Stratex International is a diversified exploration and development company focussing on gold and based metals in Turkey, East Africa and West Africa. Stratex has a history of forming joint-ventures with major mining companies (including AngloGold Ashanti, Antofagasta, Centamin, Centerra, Teck and Thani Ashanti) and successful local private companies.
The recent sale of the Oksut gold deposit in Turkey for $20m upfront and up to an additional $20m to follow is a game changer for Stratex. In many ways Stratex is the envy of many junior resource stocks as the company is now fully funded and does not need to rely on dilutive equity placings.
Stratex is listed on the London Alternative Investment Market (AIM) and has a market cap of around £25m (barely greater than their cash balance). The company was formed in 2004 and listed in January 2006. The company provides something different to the others constituents of the portfolio as it multiple exploration projects, although partners fund most of this. Most of the others are production and streaming companies.
Strategy
Stratex intends to generate revenues by developing defined gold resources into mines via production JV agreements with companies that have the technical and financial capabilities to put large resources into production. Stratex will also continue go-it-alone exploration to define new targets in Turkey, Ethiopia and West Africa and Joint-Venturing or selling resulting new discoveries to third parties whilst retaining royalty payments based on future production. In the current environment, Stratex is also in a position to pick up distressed projects from companies who cannot obtain financing.
Stratex has a proven track record and has to date discovered 2.26m oz of gold (1.6m oz attributable), 7m oz of silver and 186,000t of copper. The diversified portfolio across different continents and countries drastically reduces operational and geopolitical risk.
Projects
The key driver for Stratex is the Altintepe project in Turkey, which is a high-sulphidation epithermal gold deposit. Stratex has completed a total of 4,752.5m of diamond drilling across the property, and Altintepe has a resource of 593,131 oz of gold (grades ranging from 0.59 g/t to 2.44 g/t). Stratex’s JV partner is Bahar, a private Turkish company who are about to start constructing the mine with an aim to begin commercial production by the end of 2013. Bahar is funding 100% of this and Altintepe should be producing around 30,000oz of gold pa, of which Stratex will receive 45%. I believe the revenue from gold production will be transformational for Stratex. It is conceivable that Stratex’s profit will be in the region of $12-$13m pa and longer term it is possible that production could be closer to 50,000oz pa.
The second gold development project that Stratex has in Turkey is Inlice, which hosts high sulphidation gold mineralisation. Stratex announced in November 2012 that it is considering selling the project as their JV partner, NTF, is no longer keen on taking it into production. Although Inlice only has a small reserve of 59,600 oz of gold (resource is 69,000 oz oxide and 164,000oz sulphide) and forecast production of 25,000oz pa, the project has an excellent post-tax IRR of 178% based on $1,397/oz. There is also potential for extension of the current resource base by including non-oxide resources. Since the news release, Stratex has sold Oksut and does not need to monetise Inlice. If, it is in shareholders interest I would not be surprised to see Stratex bring in another JV partner to bring Inlice into production.
The other main project in Turkey is Muratdere, which comprises three licences covering a substantial granodiorite-porphyry system. The system extends east-west for about 4,000m and has a width of between 200m and 400m. Drilling has confirmed this is primarily a copper-gold system, with significant silver credits. Muratdere has a resource of 51m tonnes grading 0.36% copper (186,000 tonnes), 0.12 g/t Au (204,296 oz), 2.40 g/t Ag (3.9 million oz), 0.0125% Mo (6,390 tonnes), and 0.34 ppm Re (17,594 kg). It is open-ended to the east and west and at depth, suggesting considerable potential to increase the resource. On 20 December 2012, Lodos (a Turkish mining investment company) bought 51% of Muratdere for $1.7m. Lodos, has informed Stratex of its intention to exercise its option to earn to 61% of Muratdere through the payment of two tranches of US$250,000 each to Stratex and the completion of a 3,000 metre diamond drilling programme. Thereafter Lodos can acquire a further 9% for a total of 70% by completing a feasibility study.
In total Stratex have five exploration projects in Turkey including two other gold projects – Altunhisar and Hasancelebi, where exploration is being fully funded by Centerra and Teck.
In East Africa, Stratex has a total of eight early stage projects. The company has first-mover into the region, which is under-explored with major gold and base metal potential. The Afar Project comprises eleven licences covering 2,884 km2 of prospective epithermal gold exploration ground in the Afar region of north-eastern Africa, including the Tendaho licence in Ethiopia, host to the Megenta discovery, and the Oklila licence in Djibouti, host to the Pandora discovery. Under the terms of a JV agreement, Thani Ashanti (an AngloGold Ashanti Limited JV company with Thani Investments, Dubai) are earning into 51% of the Afar Project by spending $3m on exploration and development over two years. Thani Ashanti is committed to expending US$1 million in the first twelve months to include a 3,000 metre drill programme to test the Megenta prospect. Detailed mapping and sampling has been carried out at the Assal licence returning best values of 2.54 g/t, 5.07 g/t and 7.8 g/t and drilling is due to start this quarter.
Stratex also hold a 967 sq km licence for the Abi Adi project in the southern Tigray region of Northern Ethiopia. This is part of the highly prospective Arabian Nubian Shield (ANS), approximately 80 km south of Stratex’s existing Tigray and Shehagne. Independent Ethiopian company Loz Bez Mining plc identified three targets within Abi Adi – Gidemi Berashua, Kurtumza and Daba Gumbah – after a first-pass stream sediment and rock chip sampling programme. All three targets are located around artisanal primary and placer gold workings associated with quartz veining in granitic intrusives. Under the terms of a JV with Loz Bez, Stratex are currently earning-in to an initial 75% of the project and are in the process of generating drill targets.
Perhaps Stratex’s most promising grass roots project is Blackwater, which is still 95% owned by Stratex. The licence covers an area of 299 sq km within northern Afar. Within the licence area, four separate zones of low-sulphidation mineralisation – Calcite, Airstrip, Black Water and Magdala – have been identified over a distance of 15.9 km. Stratex believes that the Black Water sampling results provide considerable prospectivity for the identification of further gold-bearing veins elsewhere in the four zones identified to date. Phase 1 drilling on Black Water has been completed for a total of 4,745m within 33 diamond drill holes across four structures. Now that further detailed mapping and drill results have been interpreted, a new drill campaign is due to start in Q1 2013.
In 2012 Stratex set up a West African division. Following the purchase of Silvrex (a private UK company) they now have two exploration properties. Dalafin, in Senegal covers 636 sq km in perspective terrane and nine deposits of over 1m oz of gold have been discovered to date in this gold belt. Major gold producers such as Randgold and IAM Gold operate in close vicinity and this is clearly highly prospective (although early stage). An airborne geophysical survey has been completed at Dalafin and a maiden reconnaissance drilling campaign is about to start. Stratex also has four early stage licences in Mauritania.
Management
Stratex has an experienced board of Directors. Dr Bob Foster is CEO and has 37 years experience as a geologist in exploration and has worked in Europe, Central Asia, South America and throughout Africa. He was also a founding member of the management team of Pan-African Mining Pvt Ltd that developed the open pit Ayrshire gold mine in Zimbabwe in 1991-1996 and directed a major gold exploration programme for associated company Pan-Reef mining in during 1994-1996.
The Non-Executive Chairman is Christopher Hall has over 39 years of wide ranging experience in the mining sector. He is currently the in-house mining adviser to Grant Thornton LLP. He has a degree in geology, has worked with Consolidated Goldfields in Australia and also worked as a mining analyst. He has helped establish European Mining Finance, an international mining finance and investment company, which was the first resource company to list on AIM, serving as CEO from 1991-97. He has been a director of numerous private and listed companies.
David Hall is the Executive Director for East Africa who has 30 years of experience in the exploration sector and has worked on exploration projects and mines in over 50 countries. From 1992, he was Chief Geologist for Minorco responsible for Central and Eastern Europe, Central Asia and Middle East and was Exploration Manager for AngloGold South America after this. He is founder and Non-Executive Chairman of AIM-listed Horizonte Minerals plc. He co-founded Stratex in 2004 and was instrumental in assembling the Board and management team that has led to the successful discovery of gold mineralisation in Turkey and Ethiopia.
Valuation
Following the sale of Oksut, Stratex will have around £16m cash and up to $20m (£12m) to follow from the sale. There is clearly a huge disparity between the Stratex share price and the underlying value of the company, although this applies to numerous other junior resource stocks. Northland Capital has a conservative price target of 12.8p per share, which gives 150% upside from the current price. Stratex is barely valued at cash but based on Stratex’s attributable production at Altintepe of around 13,500 oz, profits could be in the region of $13m (£8m) based on a $1000 oz gold margin. If one were to value Altintepe on a PE of 5, add in the cash of £16m then the market cap should be around £56m compared to the current £25m. This gives a very conservative price target of 11.5p and places no value on any exploration projects.
Shareholders
Stratex has a strong institutional shareholder base. AngloGold Ashanti is the largest holder, owning 11.51%, whilst Blackrock owns 10.9% and Tech Resources 7.65%. The top eight independent shareholders own 49% of the company and the Directors own just under 5%.
Conclusion
Stratex now has a proven business model of monetizing assets with the sale of Oksut and part sale of Muratdere. Although junior resource stocks are unloved and undervalued, the market has clearly overlooked Stratex. The diversified projects across different countries, commodities and mainly funded by large JV partners makes this is a much lower risk commodity play than the £25m market capitalisation would indicate. As Stratex is now cash rich it is possible that the market is taking a “wait and see” approach as to how they use the funds.
2013 should be a transformational year for Stratex. I believe that production from Altintepe and the cash flow that will follow is the key driver that will lead to a big move in the share price. Stratex is not a one trick pony though and it is possible that it could have cash from production at Inlice if they decide not to sell the project. In addition, there are drilling campaigns across many of the projects that could unlock substantial value, should any of them return bumper grades.