Talon Receives Vote of Confidence from Rio Tinto Subsidiary

Talon Metals (TSX:TLO) received a vote of confidence last Thursday when Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) subsidiary Kennecott Exploration Company announced it will be providing the exploration and development company with a US$4-million unsecured loan. 

The relationship between the companies dates back to last June, when Kennecott and a subsidiary of Talon entered into a definitive agreement that gives Talon the right to earn a 30-percent stake in Kennecott’s Tamarack nickel-copper–platinum project, located in Minnesota. To do so, Talon must pay US$7.5 million in instalments and spend $30 million on exploration over a three-year period.

Unfortunately, the company is a little behind. Last June’s agreement set its first-year spending obligations at $10 million on exploration plus a $2.5-million option payment, and according to a recent Haywood Securities note, to date the company has only spent $6.6 million on exploration. With a cash balance of only about $2 million prior to arranging the loan and the deadline to make the $2.5-million payment fast approaching, the company had to think fast.

Luckily, it looks like the loan from Kennecott will do the trick, at least for now. Last week’s press release states that the money will be used to finance exploration activities at Tamarack, as well as to make certain option payments at the project. Importantly, Kennecott has also agreed to defer Talon’s $2.5-million option payment. Furthermore, it’s agreed “not to make any cash calls from Talon beyond the amount of the Unsecured Loan until the fourth quarter of 2015.”

It might seem odd that Kennecott would help Talon out in this way, but Haywood offers an explanation in its note, stating that the funding arrangement “demonstrates the Major’s commitment to the Tamarack project and the strength of its relationship with Talon.” Furthermore, it “clearly illustrates Kennecott’s eagerness to continue exploration at Tamarack.”

In terms of what’s so interesting about Tamarack, Haywood notes that it’s supported by an initial NI 43-101 mineral resource and remains open in multiple directions. That initial resource was released in September 2014, and points to an indicated 3.75 million tonnes at average grades of 1.81 percent nickel, 1 percent copper, 0.05 percent cobalt, 0.41 g/t platinum, 0.25 g/t palladium and 0.19 g/t gold; that’s using a nickel equivalent cut off of 0.9 percent.

Meanwhile, the project holds an inferred 3.12 million tonnes at average grades of 1.22 percent nickel, 0.82 percent copper, 0.03 percent cobalt, 0.26 g/t platinum, 0.16 g/t palladium and 0.16 g/t gold. Again, that’s using a cut off of 0.9 percent nickel equivalent.

Speaking at the report’s release, Warren Neufeld, executive chairman at Talon, expressed confidence in the deposit, noting, “[w]hile these numbers are exciting due to their high grade and closeness to surface, the resource area only comprises hundreds of meters along a Tamarack Intrusive Complex that is approximately 18km in strike length by 3km at its widest point. With the ongoing exploration at the Tamarack North Project, we look forward to expanding the resource.”

Of course, it’s important to note that no matter how promising the project may be, Talon will still be in hot water if it’s not able to meet its new funding obligations to Kennecott. Indeed, as Haywood states, “we remain cognizant the loan is repayable this year, which will require additional financing prior to December 21, 2015 — which could remain challenging for Talon in the context of the current capital markets.”

Investors would thus do well to see how Talon’s financing efforts go. At close of day Friday, Talon’s share price was sitting at $0.16. Haywood has a “buy” rating on the company as well as a price target of $0.50.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.