CFO.V: Currently 1.80. Be interested in informed opinions (either pro or con). I took a starter position.
Clifton Star Resources Inc. (CFO-TSXV)1
July 25/11 closing price: $2.90
Michael Fowler, M.Sc MBA
Clifton Star- 7 Months Stock Halt- A Donchester Resource Hatchet Job But The Figure Is A Good One- Positive : The company announced the filing of an updated NI 43-101 report on the Donchester property (contiguous with the Beattie Property, Quebec) as a result of a review by the British Columbia Securities Commission (BCSC). The former report by Peter Bevan was deemed non-compliant by the BCSC and for mostly this reason, the stock was cease traded so that a new technical report could be tabled. This process took seven months to fulfill. It is important to understand that this report is independent (typically these reports are quasi-independent) of the company and was tabled after review by the BCSC.
The new report estimates that the Donchester property hosts an inferred (even with 219 drill holes!) resource of 1.05 million ounces grading 3.06 grams per tonne using a cut-off grade of 1.5 grams per tonne and a top cut of 8 grams per tonne (see below)*. This figure is not comparable to past figures estimated, or adjacent property estimations, because of the different parameters used in calculating the resource. The figure is within our expectations and should be positive for the stock price once the initial swoon has taken place when the cease trade order is lifted.
The resource estimation can only be described as a hatchet job, probably to satisfy the BCSC. It is very rare to see such high bottom cut-offs used for a potentially partially open-pit scenario and a top cut of just 8 grams per tonne is the lowest we have ever seen! The author estimated that the effect of the top-cut to be 282,500 ounces lost in the resource estimation. In other words the uncut resource was 1.366 million ounces using a bottom cut-off grade of 1.5 grams per tonne. In the NI43-101 report, the issue of the high bottom cut-off grade was not fully explained or really justified. It does seem that the resource is probably refractory, but testing is still on-going and this hasn’t been thoroughly examined as yet. It is true that a refractory ore would be higher cost to mine, but SGS (contracted by Osisko for the adjacent Beattie deposit) used a cut-off grade of 0.67 grams per tonne for their estimation on what is the extension of the same deposit!
The effect of the bottom cut-off grade used has a severe effect on the resource estimate. If we take the Beattie deposit as an example, the resource figure doubles from using a 1.5 gram per tonne cut-off to a 0.5 gram cut-off . This is sourced directly from the Beattie NI 43-101 report. The reason for this is that all gold grades lower than 1.5 grams per tonne are deemed to be zero grade and therefore are not included in resource estimate. At Donchester, there is a lot of sub 1.5 grams per tonne material in the deposit and this was ignored as sub-economic. Also, for comparison purposes, Aurizon Mines in their resource estimate of the Joanna property, Quebec uses a 0.33 grams per tonne cut-off and this is a refractory deposit as well. The issue of the cut-off needs to be looked at industry wide to avoid these complications and their effect on stock prices. The bottom line is that there could easily be over 2 million ounces of resource at Donchester at a 0.5 grams per tonne cut-off and this would exceed expectations! Finally, normally a grade tonnage variability table is given in NI43-101 resource estimations and this was absent in the NI 43-101 report. It certainly would have helped!
In our opinion, the company has the potential of proving up a resource of plus 5 million ounces at a 0.5 grams per tonne cut-of grade. Despite the suspension of the stock for 7 months, the figure reported today only serves to reinforce that point of view. Also the company has over $14 million in working capital, is continuing to drill the Beattie and Donchester properties and it has the ability to access a $22.5 million credit facility from Osisko, convertible into Clifton stock at a price of $3.12 per share. We are assuming the stock will start trading again pre-PDAC and we fully anticipate a dive in the stock, as frustrated investors flee the stock. The announcement today shows that the suspension of the stock was not due to an impairment of Clifton Star’s asset base, but more to do with disclosure issues. Even at a stock price of $2.90, with the extremely conservative NI 43-101 reports, the stock would be trading at an EV/per resource of just $40, which is inexpensive. We would recommend buying on the downdraft.
· Bottom cut-off: All assay values below a pre-determined figure are set to zero
· Top-cut: All assay values above a certain figure are reset to that number