Dataram Corp (DRAM) recently closed out on a merger with US Gold Corp. The merger was a long time coming – the company first announced its intent to acquire the junior gold miner back in June 2016, before finalizing terms early this year and finally closing out on the deal at the end of May 2017.
The delay gave markets plenty of time to mull over the implications of the deal for both sides, and in particular, try to figure out what an exposure to Dataram and, by proxy, US Gold Corp, might look like in five years’ time.
The initial response was one of uncertainty, with the company losing strength throughout the majority of the first quarter of this year. As the deal closed, however, and the company outlined its strategy going forward, sentiment seemed to shift. With a raft of fresh information hitting press and the company’s filings subsequent to the merger’s closing offering clarity in operational areas that were previously uncertain, markets are warming up to the combined entity and Dataram’s share price is starting to turn around.
With this sort of company, the value is almost entirely rooted in the resource potential at the projects at which it controls claims. There are other inputs – access to capital, permitting and political hurdles, management expertise – but without an economically viable resource count none of these inputs matter.
Until recently, information as to the quality of the resources over which US Gold Corp has control has been relatively sparse. Historic estimates have included deficiencies (primarily based on the difference in technology available between the time at which these estimates were made and the present day) and this has made it tough to ascertain whether the estimates in place are accurate and – just as importantly – whether the current precious metal environment makes these estimates worth digging up and processing.
This week, US Gold Corp has published some information detailing the latest iteration of the resource estimates at its flagship Nevada project, Keystone. In response to the release of this information, here’s a look at how the new detail fits into (and impacts) the old and what the picture now looks like for the company as far as its attractiveness as an exposure for an investor is concerned.
So, as mentioned, the project is called Keystone, and it’s located in the heart of what’s called the Cortez gold trend in Nevada. For those not familiar with Cortez, it’s one of the most prolific (if not the most prolific) trends in the US, and it’s home to a large number of what the industry refers to as Gold Elephants. These are super-sized deposits of (as is generally accepted as the threshold for this category of deposit) more than 10 million oz. Examples of these Elephants along the Cortez trend are Barrick Gold Corp. (ABX)‘s Cortex Hills, Goldrush and Pipeline mines.
To get an idea of where the project is in relation to both the Cortex trend and to some of the deposits mentioned above, take a look at the map below.
So that’s the location; now, take a look at the image below and we’ll go into the trend in a little more detail. The image is essentially a zoomed-in variation of the above with a more detailed outline of the geographical formation within, and surrounding, the trend in which Keystone lies.
It’s worth taking a minute to explain what this map shows. The two orange diagonal bars serve as the outer limits of what’s generally regarded as the prime Cortez trend. The Sr.706 line, illustrated in yellow in the image above, is a line representing the central region along which the deposits are thought to lie. To understand why, a bit of geological knowledge is important. Basically, the idea here is that a tectonic crustal block (called a terrane) collided with the North American Plate, which runs through central Nevada. This collision induced higher crustal temperatures and pressures which produced numerous hot springs, and many of these hot springs brought minerals towards the surface. Among these minerals were the gold and silver that precious metals miners hunt for today.
The theory behind the potential mineralization (i.e. the presence of gold) at Keystone, then, is rooted in the extrapolation of the mineralization of regions located along the same trend. Pipeline, Cortez Hills and Gold Rush lie to the North of the project. Gold Bar lies to the south. Draw a line connecting these mineralization regions and you get the fault along which the plates collided and along which the geology of the region suggests many of the hot spring events took place. Mineralization should have occurred along this line – to varying degrees, but more so than in the regions surrounding the fault.
Keystone lies along the line, suggesting that – in theory, at least – it’s a prime target from mineralization.
Once a company has established the potential for mineralization, and acquired the claims to any gold potentially found within the target area, the next step is to ascertain the quality of the mineralization and the depths at which the minerals lie.
To do this, a company must undertake an exploratory drilling program. Put simply, this involves drilling large holes (of varying width and of varying depth, but with the same aim) in an attempt to ascertain the location and the quality of the deposit.
Since the early 1960s, a number of drilling programs have been conducted to investigate the potential resource at the Keystone project and its surrounding region, but none have been the sort of systematic exploratory efforts that underpin drilling programs today. In 1967, Newmont Mining Corp (NEM) drilled six holes in the area and encountered gold intercepts of around 0.02 opt. Chevron Corporation (CVX) staked the property in 1981-1983 and drilled 27 shallow drill holes, continued by an agreement with USMX that drilled an additional 19 shallow holes. On the back of these programs, significant amounts of low grade and anomalous gold were intersected but the company decided it was uneconomical to kick off production. It’s important to recognize that this doesn’t really apply to today. The cost/price ratio is very different today than it was in the early 1980s, so what was uneconomical using 1980s technology and at 1980s gold prices may well be economical in the present day. Subsequent drilling identified over 200 ft. of low-grade gold mineralization.
In total, around 150 holes have been drilled at the project (and surrounding district) to an average depth of 300 feet.
So with mineralization identified, why has no company initiated a full-scale program at Keystone? The answer is that this project has fallen through the cracks somewhat on the back of a variety of mergers and claims changing hands.
Placer Dome, prior to its acquisition by Barrick, acquired the Keystone project as part of a portfolio of claims in the region back in 2004. In 2005, when Barrick bought Placer, the former dropped all Placer Dome’s Nevada exploration projects and joint ventures, including Keystone.
And this is where US Gold comes into the picture.
The company picked up the resource, collected all the historic data together, and as noted above, has spent 2016 and early 2017 filling in the gaps from the numbers already in place. As things stand, the project currently consists of 479 claims, an area of almost 15 square miles.
So what’s next?
Two major programs are ongoing right now that are going to determine the initial assessment of the project from a geological and mineralization perspective and the reporting of each has the potential to be a major catalyst for US Gold Corp going forward.
The first is mapping. This began in July 2016 and is headed up by a geologist called Tom Chapin, who worked as a Senior Geologist for Barrick at its Cortez mine and who now serves as a Senior Consulting Geologist at US Gold Corp. This mapping should provide the company with an end-product map at detailed outcrop-scale, with a focus on the stratigraphy, structure, and alteration important to Carlin-type deposits. To the company’s knowledge, this style of mapping appears to have never been conducted in the district, and early assessment indicates strong geological and alteration similarities to the above mentioned Cortez mine.
The second is drilling.
The company kicked off a five-hole program late 2016 and completed the program in December. This program focused on a region in the eastern portion of the project area; a region in which the historic drilling data suggests the highest concentrations of various minerals (including gold) reside. A sixth hole was planned (but was subsequently delayed because of the weather) and is yet to be completed. Based on management communication, we know that three of the five holes (they were widely spaced holes) identified the intersection of, and recognition of thick intervals of altered, dissolution-induced collapse breccia. For reference, breccia is indicative of the thermal spring activity outlined above as being a key process in the process of mineralization. Breccia infers thermal activity, and by proxy, the potential for gold deposits. In other words, if you are looking for gold, you want to find breccia.
The data from these holes, in combination with the mapping, will provide an as yet unparalleled overview of the potential of the project. As noted, to date, there have been no full-scale programs conducted at the site, and the application of today’s technology to an exploration program should provide some real insight into how much gold Keystone holds, where it lies within the project’s boundaries, how deep it is and what the quality of mineralization is (with this latter factor being important as it impacts the economic viability of the resource).
Going forward, then, we’re watching out for the combined outcome of the above two processes.
Bringing all this together, then, this is a young gold mining company with an as-yet unexplored (to any real degree) resource that lies along one of the most prolific gold trends in the world. There’s risk associated with the limited data available as to exactly what the geology holds, but this risk is factored into the company’s current market capitalization. As the drilling programs add clarity to Keystone’s potential resource estimates and markets have more on which to base a valuation, US Gold Corp should revalue to reflect the added information.