- TSX-V: NVO
- Shares Outstanding: 188M
- Share price C$2.93 (18.05.2020)
- Market Cap: C$551M
A company that some of my viewers have been mentioning in the last few months is Novo Resources Corp. CRUX Investor interviewed president, Quinton Hennigh, in February. I was intrigued by the stellar ascent of the Novo Resources story, as the market clearly was, with the company’s share price approaching C$4 at the time.
Novo Resources (TSX-V: NVO)
Novo Resources is a particularly topical gold explorer right now.
Its recent momentum has been largely driven by Novo Resources uncovering another broad gold-bearing swale, or gold-bearing channel, at the Paradise prospect, found within its Egina gold project in Western Australia’s Pilbara region.
Founded in 2009, Novo Resources is an Australian Gold Explorer with 3 projects: the flagship Karratha Gold project, the Beatons Creek Gold project, and 70% interest in a number of tenements in the Marble Bar region of Western Australia. Novo Resources does not have a producing gold asset yet and, in truth, the story of Novo Resources is an unconventional mining investment story, and it is one that is difficult to understand using conventional mining measures.
This is a gold story investors are very interested in, and these investors deserve to have a greater understanding of the pros and cons of Novo Resources before parting with their hard-earned cash.
Understanding The Value Proposition Of Novo Resources
Let’s list the pros and cons:
As simple at it sounds, Novo Resources has a definitive gold focus. This shouldn’t be underestimated; many mining companies lack the refinement and efficiency that a single concentration can bring. This is a major bonus.
The land position that Novo Resources has tied up in the Pilbara and Karratha regions is a significant bonus. While the exploration licences are something of a funding liability, and Novo has struggled to define resources so far, it is important to remember that this is a gold province and Novo will continue to explore the region more efficiently with time.
Ground penetrating radar and mechanical sorting are not ends in themselves, but they are useful tools that help identify gold-rich ground and then subsequently quantify bulk samples more quickly.
Novo having a dominant land position and improved explorational tools is a clear positive.
Farm-In Agreement With Sumitomo Corporation
The agreement affords Sumitomo the right to earn-in 40% of the Egina project, by spending US$30M over the course of 3 years.
The value of the carried 60% to be held by Novo is therefore placed at US$45M (c. C$60M) on a look through basis. It’s a smart deal.
Preservation Of Cash
The Sumitomo deal helps Novo Resources preserve cash. Right now, Egina appears to be the most active project within Novo Resources’ portfolio; Sumitomo is funding this activity.
High-Quality Corporate Management
Dr. Hennigh has carried out some good work at the corporate level:
- The Kirkland Lake Transaction in 2017 was transformative.
- The Sumitomo deal in June 2019 was equally transformative.
While Sumitomo entered into the agreement with an exclusive interest in Egina, Sumitomo’s close involvement has strategic value for Novo shareholders. This is further evidenced by the fact Mr Ishikawa himself sits on the board and knows the company inside out.
This great relationship could lead to future discussions regarding the funding of Karratha or Beaton’s Creek in the future. Because the relationship is already well established, this seems a clear potential pathway for Novo Resources to open up the potential of the region.
These are several compelling reasons why an investors might register an interest in Novo Resources. However, let’s get into the stuff the really matters. Let’s talk about…
Normal Rule Don’t Apply?
Claiming that the Novo mineralisation is so different to other deposits that normal rules do not apply.
This is something we picked up on during our interview with Dr. Hennigh. It’s definitely a concern.
Slow Resource Estimates Or None At All
The resource estimates at Beaton’s Creek have progressed very slowly. Additionally, there is a lack of a resource estimate for Comet Well/Purdy’s Reward at Karratha.
This is worrying because it creates a lot of uncertainty. Is Novo Resources really in control?
Novo’s Deposits: Unmeasurable?
The deposits that Novo Resources is working on are slow, technically difficult and expensive to evaluate because of the nugget effect. In addition, the independent consultant considers that there is NO GUARANTEE that a mineral resource estimate will ever be able to be generated for the Karratha Mineralisation. Just take that last sentence in again.
Management Failing To Deliver On Promises
Novo Resources has promised economic studies on Beaton’s Creek and has failed to deliver. Similarly, there is an absence of a PEA, PFS or an option study for the project, which Novo has also consistently promised to deliver.
If a management team consistently fails to deliver on their promises, it’s usually time to feel concerned.
A Lack Of Clarity
There is a lack of clarity on the permitting situation at Karratha. There is confusion regarding the law around large bulk samples needing a mining permit but mining permits not being granted without resource estimates.
Karratha is dependent on large bulk samples in order to validate the resource statement, so this is something of a chicken and the egg situation. So will they ever be able to produce a resource statement? Unlikely.
There is a similar lack of clarity exhibited in the environmental permitting situation at Egina, which will likely be required in order to strip mine. No word from the company.
Management Focus Issues
Dr. Hennigh holds multiple senior roles at a large number of different companies. Is he able to give Novo Resources his full attention at all times?
Worrying Corporate Developments
Novo Resources has demonstrated a lack of strategic focus after investing in a number of non-core assets, which undermines the integrity of the entire investment case for developing the Pilbara gold assets.
Poor Corporate Governance
There is a dominant chairman and president and only one truly independent NED. A far from ideal structure.
A Lack Of Transparency
Budgets, timelines and strategic plans are all hazy. These are the very elements that would underpin an investment case for Novo Resources.
A Lack Of Technical Data
Public discussions are occurring regarding the purchase of a mill and plans to start mining without technical data or a resource to support the development. Very peculiar.
Not So Simple
Gold companies should be simple and easy to understand. Everything about Novo Resources is overly complex and involves academic theorising about a new paradigm.
The investor presentations are all academic and complex: they are not laid out in a manner that assists investors making investment decisions. The news released are saturated with complex data and statistics, but the core language is poor, with a lack of information on economics of extraction, timelines to milestone, delivery of promises, budgets and investment strategy.
Does Novo Resources want to make things clear for investors, or does the superfluous language help mask deep-rooted issues in the very fibres of the company? Why does this feel more like a mining project than a mining company?
Novo Resources needs to present al of the building blocks of value within the asset base much more clearly. The company is poor at explaining how or why its actions will create value for shareholders.
Furthermore, Novo has struggled to deliver study report at Beaton’s Creek and a resource statement at Karratha, thereby failing to deliver on what it promised it would deliver.
When you combine all of these points, there are questions marks about the investment or exit strategy for Novo Resources as it bounces from one new project to the next, without actually completing anything. A lot of talk, a lot of distraction, not a lot of substance, yet.
In the short term, how can Novo improve things?
We’d like to see action on all of the red flags; they are all serious concerns. The crux of Novo’s issues is administrative: the corporate governance, management, and strategic focus. If these things are changed, the investment case and value proposition could become much more transparent and lucid.
In the short-term, Novo Resources could focus on an increased level of clarity surrounding budgets, timelines, studies, and permitting. This would certainly be a step in the right direction.
Company Website: https://www.novoresources.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.