Posted: Mon Oct 29, 2012 1:00 pm Post subject: Investment Blog: Commerce Resources
Investment Blog: Commerce Resources
An Overview of a junior explorer and project developer
I first learned of Commerce Resources when I stopped by a booth at the Cambridge Show in Calgary sometime around 2005. There was a climate of very bullish sentiment for the resource sector, and very little chatter about exotic elements or rare metals back then. I recall Commerce shares were trading in the low 30 cent range or so. Most people were excited about gold juniors, silver had barely started its rise, and there were many early stage explorers that were making big-time gains in the market. I did not buy any shares at that time, but I was impressed with Chris Grove, the IR director for the company, and put the company on my watch list.
I eventually bought a small position in the company and watched the stock soar through to 2008, when the bottom fell out for the junior resource stocks. During that time Commerce achieved several discovery successes and investors had started to look for opportunities beyond just gold, silver, and base metals stories. While the crash in the aftermath of the financial crisis was painful, Commerce management impressed me because they stayed committed to their strategy, even as many other companies chased the flavor-of- the- month specs and bounced from one hot area play to the next.
One of the keys to reaching a long term objective is to stay focused. While speculative interest has been a variable factor in the ongoing bull market for resource stocks, Commerce Resources has remained steadfast in its efforts to build leverage to rare earth elements and exotic metals. It was one of the first junior explorers to define a large new deposit of tantalum and niobium with the discovery of the Upper Fir deposit at the Blue River Project in 2005. Exploration work has continued in recent years to expand this discovery zone, including the completion of a further 12,000 meters of exploration drilling in 2010.
Meanwhile Commerce was also engaged in completing other stages that are necessary to prepare for a development decision at Blue River. In November of 2011 they presented the first preliminary economic assessment for the project, demonstrating positive economics. The study projected a ten year mine life that could extract up to 7500 tons per day of resources from an underground operation, generating 2,400 tonnes of tantalum and 18,610 tonnes of niobium.
The success achieved at the end of the drill bit enabled the company to document an even larger overall resource for the Blue River Project. This year in July, it presented a report an updated resource estimate demonstrating a significant increase of 42% in the indicated resources and a 37% increase in the inferred resources for the project.
Commerce also wanted to expand our scope of exploration to a second project area and acquired the Ashram Property in Quebec through a staking program in 2007. Quebec is a very favorable jurisdiction for exploration companies, as the geology is ideal to host a large rare element deposit, and the province reimburses a large portion of the total expenses for exploration work. They commenced exploration at Ashram and achieved a significant discovery of a rare earth elements deposit that is unique both in terms of its large tonnage and high grades. Of particular interest for this new deposit area is the enrichment documented in both the light and heavier rare elements, making Ashram one of the few deposits anywhere in the world with this characteristic. I am encouraged by the enriched zone that has been defined very close to surface bearing the high value mid- to heavier elements in the suite of rare earths, and this greatly improves the overall project economics.
In March of this year, Commerce filed an updated resource estimate for the Ashram Deposit that nearly doubled the total tonnage, and also increased the average grade of the resources by about 8%, a remarkable accomplishment in such a short period of time. Shortly after, they presented a preliminary economic assessment for Ashram which also demonstrated extremely positive economics for a prospective development plan. This included a projected net present value of $2.32 billion for the project, an enormous value for a company that trades with a market capitalization of just $32 million. The study outlined a mining plan that would allow for a significant operation processing 4,000 tons per day with a mineral inventory to sustain more than 25 years of operation.
Now the key to Ashram is that the proposed development plan suggests a payback on invested capital of just 2.25 years. This, for a development expenditure estimated at $763 Million to build the mine. It therefore means that a mine at Ashram would generate upwards of $1 million per day in cash flow. Now consider that the deposit is very large and that operations could be sustained for decades…
Having defined large deposits with extremely attractive economic potential at each of its two core project areas, Commerce Resources is currently active to complete the groundwork that will support a decision to move forward with mine development planning. This process involves completing environmental surveys, testing metallurgical characteristics of sample resource material, investigating the efficiency of various processing options, and interacting with local stakeholders and First Nations groups whose support is critical to a successful development plan. In addition, they are actively in discussion with several other companies that have expressed an interest in a potential partnership arrangement that would enhance our ability to advance through to development and enable access to project funding.
The company announced the commencement of the next phase to advance the Ashram Project last month, with the appointment of the consulting firm Roche Ltd., to prepare a prefeasibility study (PFS). This involves putting together a detailed and thorough consideration of all of the aspects that would be part of a mine development plan, and also doing research on some specific elements of a major development program such as road construction and collecting environmental data. Roche was selected specifically because of the expertise this firm has demonstrated with previous work related to rare earth elements projects. As part of this study particular attention is being directed to metallurgical testing of sample material as there is great importance to determine the most efficient processing solution in order to better define the overall economic potential for the project as a whole. The PFS is expected to be completed in mid-2013.
I believe Commerce has put in place a solid financial footing that would enable this company to survive periodic downturns and still remain fully funded to continue with the important stages along the path. This prudent strategy has served the company well. Even during the past summer when many other exploration companies were unable to raise additional funding, they were able to close a small private placement that netted more than $1.6 million. Commerce Resources does not have any long term debt exposure, and the balance sheet is strong with $5 million in working capital available to fund the next stage of work. The company also receives a reimbursement for some of its exploration expenses in Quebec, which represents several million dollars in receivables pending that will continue to pad the treasury and ensure the funding is in place for the next phase of work programs.
Investors in junior exploration stocks must understand from the beginning that the development curve to move from grass roots exploration through to production is a long term undertaking. Market participants are sure to encounter volatility along the way. Commerce has evolved to where it has the luxury of controlling two extremely attractive deposits with leverage to high value metals in great demand worldwide. It should be noted that there have been no new sources of supply for the key metals that have been outlined by the company at its flagship deposits. I think this has contributed a measure of security to backstop the market value even during times when the entire sector is overly bearish.
However I do not believe the current share price for the stock is representative of fair value for the defined resources of these projects, nor for the additional value that has been created as the projects move closer to time when a mine development program may commence. The market action is beyond the control of any company. Instead it makes more sense to take a long term view, and focus on building greater value for shareholders with the confidence that this progress will eventually contribute to a much higher share price. I think this is the strategy for Commerce Resources and it is why I have held onto this stock even as I opted to sell many other explorers and project developers.
I have owned shares in this company for many years. I have added to my position, buying in the market along the way to build greater value in a core holding. I typically trade many of the holdings in my personal portfolio, buying dips and selling rallies, but with Commerce I have never sold a share along the way. I have a personal investment strategy that is geared towards keeping some of my portfolio in a speculative basket of juniors that have potential to deliver a development project and land a high value takeover deal or perhaps be carried to production as a joint venture partner. Commerce fits that strategy, and if it is one of the handful of companies that is able to achieve that level of success, my expectation is that the payoff makes it worth staying invested.
Commerce has maintained a paid advertisement on Smartinvestment.ca for several years. I contribute to general commentary on the discussion forum, and post any news distributed by the company. We display a banner link to the Commerce website, for a small fee that helps us keep the website operating. As a shareholder of the company and a founding partner of Smartinvestment.ca, I do not consider myself unbiased. I have an incentive to see the company succeed and want the stock to trade higher. However I am not obliged to buy shares, and do not have to say nice things about the company. I do think it is well run, has excellent projects in the pipeline, and there is a legitimate shot that this company will be successful, so I own shares and feel very comfortable to post my comments about its prospects.
At the current time, Commerce has documented very strong economic potential for its Ashram Project, with the potential to advance through development to become a producing rare earth elements mine. The net present value assumptions for this development run into the billions of dollars, for a company with a market cap of just over $30 million, plus cash on hand. This seems like worthwhile value to me, and I bought more shares a few months ago. The stock is still priced closer to its lows even though it has accomplished a great deal in the last few years, as I have outlined above.
When you have strong management, a good strategy, and viable projects, this usually contributes to higher share values. There will always be an uncertain outcome along the way, and sometimes even the right combination of circumstances will not be enough to see a project through to development. That is the risk that I am willing to take as a speculator in this sector, and I still choose to buy a basket of good stocks that may generate at least one winner to create an overall win for the portfolio strategy. That is why I have held Commerce Resources and will continue to own this stock even while the sector is out of favor today. These are my reasons and I have disclosed my personal bias. I think people should consider the opinions of other investors, but must eventually do all the research and come to their own conclusions with any stock.
And I think the IR team at Commerce is very good, so the first stop should be to contact the company and get the story direct. Get in touch with Chris Grove to hear the basics of what Commerce Resources has accomplished so far, and what the company is working to achieve. Chris Grove has now accepted a role within the company to expand its marketing efforts, in order to identify new corporate partners and look to build relationships with end users that may lead to off take agreements. This in itself demonstrates some of the progression for the company as a whole, in the drive towards development of at least one mine. However, I still recommend that investors take the time to speak with some of the management of Commerce to get an idea of where this company is going.
Cheers!
Mike
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