November 30, 2011

Dollar Vigilante
Surviving & Prospering During and After the Dollar Collapse

Tirex Resources Ltd. (TSX-V:TXX) is a Canadian listed exploration and development company formed in 2006 to explore for base metals in Albania, where it holds a 100% working interest in over 553 km2 in the VMS rich Mirdita district, north central Albania. In 2011 it had entered into an agreement to form a 50/50 joint venture company with Albania's largest miner for the production of copper and gold from known deposits at a rate of 500 tonnes per day (increasing to 2000 tonnes per day by 2014), with startup planned for Q1, 2012.

The company is funded by the European Bank for Reconstruction & Development, which has lent Tirex 7.5 million Euros through an unsecured convertible debenture issued in various tranches since 2009(at a rate of EURIBOR + 1.5pct) with 6 million Euros maturing on October 25, 2013, and the remainder maturing 5yrs from now.

The debentures are convertible into common shares at C$0.62 per share (mostly). At the current exchange rate (1 Euro buys 1.4CAD) that implies the issuance of about 17 million shares (or a 20-25pct dilution). 

Why Toll Milling?

The number of ways to build a company is finite. I don't know them all. But I've run across a few formulas.

If the market is hot enough or is really keen on the story, the company may be able to issue equity cheaply -meaning with minimal dilution of existing shareholders and other interests.

But this has not proven to be reliable way to build a company in most cases as it relies on a hot iron or strong promotion. Usually all that happens is you end up over-issuing stock in weak markets.

There is the Frank Giustria way in which he built Wheaton River and reverse merged with Goldcorp back in 2004-05. But he pulled that off early in the cycle. While we argue that it is still early, we simply cannot argue that the miners are as cheap as they were when Frank started up with Wheaton back in 2001-02.

And no one has been able to repeat that performance since - not even Frank.

You couldn't make accretive acquisitions as easily today. And if you did, you'd have to have a sizeable warchest of cash or the ability to issue debt, as share transactions would be dilutive here for most issuers (weak market).

Some companies prefer the prospect generating model, whereby they farm interests out to majors - or cash rich juniors - for development... or they have a royal stream. It is a tried and true model, but it can take time.

Then there is the Bema Gold way (or B2Gold today). Here the company acquires a project that can be put into production relatively quickly and with very little capital and share dilution, and then uses the free cash flow for exploration and development in order to grow organically. Thus the company does not need to dilute existing shareholders to get growth. It is generating cash flow internally. It doesn't have to be a long life operation; it only needs to live long enough for the exploration team to find and develop the company making asset. Most importantly, it does not depend on a major or bunch of bean counters to conjure up an acquisition strategy.

But this model requires exploration talent...a group that can find mines...or a region where they're easy to find.

Toll milling offers a twist on this plan in that the expertise to build and operate the mine is external. It means that the company pays someone who owns a mill with capacity to process its ore. In this case, it is paying by giving up a 50% interest. The mill already exists. Its owner, Ekin Maden Tic. Ve San. A.S., a well established, respected and privately held Turkish miner and metals trader, has contributed 500 tonnes of daily processing capacity (growing to 2000 tonnes per day over 24 months) to a 50/50 joint venture, and will also fund all capex through to production with repayment coming out of the profits of the operation (25% of profits will go toward capex loan repayments during phase 1 with the remainder to be split 50/50). The mines being targeted are old underground operations and already have workings in place so the additional capital required to upgrade them is apparently minimal. The company has filed all applications and environmental impact documentation with the relevant ministries and the local communities appear to be behind the project. It is awaiting final permits.

The joint venture is targeting production at the end of January. Tirex is working on an NI-43-101 update with a resource estimate but plans to start mining first - it will calculate a resource by drilling from underground pads.

The CEO points out that both its financier - European Bank for Reconstruction and Development - and it's JV partner, which is also the largest miner in Albania at the moment, have committed significant capital to mining the project without an NI-43-101 estimate, suggesting they have confidence in the historical resource.

So, for no money down, figuratively, and no facilities, the company's project will start earning cash flow next year, and fund an exploration and development program in an under explored district in a region that has been isolated and difficult to invest for over 40 years, but now is a rapidly emerging parliamentary democracy that has been a full fledged NATO member since 2009, and is currently an EU candidate country (targeted for 2014).

Conclusion

We like this story for the following reasons:

�         Offers emerging production and near term cash flows with no money down and minimal dilution

�         District scale exploration program with over 100 never-before-drilled geophysical targets

�         First mover advantage after country opened up to investment and resource development

�         District has never been systematically explored by modern methods and knowledge

�         Zinc, gold and silver historically ignored

�         High grade feature of the deposits remind me of Nevsun's story

�         Partners Ekin Maden (JV) and EBRD (banker) know area well and display confidence in plan

�         Strong management team

�         Cheap