Bullion Monarch Mining: Profitable, debt-free with upside potential in oil and gold

Utah-based Bullion Monarch Mining has interests in gold, silver and oil shale in the Western USA and Brazil.  In the last six months or so it has announced:

·    record profits for the fiscal year ending April 30th  2009
·    13 consecutive quarters of profitability, and record quarterly revenues for the three months ending October 31st
·    the commencement of testing using a proprietary process from its oil shale pre-commercial production demonstration facility in Utah
·    an agreement with Dourave Brazil for a one third share in two gold exploration properties
·    an increased stake in the Gold Mountain property in Oregon.
·    repurchase of approximately 1.7 M shares of its own stock

The market has responded extremely positively to the newsflow, and to Bullion’s profitable and debt-free status; the company’s share price has risen from a low of 10 cents on 21 January this year to peak at 95 cents in late October.

Background

Bullion Monarch Mining has a long history. Incorporated in 1948 it merged in 1969 with M.M & S Exploration, which was founded by the father of Don Morris, the current CEO and President of Bullion Monarch.  M.M & S was a pioneer in the Carlin gold belt of Nevada, which contains around 200M ounces of gold and which, with cumulative production to date of around 75M ounces has produced more gold than any other mining district in the United States.

Bullion’s current business model is to explore and acquire land positions, either in close proximity to major mining operations or on properties with known deposits, and to obtain production and revenues from them, either by sales with retained royalties or joint ventures, so that it can keep liabilities and expenses low, and profit potential high. Since 2006 the company has also expanded its focus from gold to include oil shale through its acquisition of 80% of EnShale Inc, which holds mineral rights to 4,650 acres of Eastern Utah and a proprietary technology for extracting oil from oil shale. Bullion’s current portfolio now comprises interests in six projects in the US and two in Brazil, as summarized in the table below.

While some of these projects are currently on the back burner the projects and issues which are most likely to be generating newsflow in the short to medium term are the EnShale operation, Newmont’s Leeville mine where the 1% royalty gross smelter royalty provides Bullion Monarch with the majority of its revenues, the new projects in Brazil and the lawsuit with Newmont and future lawsuit with Barrick.  Taking each in turn:

EnShale Inc (80% owned by Bullion Monarch) 

Oil shale is a sedimentary rock which contains significant amounts of kerogen, a solid mixture of organic chemical compounds.  Oil shale can often burn without any processing, (and indeed it has been used as a fuel in this form in small quantities since pre-historic times), but it is more efficient to mine it and then heat it to extract petroleum-like liquids from the kerogen.  However the energy required and the processing cost of oil derived from oil shale has historically been significantly higher than for conventional oil and until recently the price differential and the environmental impacts of mining and processing oil shale inhibited the development of better technologies that might reduce its cost and impact. 

In recent years however improvements in technology, high oil prices and increased geo-political uncertainty have increased interest in the potential of oil shale. EnShale Inc. was formed in 2005 to capitalise on this interest. The company argues that since the US has 82% of the world’s known oil shale reserves it should use oil shale as part of a policy to ensure energy independence, along with an across-the-board reduction in energy consumption through conservation initiatives, continued expansion of traditional hydrocarbon sources, and the promotion of renewable energy sources such as solar and wind power.

EnShale’s ultimate objective is to see that the company becomes a large scale producer of oil from oil shale.  It began by acquiring leases on 4,650 acres of state-owned land in Eastern Utah.  The land lies on the Green River formation of Wyoming, Colorado and Utah which has by far the largest oil shale resources in the world.  In 2006 Gary Aho, Certified Professional Geologist, a renowned expert on oil shale, issued a report based on USGS data which estimates EnShale’s leased oil resource at 667 million barrels of oil (note: that the term resource does not denote a proven or probable reserve as defined by the Securities and Exchange Commission Industry Guidelines). The company has also acquired and developed a patent pending petroleum extraction process for oil shale which uses either gasified coal or cheap and abundant natural gas as a heat source.  The high capital costs associated with coal gasification, makes natural gas the logical choice for a heat source The Idaho National Laboratory of the U.S. Department of Energy, using an Aspen model, developed a 600 page report which indicates that EnShale could potentially produce oil from shale for less than $30 per barrel.  The process is predicted to be significantly cleaner and more efficient than past production, will use less than 3 gallons of water per barrel of oil and the carbon dioxide produced can be sequestrated.

In 2008 the company began construction on a pilot plant to demonstrate the production process.  Recently tests began on the oil shale stockpiles. Tests are anticipated to last for six months or so, though of course this will depend on results. If all goes according to plan then EnShale will be looking to develop an underground mine, (in order to disturb as little of the surface as possible), and a large scale processing operation. Various production plant options are under review with one under consideration at 1500 barrels per day, while another is larger by a factor of ten, at 15,000 barrels per day. 

EnShale’s long term priorities are now to:

·    secure a long-term supply of shale ore through strategic land acquisitions
·    optimize the production process and to minimize the environmental impact of mining and production operations by minimizing water use, diminishing surface disturbances, and identifying commercial markets for the byproducts
·    protect its proprietary technology with patents and to establish a leadership role in the industry through commercial success
·    drive growth and optimize its financial and operational efficiency
Leeville/East Ore Mine

The Leeville Mine began production in the fourth quarter of 2006.  Under an agreement which dates from 1979 the current operator of the mine, Newmont, pays a 1% gross smelter return royalty to Bullion Monarch.  The company received royalties of $3.7m in FY 2009 while in the first half of FY2009/2010 revenues are running at $2.3m, benefiting both from Newmont’s increased production at the mine and from higher gold prices.  

Bullion’s royalties from Leeville could well continue for another decade.  The Leeville mine manager, Joe Driscoll, was recently quoted in the local press as saying , “We have got a great mine life of at least 10 years plus, and I am cautiously optimistic we will have good news on the exploration.” Additionally, based on Mr. Driscoll’s comments Bullion is expecting Newmont’s gold production to increase up to as much as 500,000 oz. from the Leeville Mine. This revenue stream is of great significance to the company as it has allowed to it to be self-funding in investing in other property, technology and exploration.

According to an article in Mining Quarterly Newmont drilling is targeting both the Turf and Four Corners deposits, both of which lie within the 5 square mile area where Bullion currently derives royalties.  


Lawsuits with Newmont

Although Bullion Monarch is receiving royalties from Newmont at Leeville it is currently in litigation with Newmont concerning additional unpaid royalties in the neighboring area. The 1979 agreement between the forerunners of both Bullion and Newmont centered on the original 5 claims (which include Leeville) and an 256 square mile area of interest around the claims in the Carlin Gold Trend where Newmont now have several mines.  Under the original agreement Bullion ceased its mining and exploration activities in exchange for a 1% royalty on future production.  In March this year the district court denied Newmont’s claim that a 1993 Nevada court judgment invalidated or adjudicated Bullion’s royalty interest.  Bullion Monarch are now awaiting a further trial date which will now probably be sometime in the New Year.  Of course it is not possible to foresee what will happen at the trials, but if Bullion is successful it could increase royalties received from Newmont.


Bom Jesus and Bom Jardim properties, Brazil

In May Bullion Monarch announced an agreement with Dourave Brazil, a 99.9% owned subsidiary of the Canadian company Dourave Mining and Exploration Inc, whereby Bullion will pay $2m for a one third interest in the Bom Jesus and Bon Jardim properties.  Dourave will use the funds to continue exploration on the projects which are located in the Tapajos area which has a history of significant gold production by artisanal miners using low tech methods. However these artisanal miners have neither the technical background nor the finance necessary to explore further, or to establish hard rock mines below the alluvial workings and so Dourave/Bullion along with several other major and junior gold companies believe that the area has considerable potential for both large tonnages and bonanza grade vein systems. The JV is now just finishing initial geological studies with a view to identifying targets for drilling in 2010.


Summary

For the moment Bullion is profitable and debt free and has a likely future revenue stream of several million dollars annually from its Leeville royalties.

Nonetheless, of course, there are plenty of risks facing the company – the latest 10K annual report lists 17 different categories of risk of which the greatest, perhaps, are that the oil shale operation may not be commercially successful or that Bullion’s revenues may be less than anticipated if the gold price falls or if production at Leeville were to fall.

However Bullion Monarch Mining has taken steps to mitigate risk by remaining debt free.  To date it has been successful in generating income while acquiring properties and self-financing the construction of EnShale’s pilot plant without diluting shareholder’s interests.  Looking ahead it could be well positioned to benefit from continuing high prices of gold, silver and oil and it has potentially huge upside from its oil shale operation, from its Brazilian gold mining projects and, perhaps, from a favorable outcome to its lawsuits on the royalties in the Carlin Trend.