Will McEwen´s Cortez Play Make the Grade ?
NEW YORK (ResourceInvestor.com) -- Rob McEwen's certainly a man who isnýt shy to take a calculated risk and his track record means several ten thousand investors will follow his lead.
With his recent acquisition of US Gold [OTCBB:USGL] and his major ownership stake in White Knight Resources [TSX : WKR], McEwen has gone "all-in" on the potential of Nevada's famed Cortez Trend. The Trend is home to a huge infusion of risk capital in the wake of Placer Domeýs [NYSE : PDG; TSX : PDG] recent and spectacular exploration strikes in this prolific gold producing area.
While investors have rushed to grab up shares even remotely linked to McEwenýs Midas Touch, one industry insider recently told Resource Investor that there are good reasons for US Gold's years at the bottom of the bargain bin.
Strength of Assets?
US Gold's main asset is its Tonkin Springs property, which contains an estimated 1.2 million ounce resource base near to Placer Dome and Rio Tinto's [NYSE:RTP] mammoth Cortez Hills deposit. The potential of US Gold and the surrounding Cortez Trend has been energetically promoted by the gold community since the rich discovery at Cortez Hills a few years ago.
Itýs not that simple according to an accomplished geologist who has visited Tonkin Springs at least a dozen times since the mid-1980s. He says the geology at Tonkin is "different, in a negative way, from Cortez." The problem, according to our source (who asked to remain unnamed because he is active in the industry) may simply be a question of geology.
Gold deposits within the Cortez and Carlin trends in Nevada, two of the region's most prolific gold zones, generally occur within carbonates (limestone) referred to as 'lower plate' rocks. In most regions, any lower plate rock is buried under substantial amounts of 'upper plate' rock (shale, limestone, or chert). At certain major deposits - such as Cortez Hills - geological activity has exposed portions of lower plate rocks, bringing them closer to the surface.
The existing gold mineralization at Tonkin is largely upper plate rock, and as of yet, Tonkin doesn't exhibit the prospective lower plate rock, although some may occur at an unspecified depth. But even if lower plate rock exists beneath Tonkin, there's no guarantee that it contains the value of gold more typical of the cash generating mines in the area.
Even more problematic, according to our source, is the fact that Tonkin has "none of the more receptive lower-plate carbonate facies within drill reach." In short, the upper plate prospects are not that exciting and the lower plate targets are strictly hypothetical.
McEwen dismissed the skepticism, noting that Tonkin was an ýunder explored areaý that has not yet been fully mapped. As such, he added, it would be difficult to make any definitive claims about the existence of a reachable lower plate deposit.
ýThereýs no evidence that it [prospective lower plate rock] doesnýt exist because no oneýs ever tested to that depth,ý McEwen added. Parts of Cortez Hills deposits, he noted, donýt begin until a depth of 600 feet to 800 feet, and only limited sections of Tonkin have been drilled that deep.
But there is another aspect of Tonkin's geology that is unusual relative to proven economic deposits in the area. Major gold deposits within Cortez and Carlin have almost always occurred within close proximity to two perpendicular faults that formed at the same point in time (known as a 'conjugate.') While some individuals have claimed the existence of conjugate faults at Tonkin, according to our source's analysis there is no clear evidence of such features yet, which is cause for investors to give pause.
McEwen responded by noting that geologists ýhavenýt totally figured out the model yetý for these type of deposits.
Our source says the immediate comparisons are the Rossi and Ivanhoe deposits which are seeking lower plate facies to offset mediocre grades and tonnages.
The Limits of Tonkinýs Existing Resource Base
The accepted interpretation of the geology becomes irrelevant though if the upper plate rocks have the right grades. After all, mining at a shallower depth is cheaper in any currency. As with most every exploration project, it is 99% about ore grade.
When it comes to grading Tonkinýs existing upper plate resource, the difference between the property and Cortez Hills is night and day. In a 2004 feasibility study, grading for measured and indicated resources at Tonkin was 0.043 ounces per tonne (or about $19 of gold/tonne), while for mineable reserves it was .061 ounces per ton (or about $26 of gold/ton). Cortez Hillsý proven mineral reserves alone have a grading of 0.169 ounces per ton (or about $74 of gold/ton).
When coupled with the fact that Cortez Hills proven reserves are 3.4 million ounces, while Tonkinýs mineable reserves are 646,000 ounces, the differences are obvious
But, according to McEwen, Tonkinýs upper plate resources are not where the propertyýs true value lies. ýYouýre not looking to enhance the surface resources [with this property] youýre looking for [another] Cortez Hills.ý
ýWhen I looked at the Carlin and Battle Mountain-Cortez Trend, I then looked at Tonkin Springs,ý added McEwen, ýand I thought: thereýs been a lot of activity [at Tonkin] but all of it has been near the surface.ý Just as with Red Lake, McEwen believes that Tonkinýs true value may be unlocked by going deep underground to uncover higher-grade deposits.
Investor Optimism
Whatever the potential of US Gold's assets, investors have jumped into US Gold's stock in a big way since McEwen, one of gold mining's biggest celebrities, took the helm.
Under previous management, the quality of the company's assets was largely ignored by investors, who let the shares idle below the $1 range for most of the past decade. Since McEwen took the reigns, however, the company's shares have surged form $0.50 to as high as $2.19, before recently settling at $1.45. In any event, the market obviously believes that the McEwen can extract the value from Tonkin that long eluded US Gold.
McEwen himself seemed to second those claims. ýAs everybody knows,ý he said, ýexploration has a low rate of success ý but the way you start improving your odds in going somewhere that raises your probability. You have to look at it [Tonkin] and say, youýre in the right state, youýve got structures nearbyýwhere else do you want to spend your exploration money?ý
Investors would also do well to remember that McEwen purchased his 33.3% interest in US Gold via a private placement that netted him 11.1 million shares for $4 million. In short, McEwen made his purchase at about $0.36 per share, or 25% of the company's price today, barely one month later. It seems logical to assume that McEwen, the mining investment genius, purchased the company's shares at what he considered a reasonable value. Can the same be said for the investors who have since bought shares?
Immediately after news of McEwen's purchase broke, several other Nevada-oriented explorers also saw their shares rise in sympathy. The speculation was two-fold: that the market has been collectively underestimating the potential of Nevada exploration, and that McEwen would continue his Nevada acquisition spree.
In the days immediately after the news, shares of Nevada Pacific Gold [TSXV:NPG] surged from about C$0.70 to C$0.91, shares of Miranda Gold Corp. [TSXV:MAD] moved from C$0.75 to C$0.85 and shares of Victoria Resource Corp [TSXV:VIT] went from C$0.47 to C$0.57. While all of the shares have since settled back down, the market's signal was clear.
Conclusion
One geologist's opinion is unlikely to make or break US Gold's success. Indeed, Rob McEwen made a regular practice of proving the experts wrong during his time developing Red Lake for Goldcorp. Investors would certainly love to see him do it again with Tonkin, but they would also be wise to understand the nature of the bet.
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