Editorial by Eric Coffin. This is not a recommendation to buy or sell any security.
GoldQuest Mining – A new study will turn this market around and bring new focus to an underappreciated mineral belt.
GoldQuest Mining (GQC-V, GQCMF-OTC) is about to issue a new Preliminary Economic Assessment (“PEA”) for its Romero gold-copper resource. Management indicated the report would be complete in Q2. Companies can issue the results of these studies up to 45 days in advance of receipt of the full report. I’m expecting to see a news release on the new PEA very soon. Based on my knowledge of the resource and GQC’s management I’m confident the new PEA will be impressive and be a big positive surprise to the market.
The last email you received from me concerned a company that is now trading about 50% higher than its price when that email was sent. We’re still waiting for the trigger event on that one. In the case of GoldQuest I think we will see the trigger (the PEA release) within a couple of weeks. The engineering group handling the PEA has a reputation for delivering on time. That tells me that news on the PEA is coming very soon. You want to get acquainted with this story and this important new gold trend now.
First the Bullet Points – I Fill in the Details Below:
- GoldQuest made a new discovery at Romero in 2012.Drilling proved up a resource of 3.2 million ounces gold-equivalent (gold + copper, 2.4 million ounces Indicated, 0.8 million ounces Inferred)
- Romero is part of the “Tireo Gold Trend” which was discovered by GoldQuest and hosts numerous other showings along its 40 kilometre length including the new Ginger Ridge discovery announced by Precipitate Gold (PRG-V, PREIF-OTC) in late 2014.
- GoldQuest reported an initial PEA in 2014.It had excellent operating costs but high capital costs concerned traders and the value of the discovery was discounted.
- Management is on the verge of announcing an updated PEA that will focus on the high grade core with a smaller and simpler mining and milling plan.
- I expect this new PEA to demonstrate a low capital intensity project with very high margin per ounce. In short, something financeable.
- Companies in GoldQuest’s peer group with financeable gold projects trade at $25-50 per resource ounce (some a lot more, actually).
- GoldQuest’s current enterprise value is about $3 per gold equivalent ounce or ONE TENTH the value attributed to “financeable” projects.
- GoldQuest management has direct experience developing and building a mine in the Dominican Republic.That mine, Cerro de Maimon, triggered a $184 million cash takeover and is still a highly profitable operation.
- Demonstrating the viability of Romero validates not just that resource but the entire Tireo Gold Trend.This is one of my favorite stretches of geology and one I fully expect will host multiple discoveries.Much of the belt has received no exploration.There is A LOT of blue sky here.
My Hard Rock Analyst newsletter service has followed GoldQuest for several years. During that period the company has made not one but three discoveries in the Dominican Republic (Las Animas, Romero South and Romero) each of which resulted in 200% plus share price moves (2000% in the case of Romero, and 600% in the case of Animas). I’ve stayed with the story because I have great respect for current and former management and the prospectivity of their Dominican projects, especially those in the Tireo Gold Belt.
The 2014 PEA – What The Market Didn’t Like:
GoldQuest announced the results of its initial Romero PEA in May of last year. In many ways it was a very positive study but in a tough market you don’t get points for “close”. Companies have to deliver studies where everything clicks in order to get the market’s attention and a higher valuation.
The original study was geared to maximize the amount of the deposit recovered under the mine plan. A laudable goal but attaining it meant a capital intensive mine plan that included some aspects (like a shaft with crushing equipment at its base) that added a lot of cost and extended the construction period. It wasn’t all bad. The plan called for production of 90,000 ounces of gold and 15.6 million pounds of copper per year mining material with an average grade of 2.55 g/t gold and 0.6% copper. The projected all in operating cost to recover the gold (after deducing the large copper credit) was $353/ounce which is quite low by industry standards. Even though the costs were very good once the mine was in operation the combination of the $374 million capital cost and longer lead time resulted in an Internal Rate of Return (“IRR”) of 15.1% and Net Present Value (“NPV”) of $176 million (both after tax). Those are decent numbers but not good enough for a tough market that only wants to hear about top quartile numbers that will attract financial backing.
I’ve been telling subscribers for months that I expect to see a new study produced and I am confident it will be a good one that will reverse the perception of Romero as an “unfinanceable” project. Why am I so confident? Because of the nature of the deposit and the management group who I have known for over ten years.
I first met GQC’s Chairman Bill Fisher and CEO Julio Espaillat when they were running Globestar Mining. Globestar had a moderate sized copper-gold VMS project in the Dominican Republic called Cerro de Maimon. The project was acquired for $350,000 and Fisher and Espaillat spent several years proving it up and developing a mine plan that would take advantage of the high copper grades and oxide gold cap. It wasn’t easy but a lot of creative thinking and financing ultimately got Cerro de Maimon into production. A rising copper price helped but the ingenuity and tenacity of Fisher and Espaillat was a huge factor in the success of the mine and of Globestar. Globestar was taken over in 2010 by Australian miner Perilya in a $185 million transaction that represented an 800%+ gain for HRA subscribers. The mine continues to operate and remains highly profitable.
The ability of Fisher and Espaillat to maximize value and get the job done impressed me. Julio is a Dominican national and highly respected mining engineer. He’s an expert at navigating the permitting process and his ability to connect with local stakeholder groups is invaluable. Anyone who knows anything about mining knows permitting a mine is hard work that requires extensive experience and a deft touch. Julio is the perfect guy for the job. Bill spent many years working on development and production level mining projects during his tenure with Boliden, the Sweden based miner and smelter. His strong suit is optimizing projects. I watched him turn Cerro de Maimon into a successful mine and he has even better raw material to work with at Romero. His experience on both sides of the table in the esoteric area of smelter contracts and mineral concentrate sales will serve GoldQuest well. He knows what smelters want and how to maximize returns for the company.
PEA 2.0 – Why it will be Much Better.
GoldQuest recently announced a new PEA was underway. That news release gave some clues to what management has planned. The key to improving the PEA will be getting the capital costs down. This will improve the NPV and particularly the IRR which is highly sensitive to upfront capital costs. Bankers want to see a high IRR number, at least 25% pre-tax would be ideal. The lack of an impressive IRR number was the biggest knock on the original PEA. Fisher and Espaillat are all too aware of this. There wouldn’t be a new PEA in the works unless the IRR and NPV could be substantially improved. This isn’t a science experiment.
So how will they do it? The recent news release gave some clues. GQC will focus on the high grade portions of the resource at Romero. One obvious change this implies is a lower production rate. There is no need to mine 3800 tonnes per day if you are going to key in on the highest grade areas. You could easily get away with 2000-2500 tpd and still produce a lot of gold and copper. This change would create a host of savings from a smaller mill to less underground rolling stock and less site infrastructure. That one change could easily save tens of millions.
A smaller and simpler production plan should also get rid of the need for a shaft and underground crusher setup. The inclusion of a shaft in the original mine plan was a head scratcher for a lot of analysts, myself included. Romero isn’t THAT deep and it’s under a hill so GQC can use topography to its advantage. It shouldn’t be needed in a lower production scenario. Removing the shaft will also save tens of millions and should shorten the construction period. That will have a big impact both capex and NPV and IRR will come along for the ride. I’m pretty sure the new PEA will not include a shaft.
A third potential improvement would be streamlining the mill and simplifying the flow sheet. The most obvious way to deal with this will be to produce one concentrate with both the copper and gold rather than a second concentrate with some of the gold that will need to be treated in several steps. I don’t know all the trade-offs here but I do know there has been a lot of metallurgical testing getting done. While the separate gold/pyrite concentrate didn’t present big challenges it would require extra capital and treatment that could perceived as less environmentally friendly. That’s a perception issue but those issues matter when you are permitting a mine. Getting rid of those additional circuits would save a lot more money. There are also a number of infrastructure items that would be nice to have but are not really necessities, at least not at the start of the mine plan. There is plenty that could be cut and I’m sure all the practical cuts will be made.
Is this practical and doable? I think it definitely is, in large part due to the nature and geometry of the Romero deposit. The graphic below is a block model 3D view of the Romero zone gold grades. The reds and yellows are the highest grade portions. As you can see, this is a fairly compact and “flattish” zone. It’s not miles and miles of veins or a breccia body that extends to the center of the earth. The simple and compact geometry allows for very efficient underground mining techniques.
The original PEA had an average mined grade of 2.55 g/t gold and 0.68% copper (3.81 g/t gold equivalent) using a $60 resource grade cut-off. The new plan will focus on high grade so let’s double the cut-off grade and see what we get. At a $120 cut-off the average grade of the Indicated resource is 4.36 g/t gold and 0.89% copper or 5.97 g/t gold equivalent.
Basically, if we double the cut-off we increase the grade of the material being mined by 57%. That means that a 2000 tpd operation would only produce 18% less gold and a 2500 tpd operation at these higher grades should actually produce more. This is just a straight line average. Mining would probably start in the highest grade areas so gold production in the early years could actually be as good as or better than the original PEA even at 2000 tpd. This should have a massive impact on project economics.
I think with all the cost cuts detailed above GoldQuest can bring the capital cost for Romero down to $200 million and I’m hoping they can get it even lower. That alone should increase the IRR by over 50% and that doesn’t account for a mine plan that optimizes the early year’s production. I’m sure GQC will be doing that too. Add it all together and you get a project with a sub $200 million price tag, gold equivalent production of 100,000 ounces per year or more and an IRR north of 25%. That is a financeable project in this market and that makes all the difference in the world. You’d be hard pressed to find a gold developer with numbers like this that has an enterprise value under $50 million. Goldquest’s current enterprise value is under $8 million, especially as they have cash. The trigger event for a change in market perception is official release of the new PEA numbers. That’s imminent and I think the math here is pretty obvious.
It Gets Better: PEA 2.0 Validates This Emerging Highly Prospective Gold Belt
Turning around the market perception of Romero won’t just add value to that resource. It will increase the stature of the entire Tireo Gold Belt, something that is long overdue in my opinion.
There are many famous mineral belts in the world and, even in a depressed market, having a land position in one of them adds a lot of value. There’s a good reason for that of course. Geologic conditions that are permissive for the creation of economic ore deposits often occur on a regional scale. Large structures, favorable rock types and a geologic history that allowed for plenty of movement and faulting and hydrothermal fluid flows often occur on a large scale. This is true for most deposit types and gold is no exception.
Think Carlin Trend, Timmins Camp, Val D’Or or Red Lake and the story is repeated. That’s the reason for the old prospector’s adage that “the best place to look for a new deposit is in the shadow of an old headframe”. I’d agree with that old saw but would add another phase to it namely, “it could be even better if you’re looking at a mineral belt that hasn’t been picked over and drilled until it looks like Swiss cheese and still has most of its discoveries ahead of it.” That’s where the Tireo comes in.
It’s important to understand that the Tireo Belt didn’t even exist as a favorable target area until ten years ago. GoldQuest’s prior management theorized that the age and rock type combined with the geologic history of the Tireo volcanic rocks should make them a good host for gold deposits. GoldQuest followed classic grassroots exploration methods to locate drainages with anomalous gold values then prospect them to find surface showings to focus on for further work. This effort was highly successful and led to the discovery of several new prospects and ultimately to the discovery of the Romero South (then called Escandalosa) 400,000 ounce gold resource. Romero itself, a blind discovery targeted using Induced Polarization (“IP”) geophysics came a few years later.
It’s important to understand that the Tireo Belt didn’t even exist as a favorable target area until ten years ago. GoldQuest’s prior management theorized that the age and rock type combined with the geologic history of the Tireo volcanic rocks should make them a good host for gold deposits. GoldQuest followed classic grassroots exploration methods to locate drainages with anomalous gold values then prospect them to find surface showings to focus on for further work. This effort was highly successful and led to the discovery of several new prospects and ultimately to the discovery of the Romero South (then called Escandalosa) 400,000 ounce gold resource. Romero itself, a blind discovery targeted using Induced Polarization (“IP”) geophysics came a few years later.
In the ten years since exploration began in the Tireo, GoldQuest and others have reported the discovery of 5.5 gold equivalent ounces. These discoveries have been achieved at a finding cost of under $10/ounce which is quite cheap. And this doesn’t include other prospects on the GoldQuest project, the new Ginger Ridge discovery made by Precipitate Gold (PRG-V) or high quality prospects in the same rocks on the other side of the Haitian border that are stalled due to politic
The map on the right shows you the location of a number of prospects on the GoldQuest holdings as well as the location of Precipitate’s Ginger Ridge discovery near the bottom of the map. As you can see there are a lot of prospects. Only a handful have been drilled so far and even this impressive list doesn’t tell the whole story. GoldQuest has had had geologists mapping to the south of the Imperial area and they have discover several new large areas of alteration and silica and/or sulphide mineralization that haven’t even been named yet.
After the Romero discovery GQC management realized they had to find some way to help target on a broader scale and prioritize targets. The company flew a 3000 kilometre airborne magnetometer and EM survey. GoldQuest realized that magnetic lows were very good targets. The mineralized systems were formed when hot fluids interacted with surrounding rock. One side effect of this interaction is the demagnetization of surrounding rock, creating a mag low.
When GQC studied their mag results they found there was a trend of magnetic lows stretching all the way from Romero to the north to Ginger Ridge in the south that remained open ended. Only a small part of this trend has been ground proofed but GoldQuest geologists are finding these mag lows coincide with large areas of surface alteration and scattered mineralization, much like the alteration zone overlying Romero. Precipitate Gold has noted the same pattern at Ginger Ridge. It recently reported the discovery of a one kilometre long magnetic low that coincides with the Ginger Ridge zone.
The airborne survey was very helpful but the main geophysical tool that has led to discoveries in the Tireo is IP. IP is particularly good at picking up large areas of disseminated sulphides that form a halo of mineralization around the known gold zones. It doesn’t discriminate well between the non-economic pyrite and areas within it that contain higher gold and/or copper concentrations.
Some of the mineralized systems found on the GQC project like Imperial and Guama are very large, several kilometers on a side in fact. While that is a good sign – large systems can contain large deposits – it does mean a lot of work is required to vector in on areas with higher grade potential.
GoldQuest is working on this in parallel with the advancement of the Romero deposit. It will take time to finish mapping in the trend and them prioritizing new zones. The good news is that there is a lot of target to work with. I think it’s highly likely the Tireo will contain several gold and or gold/copper zones that are currently unknown. Given the size of some of the new targets it’s entirely possible Romero will not turn out to be the largest deposit in the belt. Romero and its new PEA may be the immediate value driver but the potential for new discoveries by GoldQuest or its neighbour Precipitate are the blue sky and every new discovery increases the odds a larger company will want to consolidate the belt for itself.
The map on the right is similar to the prospect map above but this one includes the IP coverage that has completed so far (there is an IP grid at Ginger Ridge that isn’t shown). This is a small scale map so it’s deceptive. The IP grids are actually quite large but even so they only cover a small fraction of the favorable trend. There is still a lot of ground to cover.
GoldQuest is currently drilling some of the new targets near Romero. These are all blind so there is no telling what drill results may look like. The important thing to remember though is that a strong PEA will make any new discoveries in the belt that much more valuable. If the lead resource is shown to be economic any new ounces found will be potential additions to a mine in the making which increases their value substantially. Precipitate will soon return to Ginger Ridge to follow up on its late 2014 drill program. That program included a discovery hole so PRG is past the stage of having to vector in to find gold mineralization. It will be looking to grow a new discovery.
Precipitate Gold (PRG-V; PREIF-OTC): Following in Goldquest’s Footsteps.
Soon after Goldquest made its Romero discovery Precipitate Gold moved in to acquire a large land position adjacent to GQC. It was able to do this because the Dominican Republic limits the total area of exploration concessions any one company can hold and Goldquest was near its limit. It should be more than clear by now that I hold this stretch of geology in high regard. If you think there might be a connection between my position as a founder and large shareholder of Precipitate and the fact it jumped into the Tireo belt, you’d be right.
The map to the right shows the location of Precipitate’s concession holdings. Like GoldQuest, PRG has concessions that protect large areas of favorable Tireo volcanics and like GoldQuest only a small amount of the property has been properly mapped, much less subject to geophysics or drilling.
I covered Precipitate extensively in an earlier email. I’m not going to rehash all of it but I do want to remind you of the key points.
- Precipitate made a New Discovery in late 2014.The discovery drill hole reported 53 feet grading 0.16 oz/ton gold including 17 feet grading 0.43 oz/ton gold
- The high grade gold intercept was part of a 328 foot zone of massive and semi massive sulphides that included two additional lower grade intercepts totalling 117 feet indicating a robust system.
- The discovery hole was located near the edge of the former geophysical survey grid.
- The geophysical survey was extended in December. The target tested by the discovery hole was enlarged to over 4000 feet of strike length by this survey.
- The widest and strongest part of the target is in the new area. Except for the discovery hole this large target has never been drill tested.
With the recent release of ground mag results that revealed a kilometre long magnetic low right where it should be the pieces are all in place. In one respect Ginger Ridge is already ahead of most of GoldQuest’s new targets since it already has a proof of concept discovery hole on the edge of a large coincident chargeability high and mag low – exactly the sort of target that has succeeded for GoldQuest.
GoldQuest and Precipitate are good neighbours. The management groups are friendly with each other and they work together on government relations and property related issues. Both companies understand that when one company in a trend wins it’s good for everyone. That is a two way street of course. While the market has been discounting the value of the Romero discovery it hasn’t been helping Precipitate and PRG’s management has been swimming upstream when it came to getting market recognition. For reasons I outlined above I think GoldQuest is about to turn around market perceptions. It will soon be a tailwind for Precipitate not a headwind, just in time for PRG to start gearing up to drill at Ginger Ridge to follow up on last autumn’s discovery. I think the market soon be putting real value on Tireo gold ounces again. . That will only increase the potential for gains from Precipitate’s upcoming field programs. PRG has very strong management , a tight share structure with no cheap shares out. In short, it’s built to move on good news and the good news I expect GoldQuest to deliver should just increase the potential leverage.
I don’t rate PRG in the newsletter because of my close association with it but I will leave you with comments from two of my colleagues in the newsletter business. They say it as well as I ever could.
| WHAT OTHERS HAVE TO SAY ABOUT PRECIPITATE GOLD: "The really good news is that I can happily report that Precipitate Gold has had considerable success at its ginger ridge property such that I think this stock has a very good chance of turning a ten-fold profit for folks who buy these shares at their current price" Jay Taylor in J Taylor's Gold Energy and Tech Stocks - January 9, 2015"The expansion of the chargeability anomaly makes Precipitate's 2015 exploration at Ginger Ridge one to keep a close eye on. It's still a buy."Brien Lundin in Gold Newsletter, February, 2015 |
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So they high-grade the deposit. What is going to happen to the lower grade material? Goes to waste, very unlikely will ever get mined. Effectively sterilize those reserves during our lifetimes.