Fortune Bay (FOR) – Re-evaluated 2011 PFS Gives Golden Cause for Hope

Fortune Bay Corp.
  • TSX-V: FOR
  • Shares Outstanding: 29M
  • Share price C$1.28 (14.09.2020)
  • Market Cap: C$36M

Interview with Dale Verran, CEO of Fortune Bay Corp. (TSX-V: FOR).

We are currently experiencing the highest gold prices ever. Gold briefly peaked over a US$2,000/oz, and there is plenty of money to be made if investors pick the right companies. One potential candidate is Fortune Bay: a gold-focussed explorer and developer with two 100%-owned advanced gold projects in Canada and Mexico. Both projects are claimed to have ‘exploration and development potential’.

Fortune Bay’s aim is to become a mid-tier gold explorer and developer. The company’s strategy appears to be a traditional approach of development. It intends to systematically advance its existing projects whilst also considering strategic M&A opportunities to create catalyst moments. The result could be a ‘pipeline of opportunities.’ What is creating most of the traction for this story right now appears to be the planned revision of a 2011 PFS for the Canadian Goldfields Project. This appears to be the primary source of hope for the company.

It is important to understand a company’s corporate history before giving it any of your money. Fortune Bay has existed in its current incarnation since June 2016, but it has a long history. It roots can be traced back to October 1999, the start of a series of public transactions spearhead by the company’s Executive Chairman, Wade Dawe. This all started with the formation of a company named Linear Resources, which quickly became Linear Gold Corp. The company made a transaction for the Mexican Ixhuatán property with now-defunct Swiss miner, Xstrata PLC.

Exploration was conducted at Ixhuatán between 2004 to 2007, with Linear announcing a +1.7Moz gold discovery. Linear was clearly making some waves at the time, raising in excess of C$75M to fund exploration activities. That is considerably more than Fortune Bay is worth today.

Goldfields came into the fray in August 2009 for $5M. It hosts a +1Moz gold deposit. In 2010, Linear formed a conglomerate with Apollo Gold: Brigus Gold Corp. This new company operated assets like the Black Fox gold mine in Ontario, Canada, alongside its 2 existing projects.

Fortune Bay was founded in 2014 via a merger JV between Primero Gold and Brigus Gold to focus on the company’s development-stage assets, with cash for gold players at a premium at the time.

In 2016, Fortune Bay acquired 100% of Ireland-based software developer, Kneat Solutions Limited, changing the company’s name to kneat.com, inc. It then spun out its gold exploration properties to form the new Fortune Bay.

Goldfields Project and Ixhuatán Project

So, time for some numbers. on the face of it, there is a good amount of potential here. Not only does Fortune Bay have a combined historic resource of 2.1Moz M&I, but it also claims to have an exploration upside. This will be key to unlocking share price.

Goldfields is the clear priority right now, with its potential being underpinned by open-pit amenable targets. The numbers from the 2011 PFS: 1.03Moz of M&I gold. However, a reinterpretation/optimisation of this PFS, earmarked for Q1/21, could shake things up a bit. Expect Fortune Bay to spend most of Q4/20 identifying opportunities, looking for data gaps and making all the operations necessary for a new PFS to be rolled out.

Verran was drafted into this story back in June to become the company’s CEO. He is a nice guy, based on our first impressions of him, but he is going to need to leverage all of his 20-years of experience in the mining industry to bring focus and urgency to this story. Fortune Bay has experienced share uptick recently, but it has since tailed off a little. Patient shareholders will want to see the growth story continue.

To power the company through this growth phase, Verran and his team recently raised $2.7M (May 2020). Fortune Bay currently has around $1.8M in the treasury and the balance sheet looks like and tight. This should see the company through its new resource estimate and high-level PFS reanalysis, but when new data needs to be collated, it will need to seek out some capital.

Investors are clearly buying into the under-explored nature of Goldfields, and Verran’s involvement has brought a sense of security to the stock. We will be keenly keeping an eye on this story as it develops because some good numbers could completely change the value proposition on offer for investors. What are you thinking? Would you invest?

You can also hear our thoughts on the company at cruxinvestor.com/club. On there is an engaged community of friendly investors who have exclusive access to institutional grade company reports (broken down into digestible and easily understood investing rationale); training courses (to help you be better analysts); company interview summaries (to save you time); macro commentary (from experts from around the world); and stories of everyday investors (what they have learnt along the way). Try the 7-day trial.

Novo Resources Company Report – Review of The Egina Project

Read this extract from the Updated Novo Resources Company Report. To access the full report, click here. Published in the Crux Investor Club 1st September 2020.

Unless specifically otherwise stated, the information, illustrations and text in the section have been extracted from a NI.43-101 compliant technical report by Novo Resources, dated 30 April 2020.

Figure 6_1 serves as a location map of the project area and mineral tenement plan.

Figure 6_1 | Location and Outline of the Tenement Area – Egina Project

The project area is indicated by the tenements in yellow (Pioneer Resources JV), light green (De Grey Mining JV), purple (New Frontier JV), and the light blue blocks immediately to the west (100% Novo Resources). The project area is accessed 80km from Port Hedland or 140km from Karratha via the sealed Northwest Coastal Highway, and via a reportedly well-maintained, graded South-bound gravel road for a further 40km.

The greater Egina Project comprises 16 tenements, including 2 granted Mining Leases (“ML”, 100% Novo Resources), 13 granted Exploration Licences (“EL”), and one granted Miscellaneous Licence (“L”). Of the EL’s 418km2 is held 100% by Novo Resources and 557km2 in joint venture with a beneficial interest between 60% and 75%. One of the mining leases is subject to a royalty of 5% in addition to the Western Australia state royalty of 2.5%.

Gold mineralisation at Egina is largely found in an erosional blanket at, or close to, surface.

Whereas Novo Resources has recognised 3 styles of gold mineralisation at Egina, lode mineralisation, gold-bearing conglomerate in the Fortescue Group similar to its other 2 project areas, the one on which it focuses here are gold-bearing gravels that blanket an erosional surface “covering most of the Egina area”. The gold in these conglomerates is interpreted to have been derived from the erosion of basement rocks and the gold-bearing conglomerates of the Fortescue Group. It is therefore a very different type of target from Novo Resources’ earlier exploration projects.

Figure 6_2 shows a map in the Farno mineral right area drawn from ground penetrating radar (“GPR”) surveys with the base of the transported erosional material palaeo-drainage pattern, and the scope of trenches and diggings executed by Novo Resources. Subsequent auger drilling confirmed the accuracy of the GPR data.

Figure 6_2 | Base of Transported Erosional Material Derived From Ground Penetration Radar Surveys

The statement about the conglomerates “covering most of the area” may be correct, but the above map clearly shows sampling activities to be confined to the deepest section of the palaeo-drainage pattern extending 800m parallel to the drainage and 200m perpendicular to the drainage. Novo Resources refers to the deeper sections as“swales”.

In addition to trenches dug by the vendor of the mineral rights, 6 trenches were excavated for a total of 2,213 linear metres. Using metal detectors nuggets were extracted weighing in total 1.13 kg, but these were heavily concentrated in an area of 100m x 50m around a bulk sample given the identity number 19EGTR006A.

A significant component of the higher-grade gold mineralisation is characterised by very fine to extremely coarse nuggets ranging in size from less than 10 μm to more than 10mm (nugget mass of 4.6 gram). Given the coarse nature of the gold, very large samples are required to obtain a representative grade. For this reason, a bulk sample programme was carried out, mostly in 2019, the sample locations of which are identified by the grey squares in Figure 6_2. To guide the selection of the bulk sample locations 489 test pits were excavated and 294 “Mobile Alluvial Knudsen (“MAK”) mini samples” of 1 tonne collected. It is noticeable the technical report gives no results for the MAK mine samples. These may not be representative of the local grade, but would have been indicative of the potential of the area.

The most reliable grade results are obtained from bulk samples and Table 6_1 reproduces these.

Table 6_1 | Novo Resources Corporation | Bulk Sample Results – Egina Project

The table shows the weighted average grade to be very disappointingly low at 0.35g/t Au, which is to some extent positively biased by siting the extra-large bulk samples in most favourable spots (see Figure 6_3).

Figure 6_3 | Head Grade Versus Bulk Sample Size

The average recovery achieved by the gravity recovery plant is 70.4%, the efficiency of which is highly determined by the feed grade (see Figure 6_4).

Figure 6_4 | Gravity Recovery Versus Head Grade

The results above shows that the deposit, despite containing at times spectacular gold nuggets, seems to have a very low overall grade of 0.35g/t Au, which would yield at best 0.28g/t Au per tonne mined when treating it by (cheap) gravity processing. This converts to US$18/t at a gold price of around US$2,000/oz. Given the limited size of the area with this type of deposit and the very low prospective revenue per tonne mined, the Egina project is at this stage of no economic interest.

The most recently discovered swale at Panorama (as usual by now Novo Resources has moved on and made another exciting discovery) does not change the above conclusion unless the sample results there prove to be vastly superior to the Farno area.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Novo Resources Company Report Preview – Review of The Purdy’s Reward / Comet Well Project

Read this extract from the Updated Novo Resources Company Report. And to access the full report, click here. Published in the Crux Investor Club 1st September 2020.

Unless specifically otherwise stated, the information, illustrations and text in the section have been extracted from a NI.43-101 compliant technical report by Optiro Pty Ltd (“Optiro”), dated 30 April 2019. Whereas the technical report refers to the project as the Karratha project, this study prefers to reference these as Purdy’s Reward and Comet Well, because the first exploration results here caused the price to tenfold and the market capitalisation to reach around US$1Bn before the company moved to Comet Well and got the market again excited for a second, albeit lower price spike

Figure 5_1 serves as the location map of the project area and mineral tenement plan.

Figure 5_1 | Location and Outline of the Tenement Area – Purdy’s Reward and Comet Well

Novo Resources reached a billion-dollar valuation in 2017 on the back of excitement over Purdy’s Reward and Comet Well

The Purdy’s Reward – Comet Well project is located 37km south-southeast of the Karratha town centre or 55km by road: sealed road for 47km and thence 8km by graded dirt road.

The plan above includes 47 tenements, comprising 2 granted Mining Leases, 32 granted Exploration Licences (with another 8 under application), 3 Prospecting Licences and 1 granted Miscellaneous Lease(with another 1 under application). These can be subdivided into a number of groups, namely:

  • Controlled 100% by Novo Resource
  • The Artemis Joint Venture area of 213.1km2 in red covering Purdy’s Reward– originally 50%, fully acquired in March 2020 for A$1M and 2 million Novo Resource shares and a 1% point retained net smelter return royalty. This is a pitiful price for a half beneficial interest in a prospect that was valued at US$1Bn at some stage.
  • The Gardner/Smith Joint Venture Area of 50.8km2 in orange covering Comet Well – 80%

Figure 5_2 is a geological map for the area, extracted from an old press release in preference of a similar map in the technical report to better illustrate the relative location of the Purdy’s Reward and Comet Well prospects.

Figure 5_2 | Geological Map Showing the Relative Location of Purdy’s Reward and Comet Well

The map shows the Mount Roe package, which is a basal sequence of the Fortescue Group in which the gold-bearing conglomerates occur, in olive green.

The Fortescue Group volcano-sedimentary sequence at Comet Welland Purdy’s Reward dips shallowly (~10 degrees) to the southeast, and has a stratigraphic sequence that is characterised by from bottom to top:

  • A variety of gold-bearing conglomerates (the Lower Conglomerate)punctuated by a thin (<20m) sequence of angular volcaniclastic rocks and a 5cm to 20cm thick tuff marker unit, described as a massive mafic rock with minor fine quartz eyes.
  • Above the volcaniclastic rock and “tuff” is the “UpperConglomerate” and related sand and silt beds, minor felsic tuff, and chert. Blanketing the upper sedimentary sequence is the Mt Roe Basalt.
  • Overlying the Mt. Roe Basalt is a thick sequence of sandstones and quartzites with lesser amounts of conglomerate and siltstone, belonging to the Hardey Formation. The conglomerate tends to characterise the base of the Hardey Formation in the project area.

Figure 5_3 is a longitudinal section along the strike of the geological strata to illustrate the variability of the vertical distance between the Upper Conglomerate (in red) and Lower Conglomerate (in blue)between Comet Well on the left and Purdy’s Reward on the right. The vertical dimension is exaggerated 3 x.

Figure 5_3 | Longitudinal Section With Upper (in red) and Lower Conglomerate (in blue)

At Purdy’s Reward gold nuggets are found in a thin-skin of conglomerate, sands, and muds that directly overly the basement. This gold-bearing horizon has an irregular local geometry, dipping 5-10 degrees to the southeast.

At Comet Well, the lower gold horizon occurs immediately on top ofthe basement rocks as well and the upper gold horizon is present within a variety of coarse sandy conglomerates that occur immediately above distinct volcaniclastic package. Both gold horizons outcrop in the Comet Well area and dip shallowly (5-10 degrees) to the southeast.

The main method of exploration up to the date of the technical report has been the excavation of trenches and pits with sample sizes that were progressively increased from 50kg to 300kg to, most recently, 5-tonne bulk samples. This was an attempt to get to representative grades given the coarse nature of the gold nuggets.

The April 2020 Crux Investor Report highlighted significant permitting problems around the ability to take bulk samples large enough to be considered representative at Purdy’s Reward / Comet Well

The area has also been subjected to diamond drilling with 208 holes for 11,998m (therefore an average depth of almost 58m), but only37% assayed. Given the observation of requiring large sample sizes, diamond drilling serves little purpose apart from establishing the lithological profiles.

For this reason, this study has ignored the diamond drill assay results and only reviewed the results of 49 bulk sample with a mass of approximately 5.6t, depending on the thickness of the conglomerate at that sample site. It should be noted that sampling was much more complex than the Beatons Creek exercise as it involved jackhammer work and pre-cutting boundaries with a diamond blade.

A total of 155 samples were taken from 57 bulk sample sites. The results are summarised in Table 5_1. The gaps in the numbering have purposefully been included to highlight that these results are selectively reported. It, therefore, excludes samples with nil gold.

It is very concerning that, of the selected results, less than 30% have a grade of 1.0 g/t Au or higher. The average grade is well below 1.0 g/tAu.

Given the irregular nature of the deposit, the spotty presence of gold and prospective very difficult mining conditions the indicated average grade is far too low to be of economic interest.

Grades from bulk sampling are uneconomic, rendering the project worthless

The announced acquisition on 18 June 2020 of a mechanical sorter does not change this conclusion. Pre-concentration does not add gold to the production, but can only reduce the amount of material having to undergo a more expensive concentration process. Such a benefit comes at a loss of gold, with the loss of revenue possibly less than the operating cost saving.

Crux Investor notes that the earlier Crux Investor report commented at length on representative sample size, bulk tonnage requirements of up to 100,000t samples, and small mine-permitting issues. This report acknowledges all of those points but has not investigated them deeply since the grade information from the samples gathered to date indicates that the project is uneconomic.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Novo Resources Company Report Preview – Technical Review of The Beatons Creek Project

Read this extract from the Updated Novo Resources Company Report, focuses on one of their assets, Beatons Creek. To access the full report, click here. Published in the Crux Investor Club 1st September 2020.

Introduction

Unless specifically otherwise stated all information, text, and illustrations have been extracted from two NI 43-101 compliant technical reports in support of an updated resource estimation, the first by Tetra Tech, with an effective date of 10 August 2018, issued 20 November 2018, the other by Novo Resources management issued 13 May 2019, with an effective date of 28 February 2019.

The 2019 technical report, issued by Novo Resources, uses largely the same data as the 2018 technical report, written by Tetra Tech. The 2019 update includes the addition of 2018 diamond and trench data as well as a range of different interpretation methods. Crux Investor notes that Novo Resources itself is the signatory on the 2019 resources update. The two authors of the 2019 Resource Estimate, which included a 30% increase in tonnes, are Chairman and President Dr Hennigh, and Dr Simon Dominy, Principal Advisor Novo Resources (since 2017).

Crux Investor believes that no matter how much internal expertise a junior mining company has, signing off on resources internally should not be done until there is an established track record of conversion to production. This is a Red Flag.

Two recent Resource Estimates share much of the same data. Importantly the most recent (improved) estimate was published by Novo Resources, not a Third Party. This is a Red Flag

The updated 2019 Resource Estimate included a 30% increase in tonnes driven predominantly by an improved geological framework from the recent diamond drilling program compared to the previous 2018 estimate supported by the technical report titled “NI 43-101 Technical Report Resource Update, Beatons Creek Gold Project, Pilbara Region, Australia” issued on November 20, 2018 (the “2018 Resource Estimate”).

The Beatons Creek project is located in the Pilbara region in the North-Western part of Western Australia, 1,364 km North-Northeast of Perth and 296km southeast of Port Hedland (Figure 3.2_1).

Figure 3.2_1 | Location of the Beatons Creek Project in North-western Australia

The Beatons Creek area is adjacent to and west of the town of Nullagine, which is 296km Southeast of Port Hedland and 170km North of Newman by road.

Figure 3.2_1 | Extent and Outline of the Beacons Creek Tenement Area in 2018

The Beatons Creek Gold Project area consists of 21 predominantly contiguous tenements totalling 167.9 km2; these tenements include Exploration Licences, Prospecting Licenses and Mining Leases. The mining licences were bought from Millenium and the other licences controlled via the Creasy Group. Comparing the tenement area outlined in the 2018 technical report with the August 2015 technical reports shows a very large reduction in ground held with only the mining licences unaffected.

Geology and Mineralisation

The host rocks to the gold deposits at the Beatons Creek Gold Projectoccur towards the top of a more than 800m thick sequence of poorly-stratified, poorly-sorted conglomerate sequence with clasts from several rock types. The “Mineralized Unit” is 40m thick within which the much narrower individual gold-bearing conglomerate beds occur. These are located in an area within a few kilometers of the village of Nullagine.

Figure 4.2_1 | Geological Map for the Beatons Creek Project

Figure 4.2_1 shows the geological map for the project area with the conglomerates shown in orange-yellow with small circles. The resource outline within this formation is shown in grey.

Conglomerates occurring above and below display similar characteristics to those that are gold-bearing, but are largely devoid of appreciable gold. This will make it difficult to visually control mining the correct horizon.

Two types of conglomerates are evident and apparently interbedded with one another within the gold-bearing section of the Beatons Creek Gold Project. They are:

  • Fluvial (= river deposit) type ferruginous conglomerates, and
  • Marine lag type ferruginous (= iron rich) conglomerates.

The fluvial type conglomerates are composed of various rock types with the clasts varying in size from pebbles to boulders and in contact with each other (= clast supported, not totally surrounded by a fine matrix). Individual horizons are less than 1 metre to several metres thick and continuous over tens of metres (only!) according to Tetra Tech, but ~50m across and traceable over hundreds of metres according to Novo Resources management.

Crux Investor is much more inclined to follow the Tetra Tech guidance. Historic reports of mining activity from the late nineteenth century point out that the old-timers mined gold out of horizontal tunnels (adits) approximately 1m high in pockets of high-grade. A further corroborating factor is that the ore blocks in the Novo model are only 1 m thick.

Marine lag-type conglomerate is typically also tightly packed with clast sizes varying from cobble to boulder, and also clast supported. Individual boulders can exceed 1m diameter and are of varying composition, but are dominated by hard, resistant, siliceous boulders of several types including vein quartz and chert. Individual beds are between 0.3m and 2m thick (according to Tetra Tech, 1.5m according to Novo Resources management) and sheet-like, being continuous over hundreds of metres according to Tetra Tech, but with the main two marine lags continuous over 2.5km, according to Novo Resources management.

The discrepancy in the description in reports published by Tetra Tech and by Novo Resources less 6-months apart is a concern. NI 43-101 Technical Reports are supposed to represent a summary of data and they typically rely on data provided by Qualified Persons representing the Company in question. Nevertheless, it is normal for third party entities to actually complete resource estimates unless the Company is very large as an in-house resource estimate cannot be seen as independent and risks being biased.

The Resource Estimates from 2018 and 2019 were completed on different data sets, and the interpretation is markedly different on the continuity, geometry, and presentation of mineralisation. Crux Investor would have been much more comfortable if the 2019 Resource Estimate update were carried out by Tetra Tech, as an update to the 2018 Mineral Resource Estimate.

The two conglomerate types are interstratified with the fluvial type deposited in a delta and with the marine lag type deposited as sea levels rose with the wave action winnowing out the finer, lighter sediments. This process repeated several times to create the stack of interbedded conglomerates now evident. The conglomerate beds dip at approximately 20 degrees, so little is exposed at surface. Because the mineralisation dips into the ground, strip ratios and overburden increase quite quickly, generating logistical challenges that all deposits face.

Gold mineralisation within the conglomerates occurs as fine grains, larger flakes, and rounded particles rarely exceeding 2mm occurring in the matrix together with detrital (= weathered from pre-existing rocks) pyrite, referred to as buckshot pyrite. The pyrite particles range in size from 2mm to 65mm in diameter. There seems to be a correlation between higher gold grade and pyrite content and the particle size of buckshot pyrite.

Mineral Resources

As noted above a number of NI 43-101 technical reports have been filed on Sedar for Beatons Creek, dating from 2013, 2015, 2018 and 2019. This Crux Investor report focuses on the most recent two resource estimates, from 2018 by Tetra Tech, and from 2019 by Novo Resources.

The greatest difference between the 2018 and 2019 mineral resource estimates is geological interpretation and the addition of some diamond drill hole and trench data…

It is hard to make exact comparisons between the two resource estimates as the numbers are provided differently. On a qualitative basis, Novo Resources note that “There are a number of differences between the 2019 Mineral Resource estimate and the previous, with the greatest difference being a change of geological interpretation and the addition of 2018 diamond drill holes and trench samples.”

The report goes on to say that “key differences relate to:

  • Addition of 2018 diamond drill hole and trench data;
  • Different geological interpretation, more constrained wireframes;
  • Different block model size, larger estimation blocks;
  • Different variography based on the data set applied within new wireframes;
  • Different SGs based on new data;
  • New oxide-fresh surface;
  • Coherent resource classification – no spotted dog effect;
  • Higher underground cut-off based on potential mining scenario; and
  • Different pit shell based on new optimisation at the current gold price.”

Tetra Tech used 27,503 samples from RC holes, 680 samples from diamond drill holes, and 1,696 samples taken from trenches. The 2019 exercise used 3,767 composites sourced from 2,423 RC samples (64%), 229 diamond core samples (6%), and 1,116 trench channel samples (30%).

When comparing the map with the distribution of samples/drill holes for the 2019 resources estimation, reproduced in Figure 4.3_1, with a similar map in the 2018 technical report it is evident the later exercise includes substantially more diamond drill results (red dots) and a few more pit results. The differences are so minor, it should not explain a major difference in resource size.

Figure 4.3_1 | Map Showing Locations of Samples and Drill Holes for the 2019 Resource Estimation
Figure 4.3_2 | Modelled Reefs Solids – 2018 Resource Estimation

Comparing the reef models of 2018 and 2019 estimation, both undertaken by Novo Resource geologists, shows the later exercise filling the gap on the left in Figure 4.3_2 extracted from the 2018 technical report of the reef shown in brown yellow.

The different interpretation fits in with the difference in a statement on continuity of the marine lag conglomerate observed in the preceding report section. The 2019 interpretation provides a cross-section in support of the interpretation that is far from convincing with one RC hole around 500m north of a RAB hole and 800 m south of trench samples. One can well imagine Tetra Tech not being prepared to make this interpretative jump given the variability of the reef elsewhere. The 2019 model also includes a number of faults that terminate conglomerate horizons.

Simplistically, the wriggly outlines to the bottom right of Figure 4.3_2 are for the fluvial conglomerates and the more regular outlines to the left for the marine lag conglomerates with a transition zone in between.

Figure 4.3_3 | Cross Section (top) and Longitudinal Section (bottom) for Beatons Creek

Noticeable is the considerable variation in grade both downhole (e.g. blue and orange bars next to each other) and between holes. The grade bars are usually for a short section within an interpreted horizon, sometimes at the top, sometimes at the bottom.

The illustration also shows the transition from oxidised mineralisation to sulphide mineralisation, ignoring a transition zone.

The illustration does not reflect the complexity of mineralisation with the 2019 resource estimation having seven marine lags included. In total 44 mineralised domains have been identified for grade estimation based on lag number (9x), lag type code for marine/channel and fault block (9x). As it was found the grade does not change from oxidised to fresh mineralisation, this was ignored for grade estimation.

Sample assays were composited to a length of 1 m with the statistics hardly changing and the coefficient of variation (“CV” = standard deviation / mean) generally below 2.0, which is excellent for gold grade population giving confidence in the block grade estimation. This was further improved by reducing the CV below 1.5 by applying top cuts to the grade.

For the more widely spaced drilling of 100m x 100m up to 200m x 200m a block size of 40m x 40m x 1m was used. For more closely drilled areas a block size of 20m x 20m x 1m was used. The established grade for such a block were assigned to sub-blocks down to 2.5m x 2.5m x 0.25m to capture the volume of the resource outline.

For reporting purposes, a cut-off grade of 0.5g/t Au was used, which is too low given the assumptions of a gold price of US$1,311/oz metallurgical recoveries of 95% (sulphide) and 90% (fresh) mining cost of US$2.4/t for oxide material and US$3.68/t fresh, processing of US$17/t-US$19/t, and G&A expenses of US$3/t. However, given the current gold price, the cut-off grade is low.

For underground resources, a cut-off grade of 3.5g/t Au was used.

Table 4.3_1 gives the resource statements for Beatons Creek, effective 10 August 2018 (Tetra Tech) and 28 February 2019 (Novo Resources).

Table 4.3_1 | Novo Resources Corporation | Successive Resource Statements for the Beatons Creek Project

The increase in resources is largely driven by a change in geological modelling. Crux Investor is concerned by the higher grade in Inferred Resources over Indicated resources without adequate explanation

The table shows that gold contained in open pit resources has increased by more than 20% and underground resources by more than 250%. The few additional sample points cannot explain the increase, in particular as the area drilled by diamond core holes were not included in the resources statement. The difference must be predominantly attributed by a different approach to modeling. It is somewhat concerning that the grade of Inferred resources in the latest resource statement is much higher than Indicated Resources. The geological rationale for higher grades in inferred resources is not discussed, and this is a point of concern. Crux Investor notes that inferred resources at a higher grade than measured and indicated resources, without good geological supporting data is a Red Flag, and is improbable.

Figure 4.3_4 shows a map with the resource classification for the various areas highlighting the higher confidence resources to be where fluvial conglomerates predominate and lower confidence for the more continuous marine lags, which are generally deeper and could not be tested to the same extent by trenches and pits.

Figure 4.3_4 | Resource Classification – Beatons Creek

Please note the resource outline differs from that indicated in Figure 4.2_1.

It is unfortunate the resource statement does not give an indication of the relative contribution of fluvial and marine lag deposits, but visually it seems the fluvial deposits are the most important in the Indicated Resources.

Comparison of Bulk Sample Results and Modelled Resources Grade

During 2018 a bulk sample programme was carried out where 2t samples were collected over 1m thickness. The scope of sampling included 45 primary samples and 13 duplicate samples of oxidised mineralisation. The grade was determined by fire assaying of a gravity concentrate from each sample and separately assaying the tailings by 3 different methods.

The bulk sample grades were found to be consistently lower than the block model grades for those sites, which in turn were found to be consistently lower than the uncut trench sample results

The reported results for all samples, including 6 samples with grades below 0.5g/t Au, which is the cut-off grade, is 2.16g/t Au. Novo Resources also reports the weighted average grade of 2.42g/t excluding these 6 samples. Why this is applicable is not clear as in practice it will not be possible to exclude such material when mining.

The weighted average grade above 0.5g/t Au was determined at 2.39g/t Au for the primary samples and 2.42g/t including field duplicates. The average grade of the duplicates was 1.87g/t compared to 2.07g/t for the original samples. The CV for the pairwise samples is 22%. The average grades established by various methods are shown in Table 4.4_1.

Table 4.4_1 | Novo Resources Corporation | Comparison of Mean Grades (g/t Au) at Selected Bulk Sample Sites

The bulk sample grades were found to be consistently lower than the block model grades for those sites, which in turn were found to be consistently lower than the uncut trench sample results. Whereas the technical report puts a brave face on these results, even postulating these could indicate a potential upside above the global oxide block model grade of 1.88g/t Au, the 25% lower average bulk sample grade compared to the forecast grade as per block model could spell problems, especially considering how carefully the samples were collected.

In practice when commercially mining the narrow conglomerates with gold-bearing and barren sections visually indistinguishable, much dilution can be expected.

Mining

In 2016 the company carried out test mining excavating 29,560 tonnes of mineralised material. The waste and ore-bearing reef were all free dig. Each 12-hour period 4,000 cubic metre material was removed using one 80t excavator, a loader and 3 articulated dump trucks (“ADTs”) with 40t haulage capacity. In addition, a D9 bulldozer was used to ensure the floors were flat. According to the discussion in the technical report, the hanging wall of the conglomerate was easily identifiable as transition of soft sandstone to quartzite boulders of conglomerate. The footwall was also visually identified, but without details how this was accomplished. It should be noted, the above is at variance with the geological description of gold bearing and barren conglomerates interstratified. It raises the question to what extent the bulk mining site was representative from the overall resource area.

It should also be noted mining was under strict geological control with test pits being dug in order to provide grade control for the sub-horizontal reef. As the reef was found to vary in thickness from 0.5m to 2m and has an undulating footwall such test pits will be required in practice at great density to be optimally effective. The undulations represent the sea floor in this depositional environment, which implies test mining was on the more continuous marine lags only.

The new Resource Estimate shows bulk sample grades are in line with trench sample grades…but this was achieved only by ignoring 6 of the lower-grade bulk samples

Even with such strict geological control mining dilution was estimated at 20% (in the illustration in the technical report about the sampling process this is given as 20%-30%) and “ore” losses at 5%, mostly due to being removed with the overburden during stripping. Under commercial mining conditions, these numbers can be expected to be higher.

In total 29,560 tonnes of mineralised reef were mined and 86,876t of waste for a strip ratio of 2.94. Of the mineralised reef 2,760t were classified as low-grade and stockpiled. No information was provided about the criterion used for this classification. The estimated average grade from test pit samples was 2.42g/t Au, which is much higher than the block model grade of 1.65g/t Au. However, the calculated head grade after treatment of bulk sample material including 20% (?) dilution was 1.86g/t Au, therefore reconciling well with the trench sample result. The technical report, however, ignores that the calculations were carried out excluding the low-grade material.

Metallurgy and Processing

The discussion on metallurgical testwork that has been carried out is extremely brief in the 2018 and 2019 technical reports. This is not because of lack of testwork as according to the 2018 this was undertaken to examine gravity concentration, flotation and cyanide leaching in addition to comminution testwork.

For oxide material the mineralogical characterisation shows the gold tobe present from very coarse (good for gravity concentration) to very fine at 1 μm (requiring leaching). As the majority of gold is liberated (free milling) a good recovery can be expected.

Comminution tests show the rock hosting mineralisation to be moderately hard with an average ball Bond Index of 14.2 kWh/t and average abrasion index of 0.26, which is also moderate.

Typical overall recovery from a process of gravity concentration and leaching of the gravity tailings is forecast at almost 95% with more than 58% percentage points recovered in gravity concentrate. The 2018 report however includes a graph for gravity recovery as a function of feed grade with sharply dropping numbers at lower grade (see Figure4.6_1).

Figure 4.6_1 | Gravity Gold Recovery Versus Feed Grade

For fresh material mineralisation gold was shown to be strongly associated with a nickel arsenic sulphide (gersdorffite), as well as with chalcopyrite and carbon grains. The latter could cause high cyanide consumption and reduction of gold recovery. A further potential complication is the higher than average presence of Hg, As and Sb, but no further detail is provided.

Comminution tests show the rock hosting mineralisation to be hard with an average ball Bond Index of 18.8 kWh/t and average abrasion index of 0.26, the same as for oxide material.

The tests were on composites with grades of 5.46g/t and 4.35g/t, which are far higher than resource grades and therefore cannot be considered representative.

Test results indicate gravity recovery of 50% to 80% from “a well-designed and operated process plant”. Leach results show extraction rates of above 93%. An overall recovery rate of 92%-93% was suggested.

Tests of tailings samples indicate poor settling characteristics which would result in higher water retention (therefore increasing water consumption with less water recovered back to the plant) and reduction of the minimum strength below what is required for slope stability factors of safety.

Further metallurgical testwork is required on representative sulphide material as recovery issues and deleterious elements may create further problems…

A trial mining test in 2016 excavated 29,560t, but treated only 9,680t due to a host of problems such as crusher breakdowns and “inefficiencies”. Whereas problems were experienced, it is not clear why not all material was treated, when this could have been done over a longer than planned period. The 2019 technical report glosses over this work, but the 2018 report includes a detailed description, which still leaves gaps in the numbers and reconciliations.

The calculated head grade of treated material (which excludes low-grade, stockpiled material), is determined as 1.86g/t Au. Assayed grade of all material (including low-grade?) is 1.61g/t. The recovered grade of 0.67g/t Au implies a recovery of only 36%. The technical reports gloss over the poor recovery stating “the crushing and processing plant was never considered as a pilot plant so little emphasis is placed on plant recoveries”. For the sake of the NPV calculation, Crux Investor has used the PEA recovery rate, but it is noted that a significant amount of further de-risking work is required.

Economic Evaluation

Assumptions

An extremely simplistic cash flow model was generated assuming along-term gold price equal to the spot price on 8 September 2020 of US$1,930/oz Au.

At the rated capacity of 1.5Mtpa of the infrastructure acquired from Millenium the undiluted resources can sustain a life of mine (“LOM”) 6-years and 8-months, with an assumed start at full production on 1 January 2022. This valuation has also tested the impact of a dilution rate of 30%. The overall strip ratio has been guesstimated at 5.0 given the bulk sample of oxide material alone had a strip ratio of almost 3. Any dilution would reduce the amount of waste classified as stripping waste by the same amount.

With substantial sulphide material the overall metallurgical recovery was assumed 90% under commercial production conditions.

The operating cost has been assumed at US$4/t mined given the high degree of grade control required, selective mining and assuming a mining contractor responsible for the mining activities, excluding planning and supervision. The processing cost rates were taken as per inputs for the conceptual resources, but the site G&A at US$6M per annum. The haulage cost to the plant has been estimated at an industry-standard-rate of US$0.125/t/km one way. As at this stage the Beatons Creek would be the only operating assets it will have to carry the corporate overheads on its own. The cash proportion of these overheads amounted in the last two financial years on average to US$6.1M per annum.

With a mining contractor responsible for purchasing the equipment, the processing plant available and probably only needing refurbishment, capital expenditure is very limited and provisions of US$15M have been included for remaining studies and refurbishment of infrastructure. The closure and rehabilitation expenses have been guesstimated at US$5M.

The model includes the 2.0% royalty to IMC up to the higher of 12,000oz or A$20M. The Western Australian government is entitled to another 2.5% royalty.

The corporate income tax rate in Australia is 30%. Taxable income is based on EBITDA minus amortisation/depreciation of capital expenditure over the remaining life of mine with an inclusion rate of 30% on sustaining mine capex and 100% for mill capex. Of the mine capex 70% was included as part of cost of sales for tax purposes.

Tax losses may be utilised and carried forward indefinitely to off set against future assessable income provided a “continuity of ownership”(more than 50% of voting, dividend and capital rights) or a “same business” test is satisfied.

Investments in working capital have been ignored.

Results

Figure 47.2_1 shows the forecast financial performance over the LOM for 2 scenarios: one without dilution and another with.

Table 4.7.2_1| Novo Resources Corporation | Forecast Financial Performance – Beatons Creek

The table above indicates that the operation will have a very high cashmargin of almost 53%, even at a dilution rate of 30%.

With very low capital expenditure requirements the amount of EBITDA available for distribution to shareholders is more than 61%, despite an effective income tax rate of almost 30% of EBITDA.

The Crux Investor analysis generates a theoretical NPV7.5 of US$253M

The NPV7.5 of US$253 million is many times the assumed remaining initial capital expenditure requirement, which is high compared to peer projects.

Table 4.7.2_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters for the scenario where there is 30% dilution of gold grade.

Table 4.7.2_2 | Novo Resources Corporation | Sensitivity of the NPV (in US$’million) to One
Percentage Point Changes

The table illustrates that a one percentage point change in the gold price (i.e. US$19.3/oz) increases the NPV7.5 by only 2.2%, again highlighting the very high margin earned at Base Case metal prices. The sensitivity to one percentage point changes in working cost (i.e. US$0.43/t treated) results in changes in NPV7.5 of 1.0%.

Unfortunately, promises of technical reports are going backwards, not forwards.

There are, however, reasons to believe that the resource at Beatons Creek is never coming out of the ground. Quoting the Crux Investor report from earlier this year, “in September 2015 when Novo announced a Resource of some 292,000 oz in near-surface oxides at its Beatons Creek project, it also stated that there was a plan to release a PEA within the next 2-months. This was a great start and an admirable goal. However, Exploration continued, expanding the envelope of known mineralisation, but the proposed PEA for Beatons Creek was not completed.

In 2017 the company announced that it would release a PFS during Q4 2017

Over 18-months later, in May 2017, the company announced that it would drill another 10,000 m and dig another 800 trenches to expand and upgrade near-surface mineral Resources at Beatons Creek. It also stated that it was “targeting completion of a Prefeasibility Study (PFS) for the Beatons Creek Gold project by fourth quarter of 2017.”

In 2018 the company announced that the project was the best in the region

Note that in 2017 it is the more advanced report that is promised- a Pre-Feasibility Study (PFS), which is considerably more detailed than the PEA, that was promised in 2015. What happened next is that Exploration continued, expanding the envelope of known mineralisation, but the proposed PFS was never published. At this point, technical credibility starts to be questioned.

In 2019 the company announced that an Options Study on the project would be published

Perhaps learning from this habit of over-promising, by the time the November 2018 Resource Update for Beatons Creek was published, the accompanying technical language had been toned down. No studies were promised, instead, an opinion was aired that management thought it was one of the best deposits in that part of the Pilbara.

Crux Investor believes that the Beatons Creek resource is never coming out of the ground

Fast forward to April 2019 when another Resource Update was announced for Beatons Creek, this time taking Indicated Resources to 457,000 oz and Inferred Resources to 446,000 oz. The accompanying language was circumspect, saying that the Resource “demonstrates the potential for conglomerate Gold deposits in the Pilbara”. In the same month, it was announced that an Options Study would be completed on Beatons Creek and Karratha combined, for delivery in Q3 2019.

Note that Option or Trade-Off Studies are usually carried out internally and are typically a precursor to a PEA, which in turn is quite a step back from the promise of a PFS 2-years earlier. What this means is that the project actually appears to be going backwards, not forwards.

All in all, although the NPV creates a positive number, the resource does not look as if it will ever come out of the ground.

Novo Resources Company Report – Red Flags & Green Lights

Taken from our recent update to the Novo Resources Company Report update (09/20), here is a look into the Red Flags & Green Lights.

To access the full Report, click this link.

Red Flags

From the review of the technical data, Crux Investor reaches the conclusion that the Pilbara portfolio acreage is largely worthless. Yes, we concede that Beatons Creek does have a theoretical value and a positive NPV but we feel the resource can be grouped among those that are never coming out of the ground. Ironically, even though Novo Resources continues to promote the Pilbara portfolio, we believe that senior management within the Company has reached the same conclusion as Crux Investor. Events of the past two years show that Directors of Novo Resources have lost faith in the projects as the Company and its Chairman have steadily been diversifying away from the Pilbara gold conglomerates.

In 2019 and 2020 the company has changed its stated objective of developing gold in the Pilbara, adding the phrase that it “seeks to leverage its internal geological expertise to deliver value-accretive opportunities for its shareholders.” This is code for, “the Pilbara assets are worthless, we need to diversify.”

When the Board of Directors agrees that Novo Resources money should be invested into companies OTHER than Novo Resources, and when the Chairman and President takes any position offered to him OTHER than Novo Resources, the message to shareholders should be received loud and clear, “abandon ship, abandon ship”. Actions speak louder than words, so get out while you still can.

All in all, Crux Investor arrives at a set of Green Lights and Red Flags that are very similar to the report from April of this year. Not wanting to mince our words, Crux Investor views almost everything to do with the Company as being a furiously waving Red Flag.

Opaque property transactions in the Pilbara

An absence of updated technical studies on Beatons Creek

Novo Resources publishing the latest resource estimate at Beatons Creek, not an update from Tetra Tech

Low grade, high nugget effect at Comet Well / Purdy’s Rewards rendering the project worthless

Low grade, high stripping at Egina rendering the project worthless

Board of Directors abandoning the Pilbara investment thesis as demonstrated by ‘strategic’ investments in early 2020

Chairman and President of Novo Resources abandoning the Novo Resources cause by taking nine new senior positions with other companies during 2020

Enterprise Value 1.9 times greater than Net Asset Value indicating that the next most likely significant share price move will be lower (barring a huge rise in the gold price)

Green Lights

Novo Resources is still able to raise capital in the equity markets

Beatons Creek has a theoretically positive NPV of US$253 million at current gold prices

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Novo Resources Company Report – 09/20 Update

Read the introduction to our updated Company Report on Novo Resources here. And for the full report, click this link.

Crux Investor wrote its first company report in April 2020, on Novo Resources Corporation (“Novo Resources”) (TSX:NVO). Since April the share price has doubled, the Company has raised C$56M from investors, and the market capitalisation is currently C$628M.

In that first report Crux Investor highlighted many structural problems with Novo Resources such as ongoing mission creep and absence of milestone delivery, the lack of resources at Comet Well / Purdy’s Reward caused by an insurmountable nugget effect problem, the lack of technical reports at Beatons Creek, the terrace nature of gold at Egina, and Dr Hennigh’s personal enrichment activities at the probable expense of shareholders. In April Crux Investor felt that the Company was over-valued, notwithstanding the overall bull market in precious metals.

Clearly management of Novo Resources (and its supporters) will feel vindicated, given that the share price has doubled in 5-months, and the Company continues to receive support from investors.

In a moment of humility, Crux Investor wanted to check to see if that first analysis was unfair, or inaccurate. Accordingly, we have completed a fresh, bottom-up review of Novo Resources, with a detailed financial and technical review, prepared by a new analyst. For the sake of fresh readers, a complete background is provided, and so here it is – the new Novo Resources, Crux Investor Update (with occasional reference to the April 2020 Crux Investor Report).

Novo Resources is a Canadian company which took licences in North-Western Australia in 2012 exploring paleo-placer gold deposits in the Pilbara region. The area was known as a place where prospectors could pick up gold nuggets using metal detectors and Australian companies had explored it systematically in the 1970s. Although no large scale, commercial gold mining operation had been established in the region, Dr. Quinton Hennigh, having worked in the area as a Senior Geologist for Newmont Corporation, believed that a commercial discovery could be made. In 2010, Hennigh helped start Novo Resources and began assembling its Australian exploration portfolio. Hennigh is currently Chairman and President of Novo Resources.

The first project was Beatons Creek, comprising a set of mining licences and a surround package of exploration licences. The mining licences themselves were bought from a company called Millenium Minerals Ltd (“Millenium”), and the exploration licences around it, owned by Mr Creasy, a well-known Australian prospector, and companies controlled by Mr Creasy (“the Creasy Group” of “CGE”) were together structured into a 70% joint venture with Novo Resources. Crux Investor notes that the consideration paid to the Creasy Group far exceeded what was paid to Millenium, whereas all substantive historical work seems to have been on the mining licences.

The Beatons Creek project was quickly advanced with a NI.43-101 compliant resource estimate declared on 1 May 2013 containing 0.42Moz gold at an average grade of 1.47g/t Au. In addition, promising results were announced at another prospect. Novo Resources declared the financial year ending 31 January 2014 a “banner year”. It was so much encouraged by the initial results that Novo Resources became a serial deal-maker, picking up large tracts of mineral rights in the Hammersley Basin of the Pilbara region where similar geological deposits to the Beacons Creek area were found.

Signing off on Resources internally should not be done until there is an established track record of conversion to production. This is a clear Red Flag.

In the Management Discussion & Analysis (“MDA”) for the year ending 31 January 2015 management undertook to “fast-track Beatons Creek toward production” contemplating a mining rate of 1,000t – 1,500tpd”. Despite multiple promises of Feasibility Studies and fast-track production, there must have been complications as the Beatons Creek project has yet to be given the go-ahead. Reality failed to match rhetoric.

The technical information on Beatons Creek shows that extracting the gold-bearing conglomerates need careful delineation, which includes drilling/pitting/trenching to determine top and bottom of the strata to mine. Mining of the relatively narrow horizons that have an undulating bottom will result in considerable dilution. The resources are present in numerous reefs, but mainly in two reefs considered more continuous, but also generally deeper under overburden.

Despite years of on-and-off further exploration Novo Resources has struggled to substantially add to the 2013 Resources declaring in 2019 open pit resources of 0.75Moz. The grade has however improved to 2.3g/t Au, but with a grade of 2.1g/t Au in Indicated Resources and 2.7g/t Au in Inferred Resources. The technical report gives no geological explanation for the lower confidence resources to have a higher grade. More worrisome, bulk sample results which can be considered much more representative than smaller trench sample results on which the resource grade is based, proved to be much lower than modelled for the bulk sample sites. Furthermore, when commercially mining the narrow gold-bearing conglomerates alternating with barren sections that are visually indistinguishable, much dilution can be expected compared to the carefully controlled bulk sampling exercise.

Novo Resources is currently in the process of acquiring Millenium shares to take control of its existing process plant at 10km from Beatons Creek. Whether this 1.5Mtpa plant is optimally set up to treat the Beatons Creek mineralisation is not yet clear from the documentation.

This study has valued the Beatons Creek project for two scenarios: mining at resource grade and mining assuming 30% dilution, which is more than the 20% dilution experienced bulk sampling to account for less grade control when commercially mining. At the gold price of US$1,930 on 8 September 2020 and with Beatons Creek having to cover the cash corporate overhead expenses of C$6.1M per annum, the NPV7.5 of the project is US$253M. It generates an excellent cash margin of almost 53% of gross revenue, but has a limited life of mine (“LOM”) of 6.7-years to 8.7-years, depending on whether dilution is included or not. On paper this project would be profitable, but it requires significant further work to de-risk the opportunity. In April 2020 Crux Investor noted that Beatons Creek had gone backwards from promises of fast-track production in 2015, to promises of a Pre-Feasibility Study, to promises of an Option Study. There has been no technical study at Beatons Creek for years and Crux Investors’ new evaluation of the project also arrives at the conclusion that the Beatons Creek resource is unlikely to ever come out of the ground.

It should be stated that there have been a number of resource updates at Beatons Creek, in 2013, 2015, 2018 and most recently in 2019. The first 3 of these reports were written by independent consultants. Remarkably the 2019 resource update was written by Novo Resources itself. Crux Investor believes that no matter how much internal expertise a junior mining company has, signing off on resources internally should not be done until there is an established track record of conversion to production. This is a clear Red Flag.

The Novo Resources share price came alight in July 2017 when it announced the discovery of large (up to 4 cm) gold nuggets at Purdy’s Reward. The licences are from one of the Company’s many acquisitions, but not a Creasy Group asset. The share price rocketed tenfold making the company for a short period a US$1Bn enterprise. When interest started waning at Purdy’s Reward, announcements of nuggets at an adjacent property, Comet Well, temporarily re-inflated the balloon. Over time things have gone quiet with regard to these prospects, which is completely understandable when the technical information is thoroughly reviewed. This fresh Crux Investor report sifted through the data and saw that the weighted average grade of 0.91 g/t Au of selectively reported bulk samples renders Purdy’s Reward and Comet Well, well, worthless. So much for the US$1Bn hype, and remember that companies that selectively report samples will always report the best selection, not the worst or the average.

With Novo Resources management realising there is little (no) joy to be had from either
Beatons Creek, or Comet Well / Purdy’s Reward, attention moved on to the Egina project where prospectors at an area referred to as Farno had found gold nuggets. This time round management held out the prospect of much larger target areas with the gold in a different type, more ubiquitous occurring conglomerate. Once again, however, a review of the news releases and documents published by Novo Resources shows that the asset falls short. The surface area explored to date is not more than 800m x 200m and bulk sampling has yielded an average grade of 0.35g/t Au and a gravity recovered yield of 0.28g/t Au. And once again, the fresh Crux Investor report reached a confident but critical conclusion on the value of Egina. Worthless.

Curiously, even while it has been strategically shifting away from the Pilbara the Company has also taken full control of the Greasy Group tenements areas. Perhaps it is looking to sell the entire portfolio as a job lot, despite the fact that in ten years the Company has not had any obvious exploration success on any of the licences?

Finally, it is worth remarking that management has recently been vocal about the testing of ore sorters to reject waste. Crux Investor reminds readers that pre-concentration does not add gold to the production schedule, rather it is a volume-reduction step that may or may not create value for shareholders. Any savings created by lowering processing costs have to be off-set against revenue losses due to less gold being recovered in the full beneficiation circuit. There will be cost savings from having reduced amounts of material needing to undergo a more expensive concentration process. Equally, such a benefit comes at the loss of gold in the pre-concentration stage as not all the gold will be recovered. Therefore, the loss of revenue may well be greater than the operating cost saving. Pre-concentration in itself is not a game-changer.

Hennigh, Chairman of Novo Resource has always had too many other corporate positions for comfort but in recent months he has taken on more and more positions, reducing the time he spends on Novo Resources

At its most basic, the Company is built on sand with most of the Pilbara portfolio acreage being worthless. Yes, we concede that Beatons Creek does have a theoretical value and a positive NPV but we feel the resource can be grouped among those that are never coming out of the ground. Ironically, even though Novo Resources continues to promote the Pilbara portfolio, we believe that senior management within the Company has reached the same conclusion as Crux Investor. Events of the past 2-years show that Directors of Novo Resources have lost faith in the projects as the Company and its Chairman have steadily been diversifying away from the Pilbara gold conglomerates.

In 2019 and 2020 the company has changed its stated objective of developing gold in the Pilbara, adding the phrase that it “seeks to leverage its internal geological expertise to deliver value- accretive opportunities for its shareholders.” This is code for, “the Pilbara assets are worthless, we need to diversify.”

Novo Resource invested A$4M in an 8.2% stake in Kalamazoo Resources Limited in January 2020, with gold projects in the Fosterville region of Victoria, South Australia. In the same month Novo took a 15.97% stake in a private exploration company in a share swap. The private company is New Found Gold Corp and has exploration ground in Newfoundland and Labrador, Canada, and it ended up with a 3.73% stake in Novo. In March 2020, Novo Resources subscribed for 9 million shares in ASX listed company GBM Resources Limited with an earn-in right for up to 60% of the Malmesbury Gold Project in Bendigo, Victoria, South Australia.

Hennigh, Chairman of Novo Resource has always had too many other corporate positions for comfort but in recent months he has taken on more and more positions, reducing the time he spends on Novo Resources, and reducing his reliance on the Novo shilling/pfennig/dime. He has at least seventeen paid positions as Director or Advisor to companies other than Novo Resources and incredibly, he has taken on 10 new roles in 2020 alone.

When the Board of Directors agrees that Novo Resources money should be invested into companies OTHER than Novo Resources, and when the Chairman and President takes any position offered to him OTHER than Novo Resources, the message to shareholders should be received loud and clear, “abandon ship, abandon ship”. It is every man for himself at this point.

All in all, Crux Investor arrives at a set of Green Lights and Red Flags that are very similar to the report from April of this year. Not wanting to mince our words, Crux Investor views almost everything to do with the Company as being a furiously waving Red Flag.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Karora Resources (KRR) – Ramping Up Beta Hunt Post Royalty Renegotiation

Karora Resources Inc.
  • TSX: KRR
  • Shares Outstanding: 114M
  • Share price C$3.99 (14.09.2020)
  • Market Cap: C$575M

Karora Resources (TSX: KRR), formerly RNC Minerals, has caught the attention of a lot of gold investors in recent months. This success is not just courtesy of the incredibly bullish gold environment, with gold briefly rising above US$2,000/oz; it is clear that CEO Paul Huet’s systematic process of evaluating and improving every facet of the company has had the desired effect.

Let’s start with the most important side of this story, the company’s revenue base: gold production. After shifting the focus away from nickel and the former 28%-owned Dumont Project, selling it for 70% of what it was divested for (proceeds of up to $47.6M), Karora Resources has been consistently hitting and often exceeding its guidance. Despite COVID-19, which has negatively impacted the performance of most gold producer, Karora resources has managed to hit its guidance with strong Q2/20 production and financial figures. Here are some of the highlights from August 2020, which reiterate the company’s guidance:

  • Q2/20 consolidated gold production: 24,078oz. This maintains the 2020 gold production guidance of 90,000oz to 95,000oz.
  • Q2/20 AISC:  $1,065/oz – this is at the lower end of the 2020 guidance: US$1,050-$1,200 per ounce. Karora continues to target $1,000/oz by the end of the year and the ore-sorter looks key to this ambition.
  • Q2/20 net earnings: $9.8M  ($0.07 per share).
  • Q2/20 adjusted earnings: $16.6M ($0.12 per share).
  • Q2/20 adjusted EBITDA: $17.3M ($0.13 per share).
  • Both the company’s balance sheet and cash position has been bolstered significantly. Karora ended Q2 with $50.2M in the treasury and working capital of $43.8M, up $11.8M and $13.1M respectively from March.

Karora Resouces has been focussing on its primary operations, including the Beta Hunt Underground Mine and the Higginsville Gold Operations (HGO) including the Higginsville Open Pit mines and 1.4Mtpa Higginsville mill. It has sought to strengthen the grade of its feed for the Higginsville mill by making the Spargos Reward acquisition in August. The high-grade, open-pit gold Project in Western Australia was obtained for US$2.86M from Corona Resources. This new source of high-grade gold ore allowed the company to play hardball with Maverix Metals over the Beta Hunt royalty; we’ll get to that in a minute.

On the corporate side of things, the company has been hard at work too. The elimination of the Morgan Stanley NSR gold royalty on HGO operations is an exceptional exhibition of positive negotiations by Huet and his team. It will drive tens of millions of dollars into the company’s bottom line in the future, unlocking an unexplored 1,800km2 land package.

The 1 post-consolidation common share for every 4.5 pre-consolidation common shares rollback was another tactic deployed with the best of intentions for shareholders, and it appears to have had the desired effect. Karora Resources now has a much more respectable share registry rather than looking like something more suited to the ASX. All of the commercial activities of the company have resulted in institutional investors demonstrating much more interest, with the renowned Eric Sprott increasing his ownership in Karora by 26 million shares (prior to the share consolidation).

The message from Karora Resources is clear: it will continue in this systematic, non-promotional, accretive vein, and it will not get caught up in chasing the coarse gold it became so well known for. Coarse gold will come, but it will happen naturally, and Karora is not going to force things or deviate from its logical business model. We like this a lot. This is exactly what investors want to hear.

With an average grade of 3g/t, Beta Hunt has always been Karora Resource’s bread and butter gold asset, but mining at the site has not proven all that economical in the past. Maverix Metals’ 7.5% royalty on gold production, negotiated at a time when gold was in a significant bear slump, has proven problematic. Huet set about rectifying this issue in a similarly logical way. With Spargos Reward and the ore sorted giving Huet some leverage, he was allowed to put work at Beta Hunt on the backburner. Maverix Metals has been under significant pressure: should they hold out and face missing out on the gold bull run at its most significant stream of income, or should it budge so Beta Hunt can get moving ahead? It opted for the latter, dropping the royalty by 2.75% to 4.75% for around $18M.

As a result, Karora has been back working full-steam ahead at Beta Hunt. Some recent drill results have demonstrated enormous potential. The latest underground drilling programme has unveiled a new gold footwall zone and high-grade nickel intercepts at the northern end of the Western Flanks resource with significant gold interceptions. Moreover, there have been some high-grade gold discoveries in the Larkin Gold Zone. Lastly, Karora has experienced its first nickel discovery at Beta Hunt in 13-years at the 30C Nickel Trough. It has the credentials to slot into the EV revolution narrative in some way, but it remains to be seen if this will be meaningful, especially given the sale of Dumont. Let’s have a quick overview of some of the key high-grade intersections from various drill holes:

New Footwall Zone

  • 4.6 g/t over 9.4m
  • 6g/t over 5.3m
  • 2.4g/t over 23.3m (including 6.3g/t over 6m)
  • 7g/t over 8.6m

Infill Drilling

  • 8.1g/t over 6.6m (including 13.7g/t over 3.3m)
  • 3.8g/t over 9.9m

Nickel Highlights From Western Flanks North

  • 7.2% Ni over 1.2m
  • 5.2% Ni over 0.8m 
  • 4.1% Ni over 2.2m

Then, most recently, the company put out some more new high-grade discoveries at Beta Hunt:

Larkin Gold Zone

  • 8.2g/t over 3.9m
  • 3.3g/t over 15.8m
  • 3.9g/t over 11m
  • 15.3g/t over 3.5m
  • 7.4g/t over 8.9m
  • 5g/t over 14.4m (including 22.7g/t over 2.6m)

30C Nickel Trough

  • 3.8% Ni over 2.3m
  • 7.7% Ni over 1.3m
  • 8.6% Ni over 1m

Beta Hunt is now shaping up to be a real moneymaker, and investors need to pay attention now before they miss the potential uptick. These new discoveries are undoubtedly significant, and with coarse gold seeming inevitable, it is clear to see why so many institutional names are this story intently.

Karora Resources is now rolling into a new growth phase. It is remarkable just how dramatic a turnaround story this has been so far. This is a rarity in mining and it is one that is going to undoubtedly cause to explore further.

Hear our thoughts on the company at cruxinvestor.com/club. Where you can also get company reports, training courses, macro analysis and insight from experts on a variety of subjects and join an engaged investor community sharing ideas and thoughts with each other. Try the 7-day trial.

Company Website: https://www.karoraresources.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Russian Suspension Agreement – Uranium Investors Want Answers

In news that many uranium investors may already be aware of, the US Department of Commerce (DoC) has announced a draft amendment to the 1992 suspension agreement on uranium products supplied by the Russian Federation. We look at the implications for existing contracts with US utilities, the long-term outlook for supply contracts, and general geopolitical dynamics.

If finalised, this amendment will continue to suspend the antidumping investigation on uranium from the Russian Federation, originally signed in 1992. As some investors and uranium executives had already suspected, this is a move that will extend the Russian Suspension Agreement (RSA) to 2040, with the aim of reducing US reliance on Russian uranium and oversupply of cheap uranium into the US market.

Since the Nuclear Fuel Working Group (NFWG) policy document was released several months ago, American uranium junior miners want to restore America’s nuclear energy capabilities. This amendment appears to be one of the first major, palpable modifications made to America’s uranium policies.


What does the new RSA draft mean for existing contracts utilities have made?

The Dept of Commerce increased the quota from 20% of US requirements under the previous RSA to 24% of US requirements in 2021 and 2023, and kept the quota at 20% for 2022 and 2025 to 2027, in order to accommodate, or “grandfather,” existing contracts between US utilities and RosAtom. However, to their credit, we do not believe the DoC “grandfathered” any optional, desired, or “flex-up” quantities that US utilities and Russia wanted.

Furthermore, the DoC limited the U3O8 and conversion components of enriched uranium product (EUP) to about 15% of US requirements in 2021, 10% in 2022 and 2023, 5.7% in 2024, and about 5% thereafter. Interestingly, this ramp-down was also intended to “grandfather” some existing EUP contracts, slowly pushing Russia and US utilities into SWU-only contracts for enrichment services that don’t include any U3O8 and conversion services. This is important because it will limit Russia’s ability to package all the components of enriched fuel (U3O8, conversion, and enrichment) and offer steep discounts that unfairly undercut the prices of U.S. producers.

Russia was previously offering U3O8 and conversion services to US utilities for almost free in order to gain market share for their enrichment. It is tough for non-Russian suppliers to compete against this. The new RSA will stop this practice and increase global demand for U3O8 and conversion. It will also prevent feedstock produced from Russian underfeeding and tails re-enrichment to enter the US.

How much has really changed? 

An awful lot has changed.

If no agreement had been reached unlimited Russian uranium could have entered the US market unabated starting in 2021. This would obviously have been devastating to US producers and other non-Russian suppliers to US utilities. This is no longer the case.

Another important component of this development is that for the first time, Commerce has created a separate cap for EUP. This is a complicated concept to explain, but in effect, this will reduce the amount of Russian U3O8 and conversion that can enter the US market, and prevent the “packaging” of EUP discussed above.

In addition, Commerce placed strict limits on how “returned feed” under separative work units (SWU)-only (enrichment services) contracts is handled. Namely, that this feedstock will be deemed Russian origin and, if purchased in the US, immediately exported out of the US, thereby making it subject to the quota for it to re-enter the US.

An awful lot has changed. If no agreement had been reached unlimited Russian uranium could have entered the US market unabated starting in 2021.

Under SWU-only contracts, US utilities only buy enrichment services from Russia, and not the feedstock (U3O8 and conversion services) that goes into the EUP. Utilities isolate the SWU component by purchasing/importing EUP from Russia and then buying U3O8, UF6 and/or conversion services from other non-Russian suppliers that are then returned to Russia. Under the previous RSA, that returned feed (typically UF6) could be kept in the US and enriched at the Urenco enrichment facility in New Mexico, or exported out of the US, enriched in Europe, and re-imported back into the US, which would all occur outside the quota. The new RSA closes these loopholes. The bottom line is that the new RSA will create additional demand for non-Russian U3O8 and conversion.

If we are to conglomerate all of these changes into one cohesive strategic shift, it becomes very clear that this is much more than a mere PR exercise. American uranium producers could well be coming back into fashion.

Will this spur utilities to come back to long-term contracting before 2021?

This is the question that uranium investors want answers to. This new RSA may create a bifurcated market for uranium in the US where there is one price for Russian material and one price for non-Russian material. The new RSA is likely to create considerable quantities of Russian uranium that will need to find a home outside the US.

At the same time, there will be increased US demand for non-Russian uranium, including from the US, Canada, Australia, Kazakhstan, Namibia. US, Canadian, and Australian suppliers are certainly predisposed to signing long-term contracts. Namibian uranium is basically owned by China, and that material goes into their nuclear energy program.  All non-Russian suppliers will all be competing for additional US business and assuming US utilities just don’t buy everything from Kazakhstan, we should see an meaningful increase in long-term contracts by Q3/21.

The new extension requires TENEX to bring some of the UF6 physically back to Russia. Implications?

This refers to the SWU-only contracts discussed above. The RSA extension does not require the UF6 (return feed) to be physically returned to Russia, it just needs to be exported out of the US and returned to a facility where a Russian entity has an account, in Russia or elsewhere. Importantly, this material will be flagged as Russian-origin, it must be exported out of the US, and it will be subject to the quotas to be imported back into the US.

How much of the expected demand for the next 2 to 3-years for US Utilities has been filled by Russian Uranium and to be grandfathered, and how will that affect US utilities buying from either spot or term in that time period?

As stated above, US utilities will be able to fulfil an average of 22.6% of their requirements with Russian material (24% in 2021, 20% in 2022, and 24% in 2023). We also believe that they were hoping to receive additional material from Russia as optional, desired, or flex-up quantities under those existing contracts. To their credit, Commerce did not “grandfather” those amounts. We do not know how much material this represents; however, we have heard rumours that US utilities were thinking about importing up to 40% of US uranium requirements from Russia, if the RSA was not extended. And why not, it’s cheaper than US producers can sell. But the DoC says no. Therefore, there is likely that there is considerable unfilled demand by US utilities in the next few years that US utilities were hoping to receive, but they cannot now, as it needs to be filled by non-Russian suppliers.

In addition, the Russian quotas get ratcheted down even further in 2025 and beyond, creating even more demand for non-Russian material. It looks like Energy Fuels could well be the best-positioned US uranium producer to compete for these deals.

How significant is the US feedstock provision to TENEX? Are the contracted volumes low enough that they perhaps don’t care if the feedstock material is quarantined and shipped to Russia to be kept out of the market?

Again, as described above, there is going to be a lot of Russian material, U3O8, conversion and enrichment, that needs a home outside of the US. Russia is likely to offer steep discounts on this material to other nations, like South Korea, India, and the like. This will hurt Russia’s bottom line, and we don’t know if that will have an effect on their behaviour.  Nonetheless, as stated above, there will be increased demand for non-Russian material, which could benefit American uranium players. Investors may want to look towards the major North American uranium companies for their ability to insert themselves in to the mix.

Under the new amendment, all contracts must be approved by the DoC in order to secure an export license to allow imports to enter the USA. Does that mean contracts signed without the DOC approval will need to be sent to DOC to get the approval? What impact will this have on utilities?

Precisely.  Commerce will be required to review all contracts between the US and Russia for compliance with the new agreement. That said, Crux Investor believes that US utilities are required to do that now. So, we would not expect this feature to have much of an impact on their behaviour.

We have 4 Exclusive interviews on the topic with ISR genius Wayne Heili of Peninsula Energy; term-contract expert Dustin Garrow, the mega mind of Brandon Munro of Bannerman Resources and our man in the Hill, Curtis Moore of Energy Fuels, were we get into the detail of what this means for Uranium investors and perhaps where they should be looking. You can sign up for a 7-day trial on cruxinvestor.com/club and see lots more exclusive content on uranium investments and other commodities.

What do you make of this amendment to the RSA? We would love to get your take, so comment below and we will respond.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Karora Resources (KRR) – Reduced Gold Royalty Frees Up Beta Hunt Mining

Karora Resources Inc.
  • TSX: KRR
  • Shares Outstanding: 114M
  • Share price C$3.99 (14.09.2020)
  • Market Cap: C$575M

Karora Resources (TSX: KRR), formerly RNC Minerals, is a gold producer that is focussed primarily on the acquisition, exploration, evaluation and development of precious metal properties. It aims to become the next sustainable and high-quality mid-tier gold producer, allowing investors to leverage the current gold bull rush through strong, consistent production and exploration upside.

The company’s primary operations are the Beta Hunt Underground Mine and the Higginsville Gold Operations (HGO) including the Higginsville Open Pit mines and 1.4Mtpa Higginsville mill. Karora Resources also holds a 28% interest in the Dumont Nickel Project: one of the world’s largest undeveloped, permitted and shovel ready nickel sulphide deposits, though it may be looking to cash this in soon to better abide by its new gold focussed nature.

Matthew Gordon talks to Paul Huet, July 2020


Karora Resources is now a really encouraging investment proposition. Having guided 90,000-95,000oz gold at the start of the year, with an AISC of US$1,050-$1,200/oz that could fall to US$1,000 with the introduction of the ore sorter, the company is now starting to experience a revaluation. By focussing on gold, Huet has completely changed things. Investors can expect to hear the relatively inexpensive ore sorter testing results in the near future. 20-25% of waste should be removed, drastically increasing the feed grade to the mill, increasing the margin, and giving Karora options regarding how best to move forward.

Karora Resources, with projected total gold production of 90,000-95,000oz, and that’s excluding any exciting contributions from coarse gold occurrences at Beta Hunt. Moreover, Huet and his team expect coarse gold in 2020 based on their interpretation of the Beta Hunt shear zone/Lunnon Sediment intersection horizons. The AISC looks a solid if unspectacular US$1,050-$1,200 per oz, but the introduction of an ore-sorter could bring this number below the magic US$1,000/oz. Moreover, plenty of exploration upside is expected with coarse gold now a real possibility, especially considering Karora’s interpretation of the Beta Hunt shear zone/Lunnon Sediment intersection horizons.

By buying back the Morgan Stanley Royalty at HGO, Karora has unlocked an unexplored 1,800km2 land package. The Pioneer deposit, Two Boys extension, Paleochannel extensions, Baloo-Sluth trend, and Zuleika parallel mineralised structures all look like they could add value to the company’s bottom line. The royalty had stood for decades and, in the long-run, it is worth tens of millions to the company. Karora Resources can now profitably fill the Higginsville Mill, and in a gold rush environment that is undoubtedly the name of the game.

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Huet recently oversaw a share consolidation for the company, enabled by strong gold production figures, which clearly has the best interests of retail investors at heart. It is a 1:4.5 rollback, and it neatens up the share registry ahead of what Huet plans to be a growth phase. This growth phase will be driven by both exploration, and acquisitions like Spargos Reward, recently obtained for US$2.86m from Corona Resources… a brave transaction right now… 😉

The acquisition adds higher-grade ounces to the Karora’s feed for its mill, and it indicated to Maverix Metals that the company would be playing hardball over the Beta Hunt royalty renegotiation, having already slowed down operations to a crawl there.

The recent news has regarded this particular topic. Having quashed any legacy issues with its name change, and in a move that investors have been waiting in anticipation for, Karora Resources has agreed a renegotiated royalty package with Maverix Metals. Maverix agreed to reduce its royalty on Beta Hunt gold production from 7.5% to 4.75% from July 1, 2020. While 4.75% is still a substantial royalty on gold at this time, it is considerably better than 7.5%, an inflated figure negotiated at a time when the market didn’t care about gold and Dumont was the focus. In terms of remuneration, Karora will pay US$5M along with issuing 35.1M shares at C$0.506 to Maverix. The US$5M will be paid in two equal instalments; one was paid on the closing of the renegotiation, one will be paid in January 2021.

Mining at Beta Hunt hadn’t been all that ecnomic for Karora Resources in the past. Maverix’s former 7.5% combined the the state royalty totalled a whopping 10%, rending beta Hunt much less profitable than the company’s other properties. Considering the entire company is worth just over C$550M, the C$30M total it had paid in royalties since acquiring Beta Hunt was undesirable to put it mildly.

Now Karora Resources is free of this burden, it can get back to mining more freely at Beta Hunt, and investors hope they will be seeing some more of that infamous coarse gold from the coarse gold pockets, which put the company on the map in the first place.

With its average grade of c. 3g/t, Beta Hunt’s economics are attractive, but I think the coarse gold is the key to unlocking value; the market loves excitement, and Karora Resources could be delivering excitement in spades. Huet and his team will be looking forward to stacking up its inventory with even more ore to feed its mill.

The company is now cashed-up with a revitalised balance sheet and free cash flow to burn. There are a huge number of options for Huet to consider moving forward, and in light of the exemplary job he has done so far, I have no doubt he will make the right decisions and choose the right path. These are exciting times at long last for Karora Resources shareholders.

Company Website: https://www.karoraresources.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Precipitate Gold (PRG) – Dominican Gold Exploration, Partnered with Barrick Gold

Precipitate Gold Corp.
  • TSX-V: PRG
  • Shares Outstanding: 106M
  • Share price C$0.30 (14.09.2020)
  • Market Cap: C$32M

An interview with Jeff Wilson, President & CEO of Precipitate Gold Corp. (TSX-V:PRG). If you want our take on this interview and Precipitate Gold, go to cruxinvestor.com/club.

Matthew Gordon interviews Jeffrey Wilson, September 2020

https://youtu.be/5UcXuR7LbmU

Is this just yet another gold company looking to make a quick buck in a favourable gold bull environment, or is there more to this Dominican gold story? The share price has tripled since its COVID-19/market-reset base, which is a good sign. Now, it is time to delve into the company’s fundamentals to assess whether or not this is an investment proposition that investors should be considering.

Precipitate Gold is a is a gold developer with 3 gold assets in the Dominican Republic. Its flagship project is the Pueblo Grande gold project. Second in line, and gaining a lot of attention recently, is the early-stage Ponton gold project. Lastly, the parked up Juan de Herrera gold project continues to sit on the back-burner courtesy of regional licencing issues.

Pueblo Grande

Pueblo Grande is located adjacent to a world-class gold mine that is operated by Barrick Gold, the Puebla Viejo mine. Pueblo Viejo is one of the top-5 gold assets in the world and is the largest active gold mining operation in South America. This is very good company to be amongst.

Barrick clearly spotted the potential of the 9,863ha Pueblo Grande land package, recently signing an earn-in agreement to develop it. Barrick has the ability to earn up to 70% of the project by investing $10M and delivering a PFS within 6 years from the start of the agreement. They have to drill at least 7,500m and also deliver a PFS. The JV is rapidly pursuing development, including selective surface geochemical sampling, systematic rock-clay alteration surveying (via portable spectral mineral analysers), geological mapping and, the most exciting component for investors, an initial 2,500m of exploration drilling.

Barrick paid C$1.4M in up-front cash, which certainly helped Precipitate Gold on its way. The company has $2.3M left in its “fully-discretional” treasury to continue the accelerated development of Pueblo Grande while pushing ahead with the Ponton Project.

A really encouraging aspect of this story is Barrick’s assurance of capital on favourable terms. Rather than requiring Precipitate to come up with their 30% share of any future funding, Barrick has agreed to arrange the funding. Precipitate has not raised a lot of cash compared to relative gold juniors, and Wilson appears to be keeping plenty of options on the table for future fundraising arrangement whilst minimising dilution through smart corporate structuring and a measured approach to spending. Wilson is candid, it is hard to spend a lot of money in the Dominican Republic, but the company is in a “fortunate position”: a 100%-owned portfolio with no underlying option payments and no work commitments. Holding costs are also. minimal. This is a tight, respectable balance sheet and indicates strong management practices.

Ponton

With Barrick Gold taking care of Pueblo Grande for now, Ponton will be the primary focus of Precipitate’s capital for the next few months. Ponton is favourably located c.35km East of Pueblo Viejo and ‘hosted in the same Los Ranchos Formation geological terrain.’ It is also just 20km east of Pueblo Grande.

It is an early-stage exploration play, which carries inherent risks, but recent results have exhibited promising signs. The ground magnetics geophysical survey conducted at the Copey Hill epithermal gold target provided eye-catching highlight rock samples at surface of 53g/t gold and 17g/t gold.

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Having inherited a data set from the previous operator, Precipitate Gold had not conducted a lot of work at the 3,250ha land package. A “really compelling geochemical target… a gold in-soil anomaly that has never been drilled.” It is peripheral to what appears to be a very interesting copper-gold porphyry. Could this be an exciting epithermal system? “Cashed-up,” and with no underlying vendor payments or work commitments, Precipitate Gold can now proceed to drill numerous targets at the site.

The historical surface geochemical database of Ponton exhibits 2,880 grid/auger soil, 1,403 rock and 317 stream sediment samples. Moreover, at the Majagual Hill copper-gold porphyry zone, the previous operators had also been hard at work, conducting surface trenching, 4.7 line-Km of induced polarisation (IP) geophysical surveying, and 1,666m of diamond drilling from 5 holes in 2017.

Juan de Herrera Project

Although this asset is sideliend for now, it is worth touching on it. Juan de Herrera sits adjacent to GoldQuest’s Romero/Tiero project, which has been struggling with all manner of licencing issues. This the the main reason why Precipitate Gold has chosen to take its foot off the gas; if its neighbour is struggling to obtain an exploration permit, why will it have any better luck?

Precipitate Gold has conducted a reasonable amount of geophysical work on the property and has also already acquired drill permits for up to 100 different drill pads. This could be monetised eventually, but for now, it will have to sit around for a while. I wouldn’t be surprised to see it sold for the right price to either GoldQuest or possibly to Agnico Eagle as they look to consolidate the district.

In the long-run, I also don’t see Precipitate Gold mining gold at Ponton. It seems clear to me that they will be developing it into a de-risked, district-scale gold resource before selling it to a mid-tier/major gold mining company.

There is a communal aspect of this story that I like. Since September 2015, all current and future Tireo belt exploration data compiled by both GoldQuest and Precipitate will be shared in a ‘collaborative effort’ to both assist and accelerate each company’s search for new gold discoveries in the Tireo volcanic belt. The 2 companies also agreed to a 50/50 equipment purchasing JV, with Precipitate’s new subsidiary holding onto the assets. This gives the company access to 1 fully-operation rig and a couple of others that can be updated or used for parts if needed in the future should both companies be drilling at the same time. If GoldQuest decides to operate a few rigs at Romero, and Precipitate wants to operate several rigs at Ponton, Precipitate can inject some cash to get things moving.

GoldQuest has suspended its drilling for now and has been very “passive” at it awaits an exploration licence. Precipitate will look to get this drill “turning at Ponton” in the near future.

What did you make of Jeffrey Wilson and Precipitate Gold? Would you invest? Comment your thoughts below and we’ll get back to you.

Company Website: https://www.precipitategold.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.