A minor part of the Weekly IKN473, out last night.
We join this
conversation half way through:
A:
So do you agree that it’s going to be very difficult to reach a 43-101 or JORC
compliant resource number for NVO?
B:
Yes, we agree on that. But that doesn’t make the company worthless! They
clearly have a lot of gold!
A:
And I agree with you on that. But what I’m interested in is monetizing it,
making the company profitable.
B:
Me too.
A:
Good! We’re on the same page. But what really matters is being able to justify
the current market cap, because if you include those very-in-the-money warrants
(and you have to, really) NVO is now revolving around a $1Bn market cap. That’s
expensive.
B:
Okaaaay…if you say so. I think NVO is cheap!
A:
Fine. So in that case, I’m not even going to ask you to justify a future where
NVO is double or triple today, all we are going for is to justify $1Bn.
B:
They have a lot of gold!
A:
And a lot of market cap valuation, too. Let’s justify its market price with
that gold, yes?
B:
Well, you do what Bob Moriarty says! You mine it!
A:
I agree 100%. Now, how do you mine it?
B:
Placer-style of course! Dig it up, process it, produce gold!
A:
Okay, how much gold?
B:
What do you mean?
A:
How much gold will you be able to produce from any given part of the NVO
tenements in, let’s say, one year.
B:
Why one year?
A:
Okay, ten years! Whatever time period you prefer, I simply suggest one year at
this point because it’s a standard period used in the industry.
B:
Well, let’s say a year then. And they mine the rock at a 10g/t average and 90%
recovery.
A:
To be honest, I think the nature of this deposit means you get higher
recoveries than that. I’d prefer you used 95%.
B:
Okay, so one tonne of rock produces 0.305 oz of gold.
A:
Agreed.
B:
And 2,000 tonnes per day is 611
oz gold.
A:
Agreed.
B:
That’s 55,000 per quarter! That’s a lot of gold!
A:
Not bad, is it? 220,000
oz gold per year.
B:
Lots of mines at that production rate are worth $1Bn!
A:
Well that might be pushing the envelope a little, but I’ll concede the point.
B:
Good!
A:
But for how may years will it produce?
B:
Sorry?
A:
220,000 ounces
in a year, yes. For how many years?
B:
Lots of years!
A:
How many?
B:
We don’t know yet.
A:
Why not?
B:
We haven’t finished exploring yet.
A:
And when NVO does, will it have a resource?
B:
No, probably not.
A:
And what about that average grade? How do you know it will all be around 10g/t
like the recent bulk samples?
B:
We don’t know yet.
A:
Why not?
B:
We haven’t finished exploring yet.
A:
And when NVO does, will it have an official average grade to tell us? One that
it can safely use in economic modelling?
B:
No, probably not.
A:
And what about the capex to build the mine? How much will it need?
B:
We don’t know yet.
A:
Why not?
B:
We haven’t finished exploring yet.
A:
So what you are saying is that NVO has a lot of gold and should mine it. And
under reasonable circumstances (e.g. 10g grade, 2,000 tonnes per day, 95%
recovery) it can produce 220,000
oz per year. But we don’t know if that grade will hold
up across the whole of the resource and we don’t know what size production
facility it will need. Or how and when the mill is built, because we don’t have
a resource we don’t know how many mineralized tonnes there are and the operator
will be hoping for the whole life of mine that they find enough for the next
year.
B:
Well…maybe. But they can mine more! And produce more! What about a 4,000 tonne
per day operation?
A:
Okay that’s fine. So apart from the risk that it depletes twice as fast and
runs out, are you also telling me that we don’t know what size mine it will
need and therefore the capex cost is unknown?
B:
Hmmm, probably not.
A:
And that’s because we don’t know the grade or the tonnage, right?
B:
Right.
A:
And though certain people can make a reasonable guess on both, we won’t have
any guarantees because the third-party peer review system in the world of
mining, namely 43-101 or JORC, won’t be able to give us one. So when the
company goes to the financiers to ask for money to build the mine, what will
they be able to use to guarantee the bankers’ investment?
B:
They have a lot of gold!
A:
How much gold?
B:
We don’t know yet. But Quinton says there’s a lot!
A:
So a bunch of hard-nosed bankers who always want a guaranteed path to return of
principle loan will simply believe the founder, president, driving force and
promoter of the company? Who is also the chairman by the way and that avenue of
unusual corporate oversight can be explored another day, but for the moment
let’s give that a pass. Who is the same person who burned through a bunch of
OPM at Evolving Gold by looking for a massive gold deposit that started well
with excellent early discovery stages but eventually petered out and failed
when the deposit couldn’t grow?
B:
Are you suggesting Quinton is a crook?
A:
No not at all, far from it. He’s as straight as an arrow and his integrity is
not in doubt. All I am saying is that it might not be easy to raise the type of
capex NVO will need to build a mine.
B:
They can sell shares! Kirkland
Lake will buy shares!
A:
Okay, shall we assume 300m shares out then, rather than 220m?
B:
Okay, for ballpark purposes.
A:
And you think that company, with that mine, is worth around $1Bn today and once
the placement is done $1.5Bn at its current share price? The same ballpark
valuation as MAG Silver, Fortuna Silver, SSRI Mining, Pretium Resources, First
Majestic etc etc.
B:
Yes, because they have a lot of gold!
A:
How much gold?
B:
We don’t know yet! But if it can produce over 200k oz of gold a year for a few
years, it’s bound to make money!
A:
Oh I agree on that, don’t think for a minute that I don’t agree. But will it be
able to command the type of price/earnings ratio that a mine with a compliant
resource or reserve will be able to get? One that knows it has gold to mine and
produce in 10 or 15 years?
B:
Kirkland Lake can buy them out!
A:
And KL takes on the type of unknown resource risk you’re implying? No reserve
asset value? The potential the crater the whole company if the resource
surprises the bulls by being smaller than once imagined? We know Eric Sprott
likes taking risks, but that’s a whole different league of exposure.
B:
But these ounces are going to be very profitable.
A:
I agree. For what it’s worth, my ciggypack calculations say they could produce
at an AISC of U$700/oz and that’s U$600/oz profit per ounce. Pay taxes and
everything, I see U$80m per year net/net and that’s not to be sniffed at.
B:
Good!
A:
That’s enough to justify a $1Bn market cap…if you could give it the normal type
of PE multiple. And if it were in production. And if it had raise the capex
cash. But right now…?
B:
Dude, you don’t get it! They have a lot of gold!
A:
How much gold?
(etc)
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