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Franconia Minerals Advances Minnesota Projects, Birch Lake Metallurgy

While many newer deposits and mines are found farther and farther afield — because all the close at hand ones have been mined out — our next guest is exploring on three large base and platinum group metals deposits just a stone’s throw from the ports of Lake Superior in the U.S. Franconia Minerals’  (FRA:TSX) Birch Lake project has three established deposits with resource estimates with hundreds of millions of tonnes of underground mining ore — all located near Birch Lake in the Duluth Mineral Complex of Minnesota. The company’s recently updated NI 43-101 report estimates an Indicated Resource of 131.2 million tonnes, plus an Inferred Resources of 37.5 million tonnes for the Birch Lake deposit. Franconia’s President and CEO Brian Gavin joined us at resourceINTELLIGENCE studios to tell us how his company is gearing up for a Feasibility Study on the project.

Resource Intelligence: Hi Brian, thanks for being here today. Would you tell us about Birch Lake and how it came to be?

Brian Gavin: The Birch Lake deposit was discovered in about 1985. It’s part of the copper-nickel deposits in Minnesota. They were originally discovered in the late 50s and early 60s, but not developed at that time. It’s interesting because the copper-nickel deposits in the Duluth complex are immediately adjacent to the biggest iron ore mining area in the United States. 70% of the feedstock for the US steel industry is mined in Minnesota and it’s an active mining district right now and has an incredible amount of mining infrastructure. Because of the technological breakthroughs we’ve had in recovery for copper-nickel-platinum group metals in this type of rock, we’re at the very beginning of a new mining district in Minnesota.

RI: How much work have you done to date and ow long has it been since you acquired and developed this?

BG: We’ve been involved since 2003 and have spent about $30 million so far. We’ve done an extensive amount of drilling and have brought the project from the initial resource stage. We’ve doubled or even tripled the amount of ore and we’ve collected all of the samples necessary for metallurgical testing. We’re essentially at the prefeasibility stage right now.

RI: You’ve completed multiple resource estimates as you said. You’ve also had an increase of 21% on your main deposit?

BG: That was the most recent one. We started out in 2003 with 31 million tons of inferred resource and right now we’re at 130 million tonnes of indicated resource and 35 million tonnes of inferred. So over the life of the project, we’ve more than tripled what we’ve got. The last increase was 21%.

RI: Lets talk about the three separate deposits. You have a resource estimate on each one, but the main one is Birch Lake, is that correct?

BG: The main one is Birch Lake primarily because it’s the one we feel we can put into production most efficiently. We acquired Maturi and Spruce Road in 2003 from Inco, who had them in their portfolio since the late 1960s. The issue with Maturi and Spruce Road is that they are closer to a wilderness area and they actually lie on federally owned land. It’s worth pointing out that in the United States we don’t have one, but two governments there. One is the state government and the other is the federal government. Birch Lake is further away from the wilderness area and it’s almost entirely on state owned land, so we have very little federal involvement. For that reason we think we can move Birch Lake through the permitting process much quicker.

RI: You’ve got an analogy here with Polymet which has paved the way a bit and developed a large mine a little bit south of you?

BG: Polymet is about seven miles to the south and are developing a large open pit deposit basically looking at the same type of ore. They are just about to become the first recipient of a copper-nickel mining permit in Minnesota after about four years of permitting process. They are essentially clearing the way for us from a permitting point of view.

RI: What does that mean to you in terms of where you focus your energy now? Does it allow you to make decisions that you otherwise would have had to hold back on?

BG: I think it clears the way and we feel that we can move from a feasibility study, which we expect to complete in 2011, to receiving a permit in probably under two years.

RI: What do you know about the metallurgical profile at Birch Lake in terms of amenability to mining, recoveries?

BG: We’ve done extensive bench scale testing for recoveries and we see excellent recoveries of all the metals, from the rock to a concentrate and that is the first stage of the process. We’ve also done extensive bench scale secondary recovery using the Platsol technology, which is what Polymet plans to use and we see excellent recoveries at the bench scale. Our recoveries at the bench scale are actually almost identical to Polymet’s recoveries at the pilot scale in 2006. So we are very confident that as we scale up we’re going to see acceptable recoveries.

RI: There is an analogy with Polymet in terms of the metallurgy and how you’re developing, so will there also be a share price and market cap analogy as well?

BG: I think Polymet is going first through the process and we are to some extent following in their slipstream. We plan to have more or less the same size of mine as Polymet does initially, if you look at it in terms of the amount of metals, copper-nickel and platinum-palladium produced. It is interesting to note that right now, maybe a year to 18 months away from production, Polymet’s market cap is about 500 million dollars. We are about 3-4 years behind them in terms of getting to production and our market cap right now is between 50 and 60 million dollars.

RI: There is a gap that potentially would be closed.

BG: I’m not necessarily saying that we would have the same net asset value as Polymet or any of our other competitors, but our net asset value will be substantially bigger than it is now and we’ll close the gap between our current market cap and final net asset value by doing the requisite studies and permits and brining everything to the mining stage.

RI: Have you done a scoping study?

BG: We did a scoping study on a combined operation in our Birch Lake and Maturi deposits and we decided for two reasons that we didn’t really need Maturi. One was that we found so much new ore at Birch Lake. Also, we decided to sidestep the land complications of federal land ownership at Maturi and just concentrate on Birch Lake, which is in state lands.

RI: Are you now going to move to prefeasibility?

BG: We will take some of the results of that scoping study and apply it to a prefeasibility study at the Birch Lake deposit. From that prefeasibility study, which is essentially an in-house study on the economic viability of the project, we’ll put out an economic assessment that we can release to the public.

RI: What aspects of your previous drilling have guided you to where you’re going now and what is future drilling going to look like?

BG: We spent basically the period from June 2006 until August 2008 collecting wide diameter core for metallurgical purposes and also converting the inferred resource at Birch Lake to indicated resources. We spent about 25 million dollars collecting the bulk core. We drilled very wide diameter core, in some cases from a barge on the lake, and we needed 60 tonnes of sample which represents what we potentially will mine for serious pilot scale metallurgical testing. Any drilling we do in the future will probably be narrow diameter and much cheaper drilling to convert the remaining inferred resource to indicated resource and for exploration around the margins of the deposit to add more inferred resource.

RI: Lets talk a little bit about the dimensions of the deposit. What is the strike length? I gather there is some considerable depth as well?

BG: The deposit is essentially blanket shaped in configuration or a tabular body and it lies about 2000 feet beneath the surface on average, with a very slight dip to it. Right now it is about a mile and a quarter from north to south and about a half a mile from east to west. Maximum thickness is up to 320 feet and we plan to mine it accessed by a shaft and use a method called long haul open-stopeing throughout the thicker parts of the deposit; and room and pillar mining around the margins. We’d actually produce about seven million tonnes a year. We’d process it and build a concentrate very close to the mine site. About 50% of the tailings would actually go back down into the mine as paste backfill to provide support and help with the mining method. Also, we get the added bonus of storing our tailings underground and having less of an environmental issue at the surface by having a reduced amount of tailings.

RI: That offers some substantial savings. What does this look like for your operating costs for the project?

BG: The operating costs for the project are about $25, or less we think, per tonne. We don’t have a study right now on this project, but those are our target costs.

RI: What about the rock value?

BG: The base case metal prices that we used in our last analysis, for example in our resource estimate, is about $60 per tonne.

RI: How are you moving this project forward in terms of financing? You’re a geo, but do you get out there and do the financings as well?

BG: I am a geologist and I have been in the exploration business for a little over 30 years. But on the finance side I am the founder of the company and am CEO and I like to present to the finance people to make sure that we get the story straight. It seems that finance people appreciate that approach as well.

RI: How much fund-raising have you done in the last year?

BG: Last year we did very little. We’ve been working on a financing just recently, raising a few million dollars which will take us through the year. Our last big financing was back in 2007 when we raised $19 million.

RI: You’re a substantial shareholder in the company as well. How much do you and the rest of your management team hold?

BG: The management group has been able to retain about 11% of the company to this point.

RI: Would you consider yourself a takeover target?

BG: We really don’t rule anything out. My job is to build value for the shareholders and I am a significant shareholder, so I definitely want to build some value. I think there is good potential for us as a takeover target. I think we could build a mine if we choose to do so.

RI: I’m curious about the Duluth Mineral Complex. What is it exactly and how long has it been relevant?

BG: The Duluth Complex geologically is a large body of rock about a billion years old. It essentially intruded itself into the earth’s crust, bringing with it a lot of copper and nickel and platinum group metals. They have been segregated and concentrated into these deposits and they are very similar to what we find in the Norilsk complex in Russia and to some extent the Bushveld complex in South Africa and a little bit like Sudbury in Canada. So it’s a very large repository of the copper, nickel, platinum group deposits.

RI: Another one of your neighbours is Duluth Metals. They have really come on radar with most investors lately, haven’t they?

BG: We think of Duluth Metals as the new kid on the block because they have been exploring for a few years and they have been very successful. They started out with a very aggressive drilling program and they have actually managed to find over 500 million tonnes indicated resource and probably 3-4 million tonnes of inferred. Now there is major company interest in the district in part due to Duluth Metals. Just last week they signed a JV agreement with Antofagasta Mining from Chile, a $16 million London-listed company.

RI: So the road ahead is well paved, indeed.

BG: To some extent they are bringing major company interest in and they have demonstrated the significant exploration potential in the district. I should point out that Polymet has a relationship with a major company and that Glencore is financing their exploration. Glencore being a Swiss based refining and mining group.

RI: They have some issues that you don’t have and one of them that you mentioned earlier is your location, the lands that you are on. If we look at the tonnenage for example, you’ve got this 131 million tonnes indicated plus more inferred and plus whatever potential is still there, and its all located on lands that you have permits to.

BG: Yes. We hold most of our Birch Lake resource through state leases from the state of Minnesota. We think the permitting track with just state and private mineral and surface rights is going to be much easier than on our deposits to the north where there is federal land involvement and also for Duluth Metals. The state of Minnesota is very eager to see royalties from these lands and the royalties go more or less into the state education trust.

RI: You had a loan from the state of Minnesota.

BG: A few years ago we negotiated a $2 million loan from the state of Minnesota. For every dollar that they lent us they will get a warrant to buy a share, so the state of Minnesota may potentially be an investor in the company. Last year they gave us a $500,000 grant.

RI: What is the local community interest?

BG: Interestingly, the part of the royalties that doesn’t go into the educational system in Minnesota goes back to the local counties. So there is great interest from the local community. We’re also in an iron mining area and there has been a fantastic history for almost 150 years of iron mining in the region, but the iron mines now produce as much iron ore as they ever did with 3,600 employees in the industry. Fifteen years ago it used to be 16,000 employees. So there are people with mining backgrounds who would like jobs in mining. The local politicians and legislators are fully on side with this and even to the national level, Senator Al Franken of Minnesota recently sent a letter in favour of the mining projects.

RI: You’re working on a financing?

BG: We recently completed a $4.23 million financing which should take us through this year and provide a comfortable cushion for the work we want to achieve.

RI: What does this year entail for you moving ahead?

BG: We will probably, first of all, consolidate our land position, take down some options that we have on the land site and make sure things are in order there. We then move onto some additional drilling to convert our remaining inferred resource to indicated resource. We then move on to a prefeasibility study which we think we can complete by the third quarter of 2010. If that is positive and we think it will be, we move on to a bulk metallurgical test with the metallurgic sample we already have in our hand and that would lead directly to a feasibility study. I think we could complete the final feasibility study by mid 2011 and be applying for permits at that time.

RI: You have a lot of land here. You have far more hectares than you would actually be mining on. Are you going to be exploring these?

BG: We will do some exploration as finances allow. Our primary goal is to put a mine into production and finding a few more tonnes of ore is not a priority at this point. We can find it later on as the mine develops. We see the big value for shareholders as bringing this mine to production.

RI: What sets Franconia apart from the others?

BG: I think we’ve got a nice compact underground mining operation that we can bring in in a short period of time. There are relatively few roadblocks on the way to production and I think we can achieve our goals readily. Financing is going to be quite easy for us. The advantage that we have now from an investment standpoint is that we’ve been under appreciated to this point. We’ve recently seen Polymet’s market cap rise up to the 500 million dollar range, Duluth Metals has a market cap of perhaps 300 million dollars. We have a deposit which can be in production in 4-5 years and our market cap right now is 50 – 60 million dollars.

RI: What are you looking at for mine life, 20 years?

BG: We’re going to examine the viability of a 20 to 25 year mine life at a rate of 20,000 tonnes per day.

RI: If we go back to the calculators at Shareknow.net, we can actually evaluate your rock value per tonne. You gave a value of approx $60 per tonne. If we use today’s prices based on all of your metals and your inferred and indicated we get a total of $80.45 rock value. So it does give investors an idea of how changing prices dramatically affects the project. So if we see copper continue to advance it’s going to have more upside for your company.

BG: We like to build a mine based on conservative base case metal prices, so that whatever happens we’re always going to make money. In the good times and in the lean times. We think we’re going to have a 20 to 25 year mine life minimum and we’d like to see that take us though several metal price cycles and even at the bottom of the cycles we’d like to be making money.

RI: Thank you, Brian, for telling us more about Franconia Minerals. Best of luck on developing this excellent deposit.

BG: Thank you.

Company Information: Franconia Minerals Corporation

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