Galantas Gold GAL/GALKF .08 Research Report
CORPORATE OVERVIEW GALANTAS GOLD CORPORATION
is a Canadian junior resource company involved in the
exploration and development of gold properties in Ireland. The shares are quoted on both the London AIM and the
Toronto Venture Exchange. Through its wholly-owned Ontario holding company, Cavanacaw Corp., Galantas wholly
owns the shares of Omagh Minerals Ltd (owner of prospecting and mining rights around Omagh, Northern Ireland)
and Galantas Irish Gold which markets the company’s gold production as certified Irish gold jewellery. The
company’s prospecting licences cover an area of 653 sq kms, including over 50 identified gold targets. At June 2009,
Galantas had estimated NI.43-101total gold resources of 16,000oz (Measured), 88,000oz (Indicated) and 295,000oz
(Inferred). In June 2010, Galantas raised C$2.25m through two private placement tranches. Following this, Kenglo
One, the strategic investment vehicle associated with Chris R Brown, the former CEO of London Mining, had a 19.3%
equity stake and a warrant stake which, if converted today, would yield a further 13.1% of the equity to 32.4%. With
this funding in place, the company has been able to press ahead with its exploration programme. This is expected to
translate into a higher NI.43-101 resource estimate in the coming months.
2011 Drilling Programme Underwritten by Kenglo One
Galantas’s latest ‘sweet heart’ deal with strategic investment vehicle and major shareholder, Kenglo One,
removes any remaining doubt. Kenglo is keen both to accelerate Galantas’ move toward underground
mining on the Joshua and Kearney veins, whilst also demonstrating that CAD$0.10/share
(GBP£0.064/share) is a price that its founder and ex-London Mining CEO, Chris Brown, is happy to pay.
Last Thursday’s regulatory news release was heavily convoluted with legalese, leaving investors scratching
their heads as to the real implications of this MI 61-101 ‘related party transaction’. With the fog clearing,
however, it appears that Mr Brown has simply found a way of injecting GBP1.25m of new funds into the
Group without falling foul of the TSX Venture Exchange’s (‘TSX-V’) strict takeover code. Although
Galantas still awaits a formal ‘OK’ from the Canadian authorities, no rule appears to have been broken and
shareholders should perhaps congratulate their Group’s President and CEO, Mr Roland Phelps, on striking
such an exceptional deal! Being reluctant to dilute existing shareholders at Galantas’ current lowly share
price, he instead entered into a convertible unsecured loan agreement on an outstandingly attractive 2% pa
above Barclay’s base rate (of 0.5%)! But that’s not all. This loan either becomes repayable upon Kengo
exercising any of the warrants issued by Galantas in July and August last year or otherwise become
convertible into ordinary equity (subject to the TSX-V’s 4-month resale restriction) at CAD$0.10. So,
effectively, this facility just replicates Kenglo’s existing warrant position. In doing so, however, a means
has been engineered by which an important lump of new cash can hurriedly be placed onto Galantas’
balance sheet just at a time when the weather should allow exploration to start in earnest once again.
Too good to be true? Has Galantas found a ‘sugar daddy’? Not exactly. The first and second private
placement tranches entirely subscribed by Kenglo One last year took its holding to approximately 19.3% of
the issued shares. It also became a ‘control person’ of the company following the granting of permission at
a Special Meeting of Shareholders.
Thus, if all warrants within these offerings were now exercised, Kenglo’s stake in Galantas would rise to
about 32.4%. Should it raise its holding beyond this, however, TSX-V rules will oblige it to make a
mandatory offer for the entire share capital at or above the highest price paid (meaning CAD$0.10 or
higher). The rub, however, is that the warrants have relatively short expiry dates (being 8 June 2012 and 22
July 2012). If scheduled work for 2011, which realistically extends to 40 or 50 holes on the Joshua and
Kearney vein, were to be delayed due to a lack of financial resources, then the potential for an underground
operation may still not be adequately established before summer next year. So by offering this cheap short
term loan, Kenglo will at least ensure it knows what it is buying when the warrants mature in 15 or so
months from today. Whatever, Kenglo has placed its ‘marker’ at CAD$0.10/share (GBP£0.064) which, at
some 60% above the current mid-price, is the price at which it will take its holding almost one-third of the
Group’s voting capital. Clearly this arrangement clearly underwrites Kenglo’s conviction that Northern
Ireland’s high grade gold resource extends much further than the market currently recognises.
Drilling
The new found funds will be directed toward accelerating the Group’s first move from open cast to
underground mining. A planning application related to such a development is now at the pre-planning
consultation stage, while an existing Environmental Impact Assessment is being updated.
Following a recent channel sampling program, a one core-drilling rig has arrived on site. This rig is
contracted for a minimum of 2000m of core, though this is likely to be expanded to 5000m. Second and
third rigs are presently being organised and will hopefully arrive before June. The combined drilling
program is then expected to reach around 300m/week and total up to 15,000m. Both the Kearney and
Joshua veins are mostly located in freehold land. Kearney has been drilled with a partial fence of holes to
around 220m depth and the program is looking to enlarge the vertical and horizontal extent of the Kearney
resource base. So far, the Joshua vein has been sparsely drilled with only 17 holes to a maximum depth of
157m. The program is looking to extend its depth and northern extent, possibly with a view to working part
of it through a shallow open pit. Beaufort considers ten months of site working could, for example, produce
between 10km and 15Km of core through 50 or more holes. Mineral categories set out in the June 2008 NI.
43-101 report, for example, show Measured plus Indicated Resource for Kearney alone at 92,000 oz Au on
gradings in excess of well over 6g/t, while the Inferred figure rises to 218,000 oz Au on a grading of in
excess of 9g/t. Beyond this, of course, there are a further seven other deposits already identified with
Inferred gradings and providing substantial longer-term upside. Based on this, even if Beaufort were to
prudently assume an average grading as low as 5.5g/t gold equivalent, a spend of perhaps £1.75m could
realistically add some 150k to 250k ounces largely at the indicated level, implying a cost of just £10/oz for
this ‘in the ground’ metal. This should, of course, just be the start. Further follow-on funding should
rapidly build upon this. An obvious and realistic first target might be to take the total resource estimate to
beyond 1.0 million ounces during the next three years. A first step toward this might be anticipated during
2011.
On this basis, based on a pre-feasibility assessment and anticipated hike in production, the market may look
for Galantas to raise output to a sustainable 100,000 oz/yr gold equivalent during a minimum 15-year LOM
within three years. Modelling such a scenario it is simple to generate a net present value (NPV) of over
£40m, even after aggressively discounting the opportunity and anticipating period average gold price some
25% below that currently being achieved. Lending confidence to this scenario, it is interesting to note that a
recent short-form prospectus was filed in Toronto in August by Dalradian Resources Inc <TSX: DNA>, the
Canadian miner which also owns gold assets in Northern Ireland. Possessing an inferred resource of 1.16
million contained ounces of gold plus 400,000 ounces of silver its IPO raised over C$40m, which valued the
gold-equivalent ounces at US$41 each (roughly three times that of Galantas). Against such a background,
Galantas is clearly in a position to add significant value. Shareholders may then also be able to perceive just
how shrewd an investor Kenglo One actually is.
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