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J. Taylor's Gold & Technology Stocks

Northwestern Mineral Ventures Inc.

Traded: OTCBB - NWTMF
TSX-V - NWT
Shares Outstanding: 76,854,334
Price 10/28/05: $0.54
Market Capitalization: $41.5 million
Progress Rating: “B” (Near production)


Given your editor’s concern about deflationary pressures, I must admit having missed the early run in the uranium stocks. As regular readers know quite well, I remain concerned about deflation notwithstanding all the arguments for higher energy prices as far as the eye can see. I do know that even if we were to suffer a general run-of-the-mill recession, oil and gas prices could fall by 30% to 50% or more. A major catastrophic event like the Kondratieff winter freeze-up, which I continue to believe is very much in the making, could send energy prices downward beyond the imagination of even the grizzliest of energy bears. Even so, to ignore the current bull market in energy would be a big mistake. That’s why we have an energy sector allocation in our Model Portfolio.

However, until now, we have not had any uranium exposure. Having missed the early move in uranium stocks, I have worried that all the value plays in this sector would be gone. I also am concerned that, in time, there is likely to be an oversupply of uranium, given the significant exploration programs by dozens of junior companies, especially given the fact that a relatively small quantity of uranium is required to produce immense amounts of electric power. But, if I could find an undiscovered uranium play that has not yet caught the attention of the investing public, and if that company had near-term production capabilities to capture still-high uranium prices, then I would be willing to consider buying such a company.

Over the past couple of weeks, I believe I have discovered a company like that in Northwestern Mineral Ventures Inc. (Northwestern) Shortly after learning of this company, my comfort level was increased significantly when Northwestern hired an experienced uranium-mining executive in the person of Marek Kreczmer, M.Sc. (Geo), P. Eng., to run the company.

Not only does Northwestern have an advanced-stage, past-producing uranium project that it expects to soon put into production, but it also has its eyes on several other highly prospective properties in Quebec and Saskatchewan. Additionally, the company also has a couple of highly promising gold targets in Central America that help offset my deflation concerns. But I want to make it clear that Northwestern is first and foremost a uranium exploration company that talks of becoming a producer within a year. And, based on my discussions with management, it seems more than likely that the company’s gold properties will be spun off to shareholders in another public company in the not too distant future.

Northwestern is in the process of acquiring a number of uranium properties, and, in time, I hope to provide a thorough discussion of those properties. However, in these introductory remarks, I want to talk a bit about the project that is most advanced and which managements suggests can make it a uranium producer within the next year. That project is the Firefly and Gray Daun Mines located in southeastern Utah.

The Firefly and Gray Daun Mines
San Juan County, Utah

Northwestern has signed a Letter of Intent to earn up to a 100% interest on this property from GeoXplor Corp. The Firefly and Gray Daun Mines, collectively called the “Firefly Project,” are past producers that ceased operations when production was no longer economic owing to world uranium prices. The Firefly Project is located in San Juan County, Utah, about 230 miles (370 kilometers) southeast of Salt Lake City. It contains 39 mineral claims covering 315 hectares (780 acres), including the Firefly and Gray Daun Mines as well as additional areas designated by the U.S. Geological Survey as “favorable” for uranium mineralization.

Mining began at Firefly in 1953 and continued through to the late 1970s. Past production at this mine was halted when operations were no longer economic due to world uranium prices. Today, uranium is selling at a 24-year high, given a renewed worldwide interest in nuclear power and dwindling supplies of the in-demand commodity.

Infrastructure is of little or no concern for these former uranium-producing mines. The property is widely accessible via a network of drill access roads. A power line runs past the main adit to the Firefly Mine, where 1,200 feet of mine workings remain in place. Perhaps most significant of all for the potential economics of this project is the fact that a uranium-vanadium processing plant exists nearby. Given the high value of its vanadium-uranium ore and excess capacity of that mill, management anticipates it will be able to haul its ore to this mill for custom milling.

The ore produced in the past at the Firefly Mine contained 0.35% uranium (U3O8). Given the current price of uranium at about $33/lb., Firefly ore contains uranium valued at around $230 per ton. By comparison, the current world average ore grade for uranium is 0.15% U3O8, or about $100 per ton.

In addition, the ore at Firefly is rich in vanadium. In fact, the average vanadium grade from this mine has been around 2.04%, or roughly 41 lbs. per ton. At the current vanadium price of around $10/lb., vanadium contained in Firefly ore provides even more value than uranium. Given a grade of 2.04%, vanadium content currently adds around $408 per ton in value. Combined Firefly ore may be worth around $639 per ton before it is processed. With those kinds of values, management believes Northwestern can haul the ore to the nearby mill and have it custom milled and earn a very solid profit in the process. In round numbers, if we assume a $600-value per ton, with a $50-per-ton cost to haul the ore to the mill for a custom fee, the company would earn a gross profit of $550 per ton.

Based on past exploration, management believes it has a non 43-101 “reserve” of 100,000 tons. You don’t need a Ph.D. in math to see that this “little” uranium-vanadium mining operation could provide some very strong cash flows compared to this company’s current market capitalization of around $41 million. We want to caution our subscribers and to emphasize the fact that this so called “reserve” of 100,000 tons is not a 43-101 qualified reserve (Canadian regulatory requirements.) But to the extent this number does represent a mineable reserve, and to the extent the company is able to custom mill this ore, it does suggest Northwestern should be able to generate some very meaningful cash flows starting as early as next year. This coming week, management will be spending time carrying out due diligence work to verify the legitimacy of this project before signing the deal.

Terms of the Firefly Deal

The Firefly Property is to be obtained by Northwestern on the following terms: It will pay US$5,100,000 to acquire the Firefly Project to GeoXplor. An initial payment of US$100,000 is due upon execution of a Formal Agreement incorporating the terms of the Letter of Intent. Northwestern will make an additional payment of US$5,000,000 to GeoXplor once a decision is made to commence production on the Firefly Project or on July 31, 2011, whichever is earlier. In addition, GeoXplor will receive 300,000 common shares from Northwestern’s treasury, to be released on or prior to the first, second, and third anniversaries of the Execution Date of the Formal Agreement, which will incorporate the terms of the Letter of Intent. GeoXplor is also entitled to a 2% net smelter royalty on the production of uranium and vanadium from the Firefly Project. The signing of the Formal Agreement will take place subject to Northwestern’s due diligence, which I understand is now in process.

Other Uranium Properties in Scope

The company has signed letters of intent to acquire the following projects in the Athabasca Basin in Saskatchewan and in western Africa. It is my understanding that management has also identified several other projects it may be close to signing letters of intent for that meet management’s criteria.

One such project is known as the Waterbury Project, located in Saskatchewan, Canada. This project area comprises nine mineral claims in six separate blocks totaling 30,683 acres (12,417 hectares). The claims lie within the eastern Athabasca Basin and are favorably located with respect to several known unconformity-type uranium deposits. The potential of this project is for unconformity style uranium mineralization of both the simple (low REE, basement hosted) and the complex (high REE, sandstone hosted) types of uranium deposits. Moreover, a large portion of the property overlies Waterbury Lake, which though on trend between the Cigar Lake and Midwest deposits, has never been explored. The project area has been extensively explored by SMDC and Cogema among others, with geochemical surveys, airborne, and ground-based geophysical surveys. CanAlaska, the company with which Northwestern has signed its Letter of Intent for the Waterbury Project, has used GIS to compile these existing datasets and has assimilated them to create a powerful exploration tool.

Another uranium interest that may be acquired by Northwestern is in the democratic West African country of Niger, the world’s third-largest uranium producer. The concessions applied for total 4,000 square kilometers (988,000 acres) and were selected for their favorable geology, exploration potential, and strategic location—within the same stratigraphy to two operating uranium mines. Together these two mines produce almost 10% of worldwide production.

Northwestern is now awaiting approval of the concession applications, pending the final review and acceptance by the Government of Niger. Formal approval of the applications is subject to the discretion of the regulatory authorities in the Republic of Niger, and there is no guarantee that the applications will be granted. Further details of the concessions will be provided if, as, and when they are received.

Niger ranks third in the world for uranium production and is fourth in terms of reserves. With cumulative output to date of approximately 100,000 metric tonnes, Niger is one of the world’s most important sources of uranium. Through the use of modern exploration techniques, the country offers significant potential for new discoveries given its favorable geology.

At this stage, based on my conversations with management, whether these concessions will be granted to
Northwestern is in doubt, but if they were to obtain them, based on the merits of the project alone, they could provide exceptional upside potential for shareholders.

Silver-Gold Properties

Northwestern negotiated an option to earn a 100% interest in the 19,000-acre (7,700-hectare) silver-gold Picachos Project in Durango, Mexico, and the 44,000-acre (17,800-hectare) Tango Gold Property in Sinaloa, Mexico. A conceptual study of the Picachos Silver-Gold Deposit was carried out by Watts, Griffis and McOuat that stated, “WGM’s review of existing deposits within the local mineral belt has led it to believe that the Picachos property has the potential to host a deposit containing 20 million tonnes of ore grading approximately 365 grams/tonne silver and 2.15 grams/tonne gold. This is a deposit similar in size to Tayoltita with a similar silver grade and a somewhat lower gold grade.” If those grades held up, the deposit would contain some 230 million ounces of silver and 1.4 million ounces of gold. But of course much work and capital will be required to make such a determination

The area of interest to geologists here is a four-mile-long shear structure that controls epithermal mineralization at the El Pino prospect and may be related to gold-porphyry stock at depth. WGM further explained that even at relatively low elevations, the silver-gold ratios are quite high and it is possible that the near surface mineralization at El Pino and El Toro represents the upper part of a largely unseen (or buried) mineralized system.

The Tango Project is located approximately 15.5 miles (25 kilometers) northeast of Rosario, Sinaloa, within the Rosario Mining District, one of several significant camps in Mexico’s Sinaloa Gold Belt. The now inactive San Augustin Mine and several other mineral showings in the Zona Minera Santa Maria of the Rosario Mining District are also located nearby. The Tango Project area consists of a total of approximately 44,000 acres (17,800 hectares). The area is comprised of the 9,300-acre (3,770-hectare) Tango concession and the 34,700-acre (14,050-hectare) Tango-2 concession.

The company’s Mexican properties certainly provide some interesting prospects for a separate gold exploration company. As noted above, it seems likely management will eventually seek to place these assets in a separate corporate entity in an effort to maximize shareholder value.

SUMMARY & CONCLUSION

On the basis of information I have to date, this company appears to have the potential for explosive growth and share price appreciation in the very near future, especially if the Firefly mine can generate some early cash flow for the company. The ability to carry out its business plan is viewed by this writer as greatly enhanced with the recent acquisition of Marek Kreczmer as its president. The potential to generate good cash flows, if realized, should substantially reduce the need to dilute shareholders’ interest. A host of highly prospective uranium properties that have the potential to host world-class deposits provide substantial blue sky potential for shareholders. Your editor views the company’s silver and gold projects in Mexico as a “deflation hedge” that helps reduce risk, whether or not those projects are spun off into a separate entity.