Color Outside the Line

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As a general rule, the most successful man in life is the man who has the best information

Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.

Capex costs are escalating because:

  • Declining ore grades means a much larger relative scale of required mining and milling operations
  • A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure

There is also continuously rising Opex, or operational expenditures, to consider. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.

The bottom line? It is becoming increasingly expensive to bring new mines on line and run them.

The reasons behind flat-lining gold production, and record cash and all-in costs, are numerous:

  • Production declines in mature mining areas
  • Slower than expected ramp-ups of output
  • Development time up
  • The entire resource extraction industry suffers from a lack of skilled people
  • Extreme weather
  • Labor strikes
  • Protests
  • Increasingly more remote and lacking in infrastructure projects
  • Higher capex costs
  • Increased resource nationalism
  • Increased environmental regulation
  • More complex metallurgy
  • Lower cutoff grades

In 1998 the world’s top two highest grade mines were SMM’s Hishikari Mine in Japan @ 50g/t and Barrick’s Meikle mine in the U.S. @ 32g/t. In 2011 the world’s top two highest grade mines were Newcrest’s Gosowong in Indonesia @ 25g/t and goldcorp’s Red Lake mine in Canada @ 24g/t.

In 2014 Klondex Mines Fire Creek Mine in the U.S. was the world’s highest grade mine @ 44g/t and coming in second place was Kirkland Lakes Macassa Mine in Canada @ 22g/t. Declining mined and mineable gold grade is a direct result of the industry’s inability to discover new high grade/high margin deposits.

Goldman Sachs Eugene King published a report earlier this year (2015) warning of Peak gold. Since gold production lags discoveries by around 20 years the following chart suggests he may be right.

 

Here’s some excellent insight from Brent Cook, explorationinsights.com.

“Major gold mining companies are facing a big problem. They are unable to find and develop enough ounces to keep up with demand, for the simple fact that economic gold deposits are extremely rare.”

There are three main reasons why gold production increased up to 2000 despite declining gold prices.

  • The first is the advent of new mining and processing technologies that made previously uneconomic low grade deposits economic. This was mostly a result of heap leach technology and bulk mining methods. Meaning, mining companies could now scrape up large areas of low grade mineralization and sprinkle a cheap solution of cyanide on the rock to recover the gold. This primarily worked on near surface oxidized deposits in relatively dry climates.
  • The second is that vast regions of the world that had previously been closed for various reasons were opened up to exploration. These new areas include much of Latin America, Africa, and the former Soviet Union.
  • The third is that geologists had a whole slew of new exploration tools with which to scan the earth. These include satellite imagery, geophysics, and more sensitive chemical tools.

The net result was that new technologies kept old deposits going longer and made previously uneconomic ones viable, thereby ramping up production into the early 90’s. New deposits in previously unexplored and off-limits areas kept that production going until about 2000. All well and good but the industry is not finding as many new deposits as they need to in order to maintain current production levels. And, although we can expect incremental technological improvements in processing, mining, and exploration, there is nothing revolutionary on the horizon.

This is a worrisome slide for major gold producers—they are unable to sustain themselves. For the most part they are surviving via old deposits that are running out of ore and newer deposits that are quickly headed into the “old” deposit category. Reserves from these aging deposits are not being replaced by new discoveries. Producers’ problems are further exacerbated by rising exploration and development costs, plus the significant time it now takes to permit and finance a new deposit.”

Here’s Paul van Eeden (paulvaneeden.com) on reserve replacement,this was written in 2001:

“Worldwide gold production from mining is approximately 80 million ounces per year. A few years ago, a world-class gold discovery, which rarely occurs, would have been anything over a million ounces. Perhaps a few such deposits are discovered in a decade yet we mine the equivalent of 80 such deposits a year…

This from Natural Resource Holdings, 2013 Global Gold Mine & Deposit Rankings; “The gold mining industry needs to discover 80 million ounces of gold every year just to prevent it from shrinking and it is highly unlikely that we will ever discover 80 million ounces in any given year, never mind do so on a continuous basis.”

“There are only 580 mines and deposits on earth with over 1 million troy ounces of in-situ gold with less than 200 in North America… we are nearing peak gold production as the total in-situ ounces when adjusted for metallurgical recoveries and average mine life are about 50% less than what is required to maintain the current production trends.

The average grade of all producing mines is 1.18 g/t Au, which is 32.6% higher than the average of all projects still in the development phase (0.89 g/t Au). This has significant implications on future gold production. In the near term, with significant volatility and the gold price at a three-year low, many of these projects are simply not economically feasible.” Natural Resource Holdings, 2013 Global Gold Mine & Deposit Rankings

In their 2013 report Natural Resource Holdings identifies 3.72 billion below ground ounces of gold. You have to ask; what’s actually recoverable?

 

 

“Goldcorp estimates that global production will drop six per cent in the next three years, and almost 18 per cent in the next nine years. This may seem mind-boggling to the casual investor who watched hundreds of gold companies pop out of the woodwork during the bull market from 2000 to 2011. But it speaks to the numerous challenges facing the sector. There has been a shortage of new discoveries in the past decade, leaving the industry’s pipeline relatively bare. At the same time, companies have been deferring or canceling projects because the execution risk is just too high. That is due to soaring construction and operating costs, political risk, permitting challenges and numerous other factors.

And of course, gold prices have plunged almost 40 per cent in the past three years. That accelerated the move to the production cliff because miners have been forced to shelve many big projects. They have also focused on higher-grade ores at their mines, which means their reserves and mine lives are shrinking fast.

The production cliff puts the senior gold miners in a precarious position. The not-so-secret problem with these firms is that their current production rates are not sustainable for very long. They have a couple of uncomfortable options: let production decline, or go on an acquisition frenzy to fill up their project pipelines. And those options are complicated by the excessive debts that many of them are carrying.” For many miners, there’s no avoiding the gold ‘production cliff’ now, Peter Koven, Financial Post

 

Over the past 24 years, mining companies discovered 1.66 billion ounces of gold in 217 major gold discoveries, SNL Metals & Mining's 2014 edition of Strategies for Gold Reserves Replacement shows.

While that sounds like a significant amount of gold, it falls short of the 1.84 billion ounces produced over the same period. In addition, the amount of gold discovered and the number of major discoveries (defined as any deposit with a minimum of 2 million ounces of contained gold) have been trending downward over time, from 1.1 billion ounces in 124 deposits discovered during the 1990s to only 605 million ounces in 93 deposits discovered since 2000.

The amount of potential production from these major discoveries is particularly concerning when looking at the discoveries made in the past 15 years. Assuming a 75% rate for converting resources to economic reserves and a 90% recovery rate during ore processing, the 674 million ounces of gold discovered since 1999 could eventually replace just 50% of the gold produced during the same period.

However, considering that only a third of the discovered gold has been upgraded to reserves or has already been produced, and that many of these deposits face significant political, environmental or economic hurdles, the amount of gold becoming available for production in the near term is certainly much less.” Kevin Murphy, Fewer discoveries, slower development weigh on gold industry, Mining.com

Better than Gold

Gold’s price has risen because of the abuse and mismanagement of our monetary and currency systems - throughout history, gold has always shone the brightest when trust breaks down, confidence falls and fear climbs. Which sounds exactly like today, wars, plague, economic collapse, central banks money printing out of control and the bad news rolls on an on.

Gold is up about four times from its lows more than a decade and a half ago. What’s the upside from here?

If gold hits $5000.00 an ounce it's more than a quadruple from here. You’ve got a nice return and it’s this authors belief that gold and silver bullion and coins should be part of every investors portfolio.

But…

History shows us, time and again, the greatest leverage to gold’s rising price is owning gold exploration/development junior mining stocks.

Will mainstream investors eventually catch on to the fact they need to own both gold and gold shares? The buying of shares in companies involved in the search for and development of gold projects is an imperative to garner the coming golden rewards.

“I am amazed by how nervous more and more Investors or shall I say Gold traders are becoming. Every Bull Market must always climb a wall of worry and this market will be no different. Since so many of you seem to be wavering between whether you should become short term traders or stay as long term investors, perhaps a refresher course in making money and a little bit of hand holding may be the order of the day.

While a few succeeded by trading commodity futures; stock options, day trading or short selling. Jesse Livermore, the most famous of the short sellers who caught the top in 1929, nevertheless died broke. After a great deal of study and research it finally sunk in that most of them that achieved their ultimate goals were those individuals who identified a major Bull Market or an individual stock and RODE it for all it was worth. They bought and held during both the pleasurable upswings as well as through the sharp, terrifying down drafts, during which times they all took advantage of the down drafts to accumulate more stock. Then, when the Bull Market appeared to be in its final, frothy stage, they gradually sold their holdings to the late comers (who Joe Granville named the Bag Holders), who’s blind greed had them clamoring to get in at the top.” Aubie Baltin

Gold juniors are going to be the most rewarding, the most lucrative way to garner the huge rewards from the coming freight train rush to gold. Those golden tracks are being laid today using the world’s fiat currencies as ballast - when your cash is trash your gold is shining.

There will be fierce merger and acquisition (M&A) competition for the juniors with stable safe gold ounces in the ground by producers having to replace their reserves in an extremely competitive environment. As we’ve seen there aren’t very many decent sized deposits, ones over one million ounces, left in politically stable countries.

Junior resource companies, not majors, own the worlds future mines and juniors are the ones most adept at finding these future mines. They already own, and find more of, what the world’s larger mining companies need to replace reserves and grow their asset base.

If I was looking for superior investment vehicles to take advantage of what I think I know regarding precious metals I’d be assembling a portfolio of juniors with sizeable deposits in the  post discovery resource definition stage with the occasional green field exploration play thrown into the mix.

New Carolin Gold Corp. TSX.V - LAD

When I first started investing in the junior resource space I was given some good advice by many people. One pearl of wisdom was this;

They do not come along very often but many times the best investment is a good project screwed up by poor management. The best return on your money comes from a change of management coming in, taking over a great but screwed up project.

This is exactly the opportunity I believe is being presented by New Carolin.

The Carolin Mine, a former underground gold producer from 1982 – 1984, is located on the west fork of Ladner Creek, approximately 18 kilometers northeast of Hope.

The 1,360 tpd mill at the mine was commissioned in early 1982 and produced over 43,500 ounces of gold during 27 months of operation.

Construction of the New Carolin Mine started in 1980 when gold’s price was US$600.00 an ounce. When the first gold was poured gold was down to US$300.00 oz. With poor gold recoveries (just 60%) and mined grades lower than forecast due to country rock dilution the mine had to close in 1982.

The original resource estimate was finalized in 1997. The gold resources reported in the table below are based on exploration and development work undertaken by Athabaska Gold Resources in 1995 and 1996 using a database of 595 diamond drill holes (approximately 40,000 meters of diamond drilling).

 

The historic resource grade of plus 4 gpt was very close to the average grade that was originally mined from the Idaho Zone (New Carolin Mine).

The Carolin Mine mineralized zone is open in all directions.

A mine development map from 1981 shows the 800 level being extended north for 1.2 km to the McMaster Zone. The proposed cross cuts for drilling indicate to this author that previous operators had high confidence that gold mineralization runs beyond the Carolin Mine and that the area between the Carolin Mine and the McMaster zone could yield additional gold resources as development continues.

There are no shafts at the Carolin Mine and the underground workings are dry and fully accessible.

The future mine model for the Carolin Mine envisions open pit and underground components.

The McMaster Zone is approximately 1.3 km north of the Carolin Mine.

A New Carolin May 2012 technical report established an inferred resource on the McMaster zone of 3.6 million tonnes grading 0.69 gram gold for 79,540 oz. gold using a 0.5 gram gold cut-off. Note that over half of this existing resource is at 2 gpt and near surface.

Highlights

  • The McMaster Zone occurs within the current mine permit area and is open in all directions.
  • The McMaster Zone resource takes into account only gold. The silver accompanying the gold mineralization was not included in the historical database.
  • The current resource estimate doesn’t take into account a gold oxide zone. If it continues to depth it could be significant.

The Emancipation Mine was an intermittent gold producer from 1916 to 1941.

The Aurum, Pipestem and Ward adits all produced gold intermittently from 1935 to 1937.

There’s also ‘Jewelry Box’ type gold showings present:

  • The Montana - 30 oz’s gold from two tons of material.
  • Georgia No. 2 prospect - 33 oz’s of gold from one ton of material.

Tailings Pond

Athabaska Gold Resources drilled 60 holes into the tailings and New Carolin drilled another nine. These 69 holes were drilled into just 60% of the tailings pond’s surface area. They were used to establish a National Instrument 43-101 resource of 404,000 indicated tonnes grading 1.83 grams gold per tonne for 24,000 contained oz., plus 84,400 inferred tonnes grading 1.85 grams gold for a further 5,000 oz gold.

Since the Carolin Mine shut down the fully permitted tailings impoundment has been monitored and inspected by independent consulting engineers. After the Imperial Metals Mt. Polley tailings dam breach BC’s Ministry of Mines mandated that all of the Provinces tailings impoundments be inspected and reports filed by December 1, 2014. New Carolin completed its inspection in September 2014. Remaining tailings capacity is 1,327,723 metric tonnes.

Metallurgy

Core from the McMaster Zone (DDH 32-09; 3.96 g/t gold over 27.6 meters, from 32.4 to 60.0 meters) was provided to SGS Canada Ltd. for gold recovery testing.

Pressure-oxidation and carbon-in-leach has shown recoveries of 96.3% on flotation concentrate from the McMaster Zone. Using flotation, pressure oxidation and cyanidation - combined with cyanidation of the flotation tailings -  returned overall recoveries of 94.5%.

Mineralization of the McMaster Zone is similar to that of the Carolin Mine (no core is available for testing).

Some 1,200 junior resource exploration and development companies are located in Vancouver, British Columbia. Vancouver is well known as a hub for mining expertise and is one of the greatest mining centers in the world.

Not many of those 1200 companies can claim to have a mine, let alone one with:

  • A stable, just inspected permitted tailings impound with room to grow
  • Only a 6 km drive down an all weather gravel road from the Coquihalla Highway to the mine site
  • Power lines only six km away
  • Old mill equipment and foundations still in place
  • Extensive mine workings
  • Inferred gold resource of 750,000 ozs of gold grading 4.5g/t
  • Water and mining permit already in place
  • Politically mining friendly jurisdiction
  • Positive response from local community

New Carolin can claim all that, and a whole lot more - it’s fully permitted mine project sits just 160 km east of Vancouver British Columbia, Canada, just 30 minutes from the town of Hope. Workers can complete their shifts and sleep in their own beds in their own homes. Supplies can be easily sourced and transported to the mine site.

New Carolin Gold Corp. TSX.V-LAD has just acquired an additional 30% ownership in the Ladner gold project. Previously LAD had a 10% undivided interest in the property that holds the core asset plus 100% of the lower property that while on strike does not as yet have a proven asset. The ownership of the property has been problematic for New Carolin for almost 3 years since Century mining went into bankruptcy. The market has punished LAD for a lack of clarity on ownership and specifically for the lack of a direct path to 100% ownership.

The transfer of this additional 30% interest is very significant for LAD shareholders, not just for the significant upgrade in their percentage ownership of the assets on the property (roughly an inferred resource of 750,000 oz at 4.5 g/t gold plus 28,000 inferred oz minimum in the tailings)) but also because LAD now has a direct path to delivering on 100% ownership of the property.

LAD has an agreement in place with the receiver to acquire the 100% interest by raising $2 million towards developing the project. A key component of that agreement was the transfer of the 30% interest from Tamarlane to LAD as the receiver did not directly control that 30%. Now, with the monies raised to date, plus the $200,000 loan facilitating the 30% transfer, and the just raised $225,000.00, LAD has $1,250,000 left of the $2 mil raise required to transact the further 60%, but I predict the deal will close with another $750,000 raised.

Once LAD can claim 100% ownership they will own the roughly 750,000 oz of inferred gold underground plus the 28,000 + oz in the tailings pond (drilled out on only 60% of the ponds surface). Management of New Carolin believes that their next drill program will have very meaningful targets that could further enhance the current resource.

Will these new developments be enough to put them in play as an acquisition target or perhaps to be of sufficient interest to financiers willing to put the property back in production? We don't know but both prospects certainly exist and make this a very compelling story going forward.

There’s also considerable discovery upside left on the property.

‘The Coquihalla serpentine belt is an elongate, north - northwest trending, steeply dipping ultramafic unit. The belt lies within a major crustal fracture, the Hozameen fault and exceeds 50 kilometers in discontinuous strike length. The serpentine belt reaches its maximum development in the Carolin mine-Coquihalla River area, where it is greater than two kilometers in width. It gradually narrows to the south (Manning Park area) and north (Boston Bar).’ Exploration in B.C. 1989, Ministry of Energy and Mines

 

 

New Carolin’s Ladner Gold Property follows the Hozameen fault structure for approximately 28 km and exceeds 144 square kilometers covering substantially all of the accessible, yet still very underexplored Coquihalla Gold Belt(CGB).

The Ladner Gold Project contains several former underground producing gold mines and numerous gold prospects – more than 30 have been discovered so far.

Approximately 11 gold showings have been found within a 2 km stretch north of the Carolin Mine.

A recently completed airborne geophysical survey indicated a major magnetic linear structure that can be traced for over 18 km within the company's claims. All the aforementioned gold prospects occur along this major magnetic anomaly and there’s several kilometers of untested ground left along the structure to explore.

New Carolin is not only shaping up as a very low risk shot at a prospective near term producer but also as a company with excellent potential for further discovery.

Let’s get Jim Mustard, mining analyst and vice president of investment, mining and banking at Vancouver-based PI Financial, to bring this into perspective for us.

“The majority of M&A activity is focused on gold and copper projects. Grade is king now. Anything that can be sold as shovel-ready, and that is in a jurisdiction with clear permitting protocols, that is not subject to being derailed, and that has low to modest capital expenditures, will be sold.”

Earlier in the article I listed a whole slew of ongoing negatives for the gold mining industry as a whole and individual deposits as a whole. Perhaps we should see which, if any applies to New Carolin. Here’s the negative or con list:

  • Production declines in mature mining areas
  • Slower than expected ramp-ups of output
  • Development time up
  • The entire resource extraction industry suffers from a lack of skilled people
  • Extreme weather
  • Labor strikes
  • Protests
  • Increasingly more remote and lacking in infrastructure projects
  • Higher capex costs
  • Increased resource nationalism
  • Increased environmental regulation
  • More complex metallurgy
  • Lower cutoff grades

As we read above this list, except global changing weather patterns, does not apply to LAD. We’re close to the town of Hope, the people of Hope and the surrounding area, including First Nations people, want this mine to go ahead and are very supportive of New Carolin’s efforts.

British Columbia is an excellent place to work in the resource extraction industry and the Provincial Liberal government under leader Christy Clark is very supportive of mining.

Metallurgy studies have been done indicating high recoveries, there’s nothing complicated about the mining or extraction process and grades are high.

Having infrastructure close means a lower capex, situated just outside the town of Hope, and within 160km of Vancouver, means skilled workers and lower opex.

And of course being that the resource is in Canada is just slapping icing on our cake, getting paid for Canadian dug gold in U.S. dollars tacks on roughly 32% to gold’s spot price, currently US$1145.20, making your gold worth Cdn$1511.66.

 

Valuation

 

I’ve always used my 10% rule when evaluating whether or not a stock has share price appreciation potential. Here’s how I do it…

750,000ozs gold x US$1150.00 = US$862,500,000.00/10 = US$86,250,000.00 divided by outstanding shares fully diluted as of Sept 30th 2015 of 113,494,997

10% good times = $0.75

5% bad times = $0.37

2.5% harsh times = $0.18

New Carolin shares last traded @ .05, using 2.5% to 5% of in-situ value shows me there is upside not yet assigned to LAD’s share price, likely because, even though the path is clear to 100% ownership we are not there yet.

This author believes LAD’s current share price is going to go through an upwards revision when we own 100% of the project. I also believe we are going to find more gold, a lot more gold. Something big must be causing all those gold showings/deposits strung out along pretty much the entire 28km length of the property.

The bottom line is this project is real and we have tremendous discovery potential on not only the north property but the contiguous southern property as well - we have to spend money here.

New Carolin is a value proposition. Value will be added by:

    • A bad market about to turn in gold’s, and gold deposit owners favor.
    • Securing 100% ownership.
  • Finding much more gold.

Conclusion

 

Gold, and gold mining stocks, are not currently getting a lot of love from investors. Perhaps it’s time for you to color outside the lines a bit, give group think a huge doubt and take some advice from the Baron?

Baron Nathan Rothschild became a legend during the financial crisis right after the Franco-Prussian War. As the story goes, a panic-stricken investor came screaming into his office yelling, "You advise me to buy securities now? Now? The streets of Paris run with blood!" Rothschild replied, "My dear friend, if the streets of Paris were not running with blood, do you think you would be able to buy at the present prices? Buy when there's blood in the streets, even if the blood is your own."

Is coloring outside the lines, New Carolin Gold Corp. TSX.V – LAD and getting ahead of the herd on your radar screen?

If they aren’t, they should be.

Richard (Rick) Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including:

WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com, MSN.com and the Association of Mining Analysts.

Please visit  www.aheadoftheherd.com – We’re telling you things everyone else doesn’t already know.

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***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard owns shares of New Carolin Gold Corp TSX.V – LAD and LAD is a paid sponsor of his site aheadoftheherd.com

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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