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Eureka Resources has “found it”

By Zig Lambo, resourceINTELLIGENCE TV Contributing Editor

“Eureka” is a famous word related to gold and gold mining. It’s the exclamation, in Greek, attributed to Archimedes, who is said to have cried out “Eureka! Eureka!” (I’ve found it! I’ve found it!), when he suddenly discovered a method for measuring the volume of an irregular solid thereby making it possible to determine the purity of a gold object. This was all prompted by his attempt to determine the actual gold content in King Hiero’s crown. In more recent times the term has been adopted by gold miners as a favorite name for locations related to the discovery and mining of the yellow metal.

So it’s quite appropriate that a company with nearly 614,000 measured and indicated ounces of gold and over 1,225,000 inferred ounces of gold in the ground be called Eureka Resources Inc. Our shareKNOW Global Resource Reference analysis shows that Eureka’s 100% interest in the Frasergold property carries a gold value in the ground (before mining costs) of some $2 billion at the current gold price of $1,140. In our view that means that Eureka definitely deserves a closer look by investors interested in a situation with significant appreciation potential, which is greatly undervalued at current price levels.

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We spoke with Jack O’Neill, chairman and president of Eureka Resources Inc. several days ago to get his current thoughts on what the future holds for his favorite resource investment. By way of background, Mr. John J. O’Neill has been involved with the company since he founded it. He tells us that he did so because his experiences with investing in other people’s resource stock deals hadn’t been as successful as the other businesses he had started and operated on his own. So he decided that he could do a better job with a company where he could call the shots.

Over the years Mr. O’Neill had launched a number of other ventures including a boat-chartering firm, several real estate development projects, a logging venture, a signage company and a number of catering companies including O’Neill Railway Catering Ltd. and especially, National Caterers Ltd. The latter, provided a key building block to put him into position to invest in his first love, hotels, harkening back to the time in his early career when he was the general manager of the landmark Prince Edward Hotel in Brandon, Manitoba. The company that he then founded, called Coast Hotels, became Canada’s fastest-growing hotel chain in the 1980s and is now noteworthy part of B.C. business history. Mr. O’Neill sold National Caterers in the mid-1990s and has since directed much of his attention Eureka.

The Frasergold Property

The 2,866-hectare Frasergold property is situated in the historic and mineral-rich Cariboo Mining Division of British Columbia, about 100 kilometres east of Williams Lake, and is easily accessible by gravel road. The area has been a centre of concerted gold exploration and production since the great Cariboo Gold Rush of 1858-’65. Between three and four million ounces of gold have been recovered by placer miners working the fast-flowing streams and rivers of east-central British Columbia. The basis of the Frasergold property goes back to the late 1970s, when a BC prospector named Clifford E. Gunn panned some gold in Frasergold Creek in the heart of the old Gold Rush territory. Convinced that he had found something significant, he decided to stake the original claims in the area, to cover the panned gold anomaly in Frasergold Creek.

Jack O’Neill learned of what Gunn had discovered and decided that, with further exploration, this had the potential for becoming a significant gold producing property and decided to have Eureka acquire it. That was 1982, and since then, under Eureka Resources’ stewardship, Frasergold has been the site of about $8 million worth of exploratory work, including major programs carried out by ASARCO and AMOCO. The exploration has revealed mineralization that extends along a strike length of approximately 10 kilometres.

In November 2006, Eureka entered into an arms-length option agreement with Hawthorne Gold Corp. of Vancouver to explore and develop the Frasergold property under a joint venture arrangement. Hawthorne can earn a 51% interest in the property by spending $3.5 million on exploration, making payments totaling $175,000 to Eureka, and completing a feasibility study on or before April 30, 2010. Hawthorne can earn an additional 9 percent interest in the property by arranging production financing on completion of a feasibility study.

In September 2007, Hawthorne commenced a 5,000-metre drill program, as part of a 30,000-meter diamond drill commitment. Hawthorne’s 2007-’08 exploration and development program also included surface trenching, underground channel and bulk sample, and property-wide aerial surveys, including photogrammetry and geophysics (magnetic, EM and radiometric) as well as initiating a baseline environmental study. Total drilling on the property now exceeds 50,000 metres, including work from 2007/2008 as well as that done in the 1980s and 1990s.

As a result of this work, an independent mineral resource estimate on the property was completed in October 2009 which was published in a National Instrument (“NI”) 43-101 Technical Report and Mineral Resource Estimate released on November 17, 2009. The resource estimate has been made on only about 1.5 km (15%) of a mineralized system which has been traced for 10 kilometres. It shows 614,000 measured and indicated ounces of gold, plus 1,225,000 inferred ounces of gold, at a 0.30 g/t Au cutoff. There appears to be good reason to believe that the rest of the mineralized system should continue to carry similar values, but that remains to be determined through further exploration and development work leading to feasibility studies.

Our Value Analysis

Eureka is a relatively uncomplicated stock to analyze using the GRR calculators at http://shareknow.net/companies/1390, since we really only need to include the Frasergold property in our calculations. As noted above, it’s important to remember that only about 15% of the mineralized system has been tested and included in the Mineral Resource Estimate we are using as the basis of our calculations. If it ultimately turns out that the resource potential is six or seven times as great as the current numbers, that would make a huge difference in the project valuation numbers. Also, we will not attribute any value to the Company’s Lottie Lake property at this time since it is still in very early stages of evaluation.

So, first we come up with a gross value of metals in the ground for Eureka’s 100% interest. At the current gold price of $1,140, this is $2 billion. To be conservative, we’ll only include 50% of the inferred tonnage of 75,310,000 tonnes in our valuation. That brings Eureka’s interest value in the ground down to $1.3 billion.

Please bear in mind that what we are doing here is our own analysis using the basic information provided in the latest NI 43-101 report. Any assumptions we make and the results we obtain from using them in our GRR calculators, are our own, and are not provided or endorsed by Eureka’s management or its consultants. We are simply attempting to evaluate the relative value of this stock compared to other similar resource stocks, which GRR users can analyze on their own.

We don’t yet know what sort of percentage recovery of the gold in the ground would be achieved in an actual mining operation, but at this point, based upon our experience, 85% would seem reasonable. So that reduces the value to about $1.1 billion.

Since this project has not yet come to a point where any prefeasibility estimates have been developed by professional mining consultants, we will have to make some assumptions on our own. These will be in a reasonable range for the size of deposit and the type of operation which are looking at here.

Using our own estimated capital cost of $50 million to install an open pit heap leaching operation (probably the only type which could make economic sense here), and operating costs of $8.00 per tonne over the project life, (which may or may not be in the ballpark when an actual operation begins here), we arrive at an undiscounted value for Eureka’s 100% interest at just under $200 million. With about 15.42 million shares outstanding, this produces a value of US$14.11 per share (C$14.96). Compared to the current price of $0.15, it certainly appears that Eureka has some excellent upside appreciation potential from current levels.

With a market cap of less than C$2.5 million, a relatively thin float and rising gold prices, Eureka could prove to be a real “sleeper” for investors seeking an undervalued gold play with much more potential mineralization to develop and prove up on its existing holdings.

Disclosure: No positions