Vulcan Minerals Inc

Exploring for petroleum and minerals in Canada
...searching new areas for large deposits

TSXV: VUL

News

LETTER TO SHAREHOLDERS FEBRUARY 2013

2012 was a pivotal year for our company as we made some key operational and corporate decisions.  After recognizing that our discoveries in western Newfoundland were unconventional and that large expenditures were required to determine commerciality, we decided to sell our working interests and allow our partner to proceed to a full evaluation.  In return we received cash payments and royalties.  This provides us with upside exposure on our discoveries without the related liabilities.  Given the deteriorating equity markets at the time, this decision has proven to be prudent in terms of establishing a strong balance sheet.  We now have the ability to search for new projects in a distressed market place.

Accomplishments:

We were engaged, in earnest, since 2004 in the wildcat exploration of western Newfoundland.  The onshore program was one of the most challenging operations a junior company can undertake because of its frontier nature, absence of a service and supply industry, inaccessibility, unknown geological challenges, stringent regulatory regime, skilled labour shortage, etc.  Notwithstanding these challenges we mobilized equipment and personnel from around the world and completed the first deep wells in the Bay St. George basin on budget and without any safety or environmental issues.  We pioneered the use of certain technologies for use in onshore western Newfoundland exploration including slim hole drilling.  We are proud of the fact that we were one of the most active explorers in western Newfoundland.  Our shareholders entrusted us with their investments and we delivered prudent financial management while making the following accomplishments as operator in the Bay St. George basin:

• Tight sand natural gas discoveries at Robinsons #1 and Red Brook #2.  Both wells are cased, perferated and ready for a fracture stimulation;
• Tight sand oil discovery at Flat Bay;
• Drilled 11 frontier wildcat wells (up to 3600 metres vertical depths) and 9 test holes;
• Acquired and interpreted approximately 350 km of seismic data;
• Acquired and interpreted High Resolution Aeromagnetics over 100,000 acres;
• Acquired and interpreted Airborne Electromagnetic Survey over the Flat Bay area;
• Various basin analysis studies; and,
• Utilized a variety of drilling rigs including a conventional triple rig, cable tool rig, water well rig, mining drill rigs and related evaluation tools.

We established a joint venture and partnership with a French funded group, Investcan Energy Corporation (Investcan) in the Bay St. George basin and Offshore Labrador.  As a non-operating participating partner we:

• Drilled 3 wells at Parsons Pond including the first 2 deep wells in the area (greater than 3000 metres);
• Acquired 3000 km of 2D seismic data in the Hopedale basin, offshore Labrador;  and,
• Utilized our offshore western Newfoundland interests to become a founding shareholder of NWest Energy Inc. which acquired a 500 sq.km seismic survey.  NWest retains a 2% royalty on near shore rights including the active Green Point Oil shale play. 

These operations, collectively, cost approximately $74 million of which Vulcan contributed $12 million.  As a result, Vulcan leveraged in excess of $6 for each $1 of its own expenditure while providing our shareholders with exposure to world class drilling campaigns in two frontier underexplored basins culminating in two unconventional gas discoveries and one unconventional oil discovery in the Bay St. George basin.  These lands are being actively evaluated by Investcan and we expect them to continue that evaluation. 

Current Assets:

Following the divestment of its working interests in western Newfoundland and offshore Labrador, the company retained:
• $5.5 million cash and no debt;
• 2% royalty on Bay St. George petroleum lands (250,000 acres)and discoveries;
• Full ownership rights to technical data valued in excess of $20 million replacement value; and,
• Potential to receive up to $1,000,000 in success fees if Investcan's offshore Labrador licence is drilled.

As a result of early petroleum efforts the Company discovered a potash/salt deposit in the Bay St. George basin. This asset was transferred to Red Moon Potash Inc. (TSXV: RMK) as a spinout subsidiary company in August 2012.

Additional assets in the company now include:
• 3% royalty on Bay St. George  mineral rights (including potash/salt) held by Red Moon;
• 58% equity ownership interest in Red Moon;
• Indirect ownership through NWest Energy (19% shareholder) of 2% royalty on approximately 500,000 acres of prospective lands for Green Point oil shale;
• 19% equity ownership interest in NWest Energy;
• 1,400,000 common shares of Nortec Minerals; and,
• 49% interest in the Tassisuak Lake Nickel/Copper/PGE property in Labrador (Nortec 51%).

Corporate Strategy:

As an explorer, our shareholders expect us to participate in drilling campaigns that provide the potential for significant discoveries.  That expectation will become more difficult to satisfy in the near term in light of the stressed equity markets for junior explorers.  Our objective has always been to operate with minimal financing dilution.  As a result, the company only has 57,526,129 shares outstanding and has never had a share consolidation since incorporation in 1995.  Fortunately, this respect for capital can continue because of our relatively strong cash position; negating the need to finance at the currently dilutive low share price.  Moreover, any money spent will be difficult to replace.  Therefore, the cash must be managed prudently, but a tight market cannot paralyze the company into non-activity.  We will continue to explore because we are confident the company will continue to be financed through joint ventures and equity.  Since our inception we have provided shareholders with exposure to several exciting drill programs with the potential for significant discoveries.  This is what motivates us and will continue to do so.

The following comments contain several of my personal opinions about the future of our industry and hence forward-looking statements.  I certainly do not have a crystal ball, but I believe it is important for shareholders to be aware of the management’s view of the future.

A Changing Industry For Explorers:

The exploration business is in a state of transition and change.  In order to survive and succeed, one has to adapt to that change.  In the petroleum world, the small cap junior explorer (less than $50 million market cap) pursuing conventional plays is an endangered species.  The focus of the industry has shifted to unconventional plays that involve exploration and development costs orders of magnitude higher than conventional operations and well beyond the sustainable reach of most "junior explorers".  As a result we have taken a bit of a contrarian view and have looked at the potential acquisition of conventional oil producing properties in western Canada at a time when many juniors are under financial stress due to stubbornly low natural gas prices.  In order to satisfy their bank loan agreements many of the traditional junior companies are forced to sell assets to raise cash, particularly oil producing assets, because it is very difficult to sell small natural gas properties.  We feel that the prospects for the North American and western Canadian oil price is favourable as the dysfunctionality of the current distribution system (pipelines and rail) is sorted out.  The WTI price will probably drift up to Brent prices as more oil is moved to port and thus into the international market.  There is no guarantee, however, that we will find an acceptable acquisition opportunity.  Other, more interesting, assets may intervene.

In regards to mineral exploration, the system is currently being purged of cash strapped companies without financeable projects.  Over the last few years, the junior sector has been largely financed by institutional money not retail investors (i.e. investors making their own buy and sell decisions).  These institutions invest on behalf of their clients, providing a select few individuals with the buy and sell power over large sums of money.  They have had the luxury of lucrative finance fees on private placements at discount prices with lots of warrants.  Very few of them ever purchase shares on the open stock market.  They are primarily on the sell side only.  In recent years it seemed as if financings were freely available to any company with a listing.  In many cases the capital structure of these companies became bloated and dysfunctional as a result of highly dilutional financings.  With the recent uncertainties in world financial markets, the average retail buyer has disappeared for some time. The market has been dominated by sellers of private placement paper and hoards of day traders seeking liquid stocks.  Investors have left town in droves, undervaluing many companies, some below cash value.


What Lies Ahead:

When will the bias in the junior market shift from sellers to buyers?  I believe the surest answer is only when a significant increase in metal prices rekindles greed in the speculative investor combined with a reduction in the supply of "unwanted shares" in the juniors.  The current attrition in the market place will resolve the “unwanted shares” problem as companies disappear and stock consolidations become popular.  With respect to the greed factor, the reward of owning shares has to outbalance the risk of ownership in order to re-engage buyers en-masse.  A recovery in the American economy will reduce risk and help the equation.  I believe the future for metal prices will be very positive for two reasons. Firstly, the technological success of extracting oil and gas from very poor reservoirs in shale has revolutionized the availability of relatively cheap energy.  As a result the realities of "peak oil" and the related higher prices that would have contributed to a deeper long term global recession have been deferred.  This is being felt first in the United States where shale resource development is well advanced.  Cheap sources of natural gas are underpinning resurgence in American manufacturing and industry such as petrochemical and steel production.  This should in turn support an economic upsurge in the United States followed by other mature economies.  These economies in turn, should increase demand for goods and services from emerging economies, the cumulative effect of which will be robust global economic growth and corresponding demand for metals and commodities.  Secondly, the demand for these metals and commodities will have to be met by resources that are increasingly more expensive to access both from a development and environmental perspective (supply side constraints).   Explorers and producers will be valued accordingly.


Strategy 2013-2014:

In the near term how does one attract the interest of the currently distressed market?  A major discovery of course would garner some attention. But we know that in the exploration business discoveries are very rare and that there must be a "reward for trying" in order to encourage participation in the market.  Currently, there is no "reward for trying" and indeed, even a muted response to a discovery. 

So, where do we move from here?  In the belief that better markets lie ahead our plan is to move on three fronts for Vulcan:
i) Continue to pursue the acquisition of a new project utilizing our strong balance sheet;
ii) Close the recently announced acquisition of the 51% interest in the TL Nickel/Copper/PGE property from Nortec Minerals, providing the company with 100% interest in the project.  This project provides the company with the opportunity of a drill program in 2013; and,
iii) Continue to generate new projects and solicit partners for advancement.

The overall objective is to add value to our current asset base and to better position the company for the anticipated resurgence in a leaner, more discriminate market.  In the interim, we will continue to provide our shareholders with exposure to exploration projects.  I thank you for your continued support.

Best regards,

 


Patrick J. Laracy, LL.B, P.Geo.
President & CEO

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.  The statements made in this Letter to Shareholders contain certain forward-looking statements.  Actual events or results may differ from the Company’s expectations. Certain risk factors may also affect the actual results achieved by the Company.  There can be no assurance that forward-looking information will prove to be accurate. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from any conclusions, forecasts or projections described in the forward-looking information. Accordingly, readers are advised not to place undue reliance on forward-looking information. Except as required under applicable securities legislation, the Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new information, future events or otherwise.