Fundy Minerals - A Cheap Ofex Exploration Stock

Fundy Minerals

Share Price: 5.5p
Market Capitalisation: £2.26 million
Number Of Shares In Issue: 41,073,114
Director’s Holding: 39%
Market: OFEX

History and Strategy

Fundy Minerals was founded on 17th March 2004 in New Brunswick, Canada by mining entrepreneur, Ken Whaley. The company’s initial portfolio of projects came from Whaley’s historical exploration efforts in New Brunswick, comprising of three gold-focussed projects and four base metal projects. Fundy commenced trading on Ofex on 5th April 2005 and, shortly after listing, announced it was diversifying away from being purely focussed on exploration in its native Canada, to gold exploration in Liberia, Africa. A few months after exploration commenced on its Liberian claims diamonds were discovered, which led Fundy to focus on both gold and diamonds in the country.

In an unusual but shrewd move, Fundy announced the acquisition of Flatlands Limestone Ltd on 23rd May 2005. The acquisition provided Fundy with an industrial limestone deposit, which will be brought into production in 2006, and which the management believes will generate a pre-tax profit of CDN$1 million (c.£500,000) for the next ten years. Such a profit would generate earnings of 1.21p per share, and have a significant impact upon Fundy’s revenue, balance sheet, and exploration budget.

Aside from its exploration activities in Liberia and Canada, Fundy has a 40% interest in Minex Technologies, which has developed with SRK (UK) and Cardiff University, a novel technology to improve the extraction process of minerals, in particular gold. A pilot plant is under construction, and it is hoped that the technology will be in a position to be rolled out in the first half of 2007.

Fundy’s strategy has evolved to focus on its exploration for diamond and gold in Liberia, and also to acquire further properties in the country. In addition, Fundy is fully committed to the development of its exploration portfolio in New Brunswick and helping advance the Minex Technologies technology.

The New Brunswick Properties

New Brunswick is known for being one of Canada’s three Maritime Provinces, and the only officially recognised bilingual province, speaking French and English. The capital of New Brunswick is Fredericton, whilst it is estimated that the total population of the province is 758,000. New Brunswick is surrounded by the Appalachian Mountain range, having a total land and water area of approximately 70,000 square kilometres. 80% of the region is forested, with 20% consisting of farming land and urban areas. Fundy has a total of nine properties in New Brunswick covering a total of 6,080 acres.

The Sand Brook Gold Prospect – Sand Brook is located in the South-Western part of New Brunswick, 70km from Fredericton, the capital of the province. The significance of Sand Brook is its close proximity to the Clarence Stream Gold deposit, which is owned and operated by Freewest Resources of Montreal. To date, work carried out on the Clarence Stream deposit has indicated that its reserves are in excess of 300,000 ounces of gold at an average grade of 7.2 g/t. It has been estimated that Clarence Stream could host over 700,000 ounces of gold.

The Sand Brook claims were a part of founder, Ken Whaley’s mining portfolio, and consist of 49 claims covering 600 acres of land. Fundy undertook soil and grab sampling and geological mapping of the property in 2004. Gold grades received from trenching and outcropping have been as high as 19.4 g/t. The property is also rich in copper, lead, zinc, silver, antimony and arsenic.

Fundy’s strategy at Sand Brook is to drill targets where the trenching, as seen in the photographs below, and sampling have yielded anomalous high gold values. The company is of the opinion that further drilling could enable a resource calculation on the property to be determined.

The Marigold Claims (Gold) – There are 15 claims which make up the Marigold region, covering approximately 600 acres. The principal mineral that Fundy is exploring for is gold with copper being a secondary mineral. Assays received from sampling have shown grades to be as high as 18 g/t. Marigold is located on a series of South-South-Westerly lineations, which are parallel to the Bay of Fundy fault, the Cape Spencer gold mine and the Clarence Stream gold deposit. The Bay of Fundy is renowned for its abundance of fossils from the late Triassic and early Jurassic periods. Furthermore, Marigold is known to be along strike and a few miles away from the Gordex gold mine, which produced 4,832 ounces of gold from in-heap leaching from 194,224 tonnes mined. Fundy’s strategy at Marigold is the same as Sand Brook. It will drill targets where trenching and sampling have yielded anomalous high gold values.

Harry Brook (Gold) – In the summer of 2005 a provincial geologist found a boulder containing the most concentrated gold deposit in the history of New Brunswick, having a grade of 1,320 grams per tonne. A stream sediment sampling program undertaken by the provincial government yielded anomalies, which led Fundy to stake 160 acres in the Southern region of the province, known as Harry Brook. Fundy plans to carry out sampling and mapping work at Harry Brook this summer.

The Mowat Group Claims (Base Metals – Lead and Zinc) – The Mowat Claims are located in the mid-Northern region of New Brunswick, and are along strike from the Heath Steel mine, owned by Falconbridge Ltd. The claims total 360 acres and host lead and zinc. To date there has been encouraging drill hole results, yielding grades of 1.25 metres of 4.07% of lead and 9.704% zinc. The strategy at Mowat is to engage in geophysics and trenching work this summer.

The County Line (CNE) Claims (Base Metals – Lead and Zinc) – Located in North-Eastern New Brunswick, the County Line claims are spread across 640 acres. The South-East region of the claims is located 500 metres away from the Captain North Extension (CNE) mine, a deposit which was explored and developed by Stratabound Minerals Corp from 1988 to 1990, and subsequently operated as a small open pit mine from 1990 to 1992. More recently, under an option from Stratabound, Eastman Resources delineated a number of geochemical and geophysical methods, which resulted in two kilometric-size massive sulphide targets being identified. Fundy conducted work on its County Line claims in 2004, and the results from a MegaTEM II Airborne Geophysical Survey Data from Noranda showed two pronounced anomalies. Fundy plans to drill these two anomalies in the near future, and anticipates intersecting zones of massive sulphides, which would be the source of the lead, zinc and other base metals.

Nowlan Lake – (Base Metals – Sphalerite, Chalcopyrite and Bornite) – Located in the mid-Northern section of New Brunswick the Nowlan Lake claims are located within the Flat Landing Brook formation. The felsic volcanic rocks which are present show a mixture of shallow intrusions, pyroclasic and proximal epiclastic deposits. The minerals sphalerite, chalcopyrite and trace of bornite with a matrix of rhylitic tuff have been identified. It is believed that the mineralogy could indicate a proximal Stratmat type deposit, which has geology common to New Brunswick. Exploration conducted to date has identified a weak magnetic anomaly.

The Caribou Lake Claims (Base Metals – Copper and Zinc) – The Caribou Lake Claims cover 360 acres of land which has shown good mineralization for lead, zinc and copper with secondary minerals of gold and silver. The principal drilling target is a rusty sulphide that has shown around 200 metres long and 25 metres wide of copper and zinc with values of up to 1,346 ppm of copper and 1,935 ppm of zinc. Fundy plans to commence geophysics and trenching work on the property in the summer of 2006.

Flatlands Limestone (Sedimentary Rock – Limestone) – Fundy acquired the Flatlands Limestone deposit in May 2005 as a result of acquiring Flatlands Limestone Ltd for CDN$7,100 (£3,500) and 192,000 shares. The acquisition of Flatlands, which is located in the Northern part of the province, gave Fundy the title to a deposit estimated at roughly 1 million tonnes, with the potential for 3 million tonnes, of high-grade limestone in the form of nearly 100% Calcrete.

Fundy will bring the Flatlands deposit into production in 2006, with several options available to it, such as contracting the production out or leasing trucks and producing limestone itself. The production is a very simple process, given that the majority of the overburden has already been removed. There are several large end users of limestone in the New Brunswick region to whom the material is likely to be sold to. Fundy believes that it will generate a net pre-tax profit of CDN$1 million (c.£500,000) for the next ten years. There is a strong likelihood that this kind of profit could be generated for much longer than ten years, given that there is likely to be a greater reserve of limestone that is revealed as excavation proceeds further into the deposit.

The decision to acquire a limestone deposit to generate profits is an unusual strategy for a small exploration company. However, given that the cost of the acquisition was negligible and the production can be leased out, thus not taking up much of management’s time, this is a very shrewd and sensible move. The profits generated can be utilised on a more aggressive exploration strategy on Fundy’s additional New Brunswick properties and in Liberia. Fundy has historically low overheads, which means that the revenue generated from the Flatlands project is likely to see the company record a pre-tax profit, and increase its cash reserves.

Exploration In Liberia, Africa

Liberia is situated on the Western coast of Africa, sharing its borders with Sierra Leone, Guinea and The Ivory Coast. The capital of the country is Monrovia, and it has an estimated population of 3,482,211 people. Liberia borders the North Atlantic Ocean and has a landscape characterised by predominantly flat to rolling coastal plains. The country has a hot and humid climate, with wet and cloudy summers with heavy showers. In recent years Liberia has been severely affected by two civil wars, the first being the Liberian Civil War, which ran from 1989 until 1996, whilst the following was the Second Liberian Civil War, which went on from 1999 until 2003. The civil wars displaced hundreds of thousands of people and destroyed the Liberian economy. However, in 2006 Liberia has become a safe country to operate in. In January 2006 the US-educated economist and former finance minister, Ellen Johnson-Sirleaf was inaugurated as Africa’s first elected female head of state, having won the second round of presidential elections in November 2005. Johnson-Sirleaf is intent of rebuilding Liberia and fostering reconciliation.

In 2005 Mittal Steel, the world’s largest steel company, entered into a mining development agreement with the Liberian government, which gave it access to over 1 billion tonnes of iron ore reserves in the West of the country. Mittal Steel has agreed to spend over $900 million (c.£515 million) over the lifetime of the project, which will include the development of a mine, and railway and port infrastructure.

Fundy has got itself into a strong position in Liberia, being the fourth largest land holder of a mining company in the country. The country is one of the least explored African countries, which has provided Fundy with a pioneering aspect and blue sky potential. The country has a large US presence, and, with a newly elected government, the company sees Liberia as being an excellent place to operate in. There are plans to increase its position in the country further through the acquisition of additional properties.

Fundy’s Liberian Permit

Fundy announced that its wholly owned subsidiary, Fundy Minerals (Liberia) Corp, had been awarded a 2,000 square kilometre permit in Liberia on the Sehnkweh Cestos Permit area of the Sehnkweh River area in April 2005. The permit covers part of the South Eastern Cestos shear zone, the Eastern Todi shear zone and diorite and amphibotite intrusives. The Cestos Shear zone is known for its gold mineralization and the area adjacent to it is currently being explored by Diamond Fields International.

Initially Fundy believed that it would be exploring principally for gold and other metals, but in July 2005 it announced that a significant quantity of gem quality diamonds had been extracted by artisanal miners in the Tarsu and Bafu Creeks and on the Tarsu Mountain. Prior to being a part of Fundy’s permitted area of exploration this property had been owned by DeBeers’ subsidiary, The Diamond Mining Corporation of Liberia. To date well over 7,000 diamonds have been recovered from the permit in little over seven months since Fundy was granted the permit. The largest diamond that has been recovered from the area has been 15.78 carats.

On 1st November 2005 Fundy announced that its Cestos Sehnkweh Reconnaissance Licence had been renewed for a further six months. It is the company’s intention to convert the licence into a full exploration licence on 25th April 2006. A geologist for the Ministry of Mines in Liberia is on record as stating that “this discovery is perhaps the most prolific diamond discovery known to the ministry in Africa.”

Knowing that it has a large quantity alluvial find, Fundy’s priority is to undertake extensive sampling in the area and drainages to analyse the kimberlitic indicators to help to find a kimberlite pipe or dyke. The current morphology of the indicator minerals gathered so far implies that the source pipe or dyke is close by to the alluvial harvesting. In addition to its exploration for diamonds, the company is also focussing on exploring for gold. Fundy plans to conduct an extensive amount of work on the Northern part of its permit along the Todi Shear zone and Northern batholiths, which are known for gold. Wide grid sampling for geochemical analysis and subsequent geophysical work will be undertaken in order to further explore the anomalous areas and to pinpoint the economical mineral sources.

Fundy has made swift progress in Liberia and has built up strong relationships with the government and its ministries. This has led the company to want to have an increasing focus within the country, and it is currently negotiating possible acquisitions.

A comparison can be made to Mano River (MANA), which is traded on AIM and TSX, and is capitalised at £25 million, a multiple of Fundy’s valuation. Like Fundy, Mano has had exploration success for diamonds in Liberia, recently recovering diamonds from decomposed kimberlite on its joint venture with the Liberian Government. Liberia is fast gaining a reputation as being under-explored and the significant potential it harbours for major diamond discoveries.

40% Interest In Minex Technologies Ltd

Fundy announced that it had acquired a 40% interest in Minex Technologies in May 2005. Minex Technologies, which has its headquarters in Taunton, Somerset, has developed and holds the intellectual property rights for a revolutionary mineral extraction process that involves vaporised chlorine gas. Fundy acquired its 40% holding for £46,000 and 100,000 shares, and to provide up to US$1 million in development costs. Fundy’s involvement is highly significant for Minex Technologies, because the company had total assets less current liabilities of £100 on its balance sheet to 31st March 2005. The capital and expertise that Fundy can bring to Minex to assist in advancing the technology is of great significance to the long-term success of the process.

The Process

The extraction of minerals, in particular gold, has long involved the use of cyanide, which brings significant environmental problems. The concern that has arisen from the use of cyanide in mineral extraction has led to a considerable interest in the development of alternative, commercially more attractive, environmentally friendly technologies.

Minex Technologies has developed and holds the intellectual property for a process that involves three principal stages:

(i) Contacting the precious metal-containing source with a vapour phase chloride salt;
(ii) Condensing the precious metal containing volatile product of step (i); and
(iii)Recovering the precious metal from the condensed product of step (ii)

Key to the process is finding that the precious metals can be extracted and recovered from materials in which they are contained in a cost-effective way and at a commercially viable recovery level by forming a metal containing compound in the vapour phase, condensing the precious metal containing vapour phase product, thereby extracting the metal from its source in the form of a metal chloride compound, and recovering the extracted metal from the condensed product.

Results To Date And Strategy

Fundy announced in November 2005 that the results provided by SRK Consulting from metallurgical test work using the Minex technology confirmed that the process has the potential to extract high levels of silver, copper and gold comparable to or even better than established processes. The process is now in its second stage of development focussing on the recovery and refinement of the aforementioned and other metals to produce saleable products. Further tests will be conducted over 2006 and there is the possibility that at some stage the company will be spun off as a separate entity on either Ofex or AIM. Fundy plans to acquire small shareholdings to increase its interest in Minex Technologies over the coming months.

The Board Of Directors

Chairman and CEO – Jeff Michel – After a career with the US Coast Guard having completed a successful tour of duty in the field of Drug Interdiction and Border Control, Jeff Michel commenced work in Retail Investment Banking. Michel’s focus was on specialising in small caps, new market entrants, and start up businesses. For well over a decade Michel has worked for small cap retail brokers and dealing firms, and at a senior corporate level specialising in business development, compliance, and cost containment. Michel’s past underwriting projects have included straight equity financing, PIPEs, debt, RTO’s, and convertible debt to M & A arrangements. In addition to being the chief driving force behind Fundy’s growth, Michel is the Managing Director of Southwood Partners Ltd, where he consults to public and private companies on debt restructuring, public market management, investor relations, DTC analysis, strategic partnerships, and corporate governance.

Executive Director – Rob Robertson – The former Associate Editor of the Northern Miner, one of the world’s leading mining publications, Rob Robertson is currently a part of the senior management with The Grosso Group in Vancouver. The Grosso Group is a management team that combines its experience, financial networks and dedication behind every company which forms a part of the group. Such companies that are members of The Grosso Group include the publicly traded IMA Exploration Inc., Amera Resources Corp, Golden Arrow Resources and Gold Point Exploration. Robertson’s career has seen him work as an exploration geologist with a number of junior mining companies in Northern British Columbia and throughout Canada.

Finance Director – Scott Sparks – In addition to his role as Finance Director of Fundy, Scott Sparks is the Revenue and Budget Coordinator for Fredericton, the capital of New Brunswick. Sparks is also a Councillor for the village of New Maryland, which is a suburb community of Fredericton, as well as being the Chair of Finance, Administration and Policy for the village. Sparks’ other roles for New Maryland include being the Co-Chair of Transportation and Protective Services, and being a founding member of the New Maryland Community Support Group.

Non-Executive Director – David Vanrenen – David Vanrenen has had a long and distinguished career in the financial markets. In 1969 Vanrenen joined as a partner of Cliffe, Neal and Co, before subsequently moving to Mathison Hollidge, a large South African broking house, in 1975. Vanrenen was responsible for developing the South African bond market, and was a member of the Johannesburg Stock Exchange Committee for two years. In 1982 Vanrenen moved to Australia, where he founded the investment bank, Australian Gilt Securities. In 1987 the company was acquired by Rand Merchant Bank, and Vanrenen remained as Chairman for a further two years. More recently, in 1992, Vanrenen established Equisoft Ltd, which developed front-end quantitative analytic systems with Reuters. In 1997 Vanrenen was responsible for building Earthport, a leading internet payment system, where he was Chairman until 2002. Vanrenen is Chairman of Ofex-listed Waltech.

Conclusion

To date Ofex-listed Fundy Minerals has been largely ignored by investors, despite the rapid progress that has been made since its listing in April 2006. A selection of Fundy’s projects are further advanced than the company’s valuation indicates, which serves for an attractive investment opportunity. The Flatlands industrial limestone project will shortly be brought into production on a low capital expenditure, due to there being no extraction or refining process. Fundy’s management has estimated that Flatlands will generate a net profit of CDN$1 million (c.£500,000), which as a stand alone project would produce earnings of 1.21p per share, a figure that compares very favourably against a share price of 5.5p. The revenue from this project can be utilised on a more aggressive exploration strategy in Liberia and New Brunswick, as well as providing capital for strategic acquisitions.

Fundy is in a secure financial position with no debt, although there is likelihood that a fundraising will be necessary at some point in the next few months in order to bring Flatlands into production and provide additional working capital. However, when Flatlands is generating revenue the company’s likelihood of coming to the market for further equity will be substantially reduced.

The large quantity alluvial diamond find by Fundy in Liberia has already confirmed the company’s belief in the country. The intention is to convert the current reconnaissance licence into a full exploration licence on 25th April 2006, and I also believe that further properties will be added to its portfolio in Liberia over the coming months.

The ownership of 40% of Minex Technologies Ltd is an unusual but unique position for an exploration company to take, but the earnings potential of the process is huge. There have been encouraging results received to date from the technology and further enhancements will be made with the assistance of SRK (UK) and Cardiff University, before the process is rolled out to the industry in 2007.

Website – www.fundyminerals.com

Development Timeline

March 2004 – Fundy Minerals formed from the historical portfolio of Ken Whaley.

June 2004 – Jeff Michel appointed as Chairman, bringing an extensive amount of public market experience.

July 2004 – Field work undertaken at Fundy’s Sand Brook Claim, including grab samples and geological mapping.

July 2004 – Rob Robertson, geologist and editor of the Northern Miner, appointed as a director.

August 2004 – Fieldwork conducted at Sand Brook, County Line (CNE) and Mowat properties including soil and grab sampling and geological mapping.

September 2004 – Fieldwork done on all properties, including grab and soil sampling and geological mapping with substantial time devoted to the Sand Brook property.

September 2004 – Assay results from and trenching at Sand Brook yields a grade of 0.10 - .11 ounces per tonne (3.8 g/t).

October 2004 – MegaTEM II, which can detect conductors far deeper and at a greater resolution that traditional technology, reported anomalies on the CNE property.

October 2004 – Additional assay results received from Sand Brook with grades as high as 0.45 and 0.56 ounces per tonne.

November 2004 – Fundy exhibits at The Exploration and Mining Conference 2004 at New Brunswick.

November 2004 – David Vanrenen, Chairman of Ofex-listed Waltech Services, appointed as a director of Fundy.

December 2004 – An additional 1,120 acres added to the Sand Brook claims.

December 2004 – Assay results from the Marigold gold property as high as 11 grams per tonne.

February 2005 – Scott Sparks, the Revenue and Budget Coordinator for the City of Fredericton in New Brunswick, Corporate Secretary for Lorne Amos and Financial Planner for York Financial Services appointed as director of Fundy.

March 2005 – Fundy makes its application to list its shares on Ofex.

April 2005 – Fundy commences trading on Ofex.

April 2005 – Fundy forms its advisory board, which includes the CEO of Jilbey Gold, Greg Isenor, and the President of Corporate Capital Partners (UK), Malcolm Bradley.

April 2005 – Gold assay results released from the Sand Brook property show the highest grade to be 15.85 g/t, equivalent to 0.46 ounces per tonne. The average grade returned was 2.9 g/t.

April 2005 – The licence area at CNE is expanded by 240 acres, taking its total holding to 640 acres.

April 2005 – Reconnaissance permit in Liberia is granted to the company, covering approximately 2000 square km’s in the Sehnkweh Cestos Permit area of the Sehnkweh River area.

May 2005 – Fundy acquires a 40% interest in Minex Technologies, which is developing and holds the intellectual property to a revolutionary mineral extraction process.

May 2005 – Fundy acquires Flatlands Limestone, which holds the title to a high-grade limestone deposit in New Brunswick.

May 2005 – A Back-in Rights Agreement with Jilbey Gold Exploration (now known as High River Gold) is agreed to on Fundy’s Liberian property.

July 2005 – A significant quantity of gem quality diamonds are found on Fundy’s Liberian exploration acreage.

October 2005 – A strategic stake covering 160 acres in the Southern area of New Brunswick known as the Head of Millstream is taken as a result of a boulder found by a Canadian geologist containing the most concentrated gold deposit in the history of New Brunswick at 38 ounces per tonne (1,320 g/t).

October 2005 – Fundy signs a Letter of Intent to acquire a 10% stake in the Naboom Platinum from Centurion Gold Holdings in South Africa.

November 2005 – The Liberian permit is renewed and micro diamonds are found in samples. The Liberian Ministry Geologist reports that “the discovery is perhaps the most prolific diamond discovery known to the Ministry”.

November 2005 – SRK Consulting reports that the Minex technology has the potential to extract high levels of minerals, comparable or better than established extraction processes.

January 2006 – Fundy launches a new exploration, sampling and mapping program on its Cestos Sehnkweh permit area in Liberia.

February 2006 – The plan to acquire a 10% interest in the Naboom Platinum project in South Africa is cancelled due to inadequate supporting due diligence.

• I have a small financial interest in Fundy