 5% Royalty Payment for the Kiewit Property and up to 15% for the Clifton Shear Veins depending on the market price for the precious metals. These favorable percentages further enhance the value of CFTN.
When will mining of the Clifton Shear Veins begin? I cannot answer that. I estimate the beginning of this mining will be in approximately three years. Obviously, neither CFTN nor Desert Hawk currently has the resources to drill core samples to determine the amount of silver available in the Clifton Shear Veins. However, I see Desert Hawk generating revenues of $14 million for 2015, $22 million for 2016, and $26 million for 2017 and annually thereafter from the Kiewit Property. This is based on the assumptions stated in the section titled "Current Mining Operations and Royalties Being Received" below. The revenues are calculated assuming the annual ounces of gold recovered as stated below, a gold price of $1,200 per ounce, and that Desert Hawk will retain 94% of the revenue after remitting 5% to CFTN and 1% to two other entities. Since there is no historical operating information for Desert Hawk, it is impossible for me to project net profits for Desert Hawk. However, it is reasonable to assume that the operation will be profitable, and Desert Hawk will have adequate cash flow to drill core samples to determine the amount of silver available and where to mine in the Clifton Shear Veins.
This is why I get excited about CFTN, and why I have been a shareholder of CFTN stock for 5 years. I believe the market gives CFTN a value of $11 million because CFTN has not been discovered by the market. This market cap is based on 154,584 preferred shares outstanding (a preferred share is convertible into one share of common stock) plus 58,770,791 shares of common stock outstanding on December 31, 2014 (a total of 58,925,875 equivalent common shares) and a closing price of the common stock of $0.19 on May 15, 2015. So far, I have only discussed silver known to exist in the Clifton Shear Veins, and the probable amount that exists, i.e. one billion ounces. In the next sections, I will discuss current mining revenues being derived from gold and CFTN's ownership of ABL. These two items, generating current income for CFTN, are worth far more than $11 million.
Current Mining Operations and Royalties Being Received
To understand the current mining operations, readers are invited to visit CFTN's website and to become familiar with Desert Hawk Gold Corp ("Desert Hawk"). Desert Hawk is a public company, although its stock does not trade, and Desert Hawk, therefore, files with the SEC. As a result, it is fairly easy to understand the operations of Desert Hawk and the substantial investment that DMRJ Group has made in Desert Hawk and is committed to invest. To get an overview of Desert Hawk, I refer readers to its recent Form 10-K filed with the SEC. When one reads the financial statements, one would conclude that Desert Hawk is bankrupt. Without the future backing of DMRJ Group, this is true. However, from reading Desert Hawk's 10-K, it appears DMRJ Group has invested approximately $15 million consisting mostly of convertible debt, in Desert Hawk. It is highly unlikely with this investment and the prospect of realizing its 67% investment in Desert Hawk's common stock that DMRJ Group will not continue to fund Desert Hawk until it generates sufficient cash to operate on its own, especially considering that Desert Hawk is now in operation and recovering and selling gold. On May 14, 2015 Desert Hawk filed its 10-Q with the SEC. This 10-Q shows positive cash flow from operations for the first 3 months of 2015.
As stated above, CFTN has a Lease Agreement with Desert Hawk. Under the Lease Agreement, CFTN is to receive a 5% royalty payment for all precious metals mined in the Kiewit Property, the property in which Desert Hawk is currently mining. The royalty payment of 5% is a constant percentage for the Kiewit Property regardless of the price of precious metals. While there is some silver being recovered from the Kiewit Property, the main precious metal being recovered is gold. The amount of the royalty payment stated in Article IV of the Lease Agreement on page 7 is 6%, but CFTN receives only 5% since 1% is given to two other entities as compensation for their previous efforts in surveying and drilling core samples on the Kiewit Property.
Based on the expected number of tons of ore being placed on the heap leach pad annually, and based on the recovery of gold from the heap leach each year, and based on an assumed market value of $1,200 per ounce for gold, future annual revenues to CFTN are expected to be $720,000 for 2015, $1.2 million for 2016, and $1.4 million for 2017 and for each year for future years for 10 years or more. These estimates are based on recovering 12,000 ounces of gold for 2015, 20,000 ounces for 2016 and 24,000 ounces for 2017 and future years. These revenue expectations are for gold only. There is some silver also being recovered from the Kiewit Property. However, due to the rather small amount of silver being recovered in the Kiewit Property, revenues from silver recovery are not included in the above amounts.
Heap leaches are an interesting way of extracting precious minerals from mined ore. A heap leach continues to produce for several years even after no more ore is added to it. The expected productive life of the Kiewit heap leach is more than 10 years. For a more detailed description of the heap leach process, please visit CFTN's webpage and Desert Hawk's Form 10-K.
CFTN's Investment in ABL and Annual Dividends Received from ABL
CFTN owns 19.7% of ABL, a manufacturing and sales company of healthcare products using powerful nanosilver technology. ABL's sales for 2014 were $12.6 million, a 26% increase over the $10 million for 2013, and net income was $2.6 million for 2014, a 160% increase over the $1 million for 2013. We can see ABL's revenues and profits have increased significantly historically, and revenues are expected to increase at an annual rate of 25% for the next several years. Therefore, one could expect continued increases in dividends from ABL. However, perhaps a better way of realizing CFTN's investment in ABL would be for CFTN to sell the ABL unit shares it owns. There is no public market for member units of ABL, and therefore, there is no market value established for ABL. However, if we assume a reasonable market multiple of 20 P/E for ABL, then ABL has an estimated market value of $52 million. CFTN's share of ABL's value is 19.7% or $10.2 million.
Currently, CFTN accounts for its 19.7% ownership of ABL under the equity method of accounting. The income recognized from ABL under the equity method of accounting for 2014 was $528,389. However, as its percentage of ownership in ABL decreases, due to ABL's issuing shares from the exercise of options, CFTN will most likely change its accounting method to recognizing income based on dividends received. During 2014, CFTN received $488,000 or $0.32 per equity share of ABL owned. The 19.7% ownership of ABL represents 1,525,000 equity shares of ABL that CFTN owns. It is expected that ABL will pay dividends between $0.35 and $0.50 per unit share for 2015 or between $533,750 and $762,500.
American Silver, LLC ("ABL") is a limited liability company formed under the laws of the State of Utah on November 10, 1998. ABL was primarily formed as a holding company for its wholly owned subsidiaries, American Biotech Labs, LLC, ABL Manufacturing, LLC, ABL Medical, LLC, and ABL International, LLC. American Biotech Labs, LLC markets and sells products for the dietary supplement and cosmetics markets, which are distributed through health food stores, healthcare providers, nutritional supplement distributors, and other companies throughout the world. ABL also markets and sells products throughout the U.S. that is approved by the US EPA as an effective broad spectrum disinfectant and bacteriostat against odor-causing bacteria in dental unit water lines. ABL Manufacturing, LLC manufactures products using a patented process. ABL Medical, LLC has recently launched the marketing and selling of approved wound dressing medical device products under FDA Section 510(K).
ABL's mission is to create documentable, stable and powerful nanosilver products. It is a three time recipient of the Best of State award for Medical Innovation. ABL utilizes SilverSol® nano-catalytic technology in its products. SilverSol Technology® has twenty plus safety reports and test series as well as the first ever double-blind, FDA-cleared, human ingestion toxicity study done on any silver product. SilverSol® silver particles are Ag404 molecules. The term "Sol" is a chemical designation of a pure mineral permanently suspended in water where the mineral's charge is transferred to the entire body of water. The technology is also known as Silver Hydrosols.
ABL has taken the old technology of colloidal silver and improved it to create the next generation of silver products. Through a new manufacturing technology, patented under multiple patents, ABL's advanced nanosilver solution has become the new standard by which all other silver products are measured. ABL calls this new generation of colloidal silver, SilverSol®, SilverSol Technology®, or SilverSol® 101. Not only is ABL's SilverSol Technology® more advanced than the original colloidal silvers, but through years of research at leading universities, it has compiled thousands of pages of test work documenting many key advances. For more information about ABL, visit ABL's webpage.
Conclusion
If we consider value CFTN is now actually receiving as income from mining operations and the $10.2 million estimated value of its investment in ABL, CFTN could easily have a current market cap of $25 million versus its current market cap of $11 million. This would equate to a per share amount of $0.43 instead of the current share amount of $0.19. If the market discovers CFTN in the next few months, which I believe it will, CFTN could easily result in an investor more than doubling his money in a very short time. The $25 million value is computed without any recognition of the probable one billion ounces of silver in the Clifton Shear Veins.
In my mind, CFTN could easily be valued at $200 million. Some have told me that figure is too low, but I am a conservative old accountant and will use this lower value. This $200 million valuation is based on the assumption there is one billion ounces of silver in the Clifton Shear Veins (there is strong evidence there is that much silver), there is a large amount of gold in the Kiewit Property, plus the $10.2 million value of ABL that is not recognized by the market, and the current operational profitability of CFTN. Using the $200 million valuation, CFTN's shares are extremely underpriced and could easily be priced at $3.40. With no revenues or operating profit, it was valued at $2.55 on February 1, 2004.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
