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Novo Resources (NVO.v): Speculators having fun

Here's the ten day price chart of Novo Resources (NVO.v), one that priced the company at around $150m last weekend and a bit more today.

Volatile? You bet. The discovery it announced last week is perfect stuff for a speculative end of the market, but (and to make clear to the sartorially challenged jackass Jordan Roy-Byrne) your humble scribe is not joining in on this one because even though it could be anything, it could also be overbought already. I wish those people playing the stock the best of fortune but it's not a trade for me and here, in the piece from IKN426 published Sunday, is why:

Novo Resources (NVO.v): Difficult to value
I think most of us saw the video, results, photos and news release out of Novo Resources (NVO.v) last week, the wonderful nuggets of gold dug up after the metals detector went crazy in its first trench at its Purdy’s Reward project in Western Australia (if not, start here (19)). The stock shot higher on the news of course and closed up nearly 50% on the week with outsized volume, but the action late Friday was interesting too because there were clearly sellers.

Here’s the problem with NVO and its Purdy’s Reward discovery. Yes it’s exciting, anytime you discover rocks with large lumps of visible gold it’s always going to grab the attention of the market and rightly so. It’s also the type of result you’d want from this type of paleoplacer deposit at this early stage, as it’s long odds-on that if your first bucket of rock gives you impressive gold returns you’re going to find the same stuff in other places, again and again. But it’s going to be tough to value:

How big is the deposit? No idea, and there are only two ways of finding that out with any type of security: You either SwissCheese it with a very expensive drill program or you start mining it out now and see how long it lasts.

How much can you produce a year? This is Nugget Effect mineralization to the Nth degree, so what kind of throughput will it support? And what amount of production will that give you? And how long until the rock runs out? Without a good handle on size and grade, these questions become best guesses and you may end up spending way too much on your capex for the eventual mine.

NVO is already a $150m Market cap company and that’s expensive for a junior, exciting discovery or not. I’m not saying there’s not speculative potential in the stock, I am saying it’s hardly a riskless trade by any means. It’s way too early to make any firm statements or start assuming things, but from the scant evidence to date I can imagine Purdy’s Reward becoming a nice and very profitable source for a small mine in private hands that can run for years. Is it big mine material? I don’t know and to answer that one, NVO will have to spend a LOT of money and time on the deposit, Is it worth $150m? Frankly, it could be worth half that or it could be worth ten times that. What I do know is that if you’re going to speculate on its future I wish you the best of fortune (as I do Quinton Hennigh and his team) but I won’t be joining them until we know more.

PS: Today's price isn't even the 52 week high yet. Just saying.