We are committed to helping investors come to grips with the resources sector and learn how to interpret news releases made by companies. In these Analyst’s Notes we illustrate how news from companies affects the investment case for the stock, and how it can affect peers as well. The topics are selected based on what the analysts think is both relevant and informative to you, the investor.
Before making comments, please ensure you have read the whole article and the FAQs at the bottom..
This week, we have chosen to focus on New Found Gold.
On 11 January 2021 New Found Gold Corporation ("New Found”) (OTC:NFGFF) (TSX:NFG) announced its latest exploration drill results at its Queensway project in Newfoundland, Canada.
The Queensway project is one of two mineral assets held by the company, the other being the Lucky Strik in Ontario, Canada. The latter project has been ignored for the purposes of this note as it is not even mentioned in the latest corporate presentation of the company. Following an initial public offering of C$27.3 million the share started trading on the Toronto Stock Exchange in August 2020. Since then, the price performance has been spectacular as shown in Figure 1.
The share price has performed well in response to drill results released for the Queensway project, generating some impressive numbers. At a share price of C$3.46 on 8 February 2021 market capitalisation was C$513 million, whereas the diluted Enterprise Value amounts to almost C$497 million, despite substantial net current assets of C$67 million, due to substantial warrants and share options being in the money.
In this report we review the geology of the project from a regional and from a local perspective. This report digs into the detail of company news releases, and even goes so far as to generate its own cross-sections. The conclusion is that even though there is much for management to work with on the project, it should be noted that New Found Gold has a diluted Enterprise Value of almost C$500 million.
This means that the market seems to place a value of around US$1,000 per ounce on a hypothetical gold resource of 0.4 Moz sketched out in a ‘back of the envelope calculation’, or at least ~C$500 million on the exploration potential for the district. We feel that a value of US$1,000 / oz would be a very high valuation for measured and indicated resource ounces, and yet the Company is still in the Blue Sky phase of analysis.
In conclusion, we wonder if the market has got ahead of itself, and whether the structural complexity, and challenges associated with grade concentration on thin structures and a lack of continuity of mineralisation have been fully communicated by the Company to the wider public? We invite New Found Gold to explain to us and to the wider market how the company is treating very high grade results within broader mineral intercepts, and how grade smearing is avoided. From the ground floor, it seems that smearing could be a problem.
Geological Background of the Queensway Project
The Queensway Project contains nine claim packages that have been acquired after exercising option agreements. These claims carry various net smelter royalties, generally between 1% and 2% of which many can be partially bought out. In addition, New Found also conducted map staking resulting in 49 map staked mineral licenses which are held 100% by the company. The combined holdings cover 86 mineral licences comprising 151,030 hectares (1,510 km2).
The areas have been subject to substantial historical exploration activities by various operators, among others, Noranda and Rubicon, including 218 diamond drill holes for 25,538 m core.
The Queensway project is located in an area where two geological plates collided 500 million annum (“Ma”) and 450 Ma ago. The Gander River Ultramafic Belt (“GRUB”) is interpreted as the continental suture of the two plates. The project area is immediately west of DRUB in the so-called Exploits Subzone depicted in grey colour in Figure 2.
The grey colour is very appropriate as the Exploits Subzone is dominated by mudstones.
The enormous forces associated with the plate collision gave rise to very intense flattening, accompanied by tight folding of the mudstones, which have a tectonic fabric that is very penetrative, sub-vertical and trending NNE-SSW parallel to the GRUB line. The direction of thrusting was towards the southeast. The penetrative tectonic fabric, the tight folding, and the intense deformation is important, as it has a real effect on the distribution of mineralisation, and therefore on the economics of the ore body.
Mudstones are not conducive to distinguish original bedding when strongly deformed, but locally decimetre-scale, open to isoclinal folds have been observed, shallowly-plunging to the north-west. Locally this fabric is affected by cross cutting younger structures which trend southeast and dip 60º SW. What this means is that the mudstones often do not look very deformed, but they have been subject to the same deformational forces that have affected the entire region.
Like so many deposits globally, here at Queensway, gold mineralisation is very much controlled by structure. On the macroscopic scale the intersections of the ENE and NNE faults have shown to be favourable locations for gold mineralisation historically as shown in Figure 3.
The Appleton Fault Zone and JBP (= Joe Batts Pond) Fault Zone identified on the map with exploration targets are shown as interrupted lines in Figure 3 being “Secondary Fault Structures”. These constitute at this stage the most notable mineralised zones on the property.
Figure 4 shows the structural model for the control of gold mineralisation.
The Appleton and JBP faults zones are shown above as “mineralized low-displacement faults”. Still with us? The area is intensely deformed, the gold is preferential distributed on low-displacement faults as shown above. Got all of that? Good, on we go.
The genetic model assumes that gold was sourced from sedimentary rocks at depth, when it was released during the metamorphic breakdown of pyrite to pyrrhotite together with sulphur and trace metals contained in pyrite. The released gold is thought to have been emplaced in sedimentary rock at higher levels during the main deformation event through quartz veining associated with tight folds and high strain zones. The deposition occurred in conjugate sets of fault-fill and extensional veins. The veins typically show evidence of intense deformation, characterised by boudinage (= pillow like deposits), shearing and folding. In short, the gold is in intensely deformed veins and both the gold emplacement and the vein formation is believed to have happened during the main deformation event.
Knowing that the main deformation event was intense, reviewing the schematic pictures, and reading the description of the mineralized geology (intense deformation… boudinage… shearing… folding are words that pepper the technical reports), it is most likely that the target deposits will be discontinuous and complex in their distribution underground. If the mineralised bodies that are shown in a presentation are overly simplistic for a structurally complex area, questions will be asked.
When reviewing drill results in a complex, structurally controlled deposit, some of the most important things to look out for are mineralised orebodies that ‘fit’ the structural picture. What we have done is have a look through drill results announced by New Found Gold, just because that is what we do. You’re welcome.
The first drilling was targeting the various deposits in a cast-the-net-wide approach until some very promising results at the Keats Zone focused attention there for follow-up drilling. The location of targets drilled can be found in Figure 3.
The top half of the table illustrates typical results for a first drilling campaign by a new company in a previously explored area. That is to say, the Company made some good hits, intersected some areas that were less good, and also returned some exceptional intercepts. Highlights were Keats Zone hole NFGC-19-01 which yielded an intercept of 86 g/t gold over 20.5 m, the Lotto Zone (hole NFGC-20-17) with 41.2 g/t gold over almost 5 metres and 10.1 g/t gold over 13.8 m, and Dome (hole NFGC-19-03) which returned 16.5 g/t gold over 6.1 metres. These are properly good results, even if much of the gold is in narrow structures.
One way of looking at the first-pass prospectivity of a drill hole or area is to multiply the grams by the metres of an intercept, to get a gram x metre number. Looking at the gram x metre numbers of these better intersections, one can see 1,763 for the first hole into Keats, about 200 g x m at Lotto, and about 100 g x m at Dome. It is therefore not surprising that the follow-up holes were drilled at the Keats Zone.
The second half of the table shows the results from the follow-up holes, and once again the company was able to report a suite of excellent results. The bottom half of the table shows a weighted average grade of 12.8 g/t Au over an average width of 13.4 m.
What we are not sure about is whether the Company may have smeared results from down-hole, or not. Of course it is tempting to report good grades over wide thicknesses, but it can potentially lead to misrepresentation of the integrity of the deposit in the public arena.
For a Company, or indeed the investor, to recognise smearing is important, as smearing hides the fact that the target may not be as consistently present as implied. Not only that, but smeared grades have a significant impact in the resource estimation process as the very high grades that contribute to the good average grade of an intersection would be cut to a much lower value if they were just constrained to the source structure, and not smeared. We are uncomfortable with some of the data that has been presented by New Found Gold, as it looks as if some of the results have indeed been smeared.
The most extreme example is hole NFGC-20-23 which had a headline intersection of 22 g/t gold over 41 metres. A closer look at the data indicates that with 90% of the gold intersected in this reported width of 41.3 m is present in 0.35 m. Remember all the preamble about structural complexity at the start of this report? Well, seeing 90% of the gold in a 35 cm width fits the model, but it does not seem to fit with 41 m @ 22 g/t Au.
A further concern is the location of the follow-up drill holes. A map can give the reader information that a table cannot, and a review of the drill plan is needed to put the position of the holes in context. What the map shows is that follow-up drilling at the Keats Zone has been carried out on a tight spacing. Given the complexity of the geology as discussed at length in the earlier part of this report, it is eminently understandable that New Found Gold would put its first holes in close proximity of each other. Companies typically do this to first get a handle on geology and controls of the mineralisation before stepping out with subsequent drilling.
What New Found Gold does not do, however, is to provide cross sections to show the relative location of the drill intersections in news releases. Cross-sections are a vital piece of the jigsaw, and investors are entitled to be very cautious of any company that does not adequately present its information in three dimensions to the public.
We have attempted to give some more clarity on the location of intersections in the next report section.
Drill Results in Context
Figure 5 has been included to illustrate the closed spaced nature of follow-up drilling at the Keats Zone.
The first thing to refer to is the bar scale at the bottom, or the north coordinates, which demonstrate that the drilling has occurred within 100 m (bar a solitary hole sitting at the top right of the image, on the 4900 N coordinate line). The blue and red lines on the plan indicate drill hole fences that are only 12.5 m apart.
In the absence of cross-sections provided by the Company, we have used the publicly available information and drawn up a number of cross sections from 4750 N to 4850 N by hand to establish how well the intersections intercorrelate. I know, a bit keen. You’re welcome. And the results are shown in Figures 6-9 below.
The cross sections show that New Found Gold is drilling an attractive target at Keats Zone. The deposit seems to have a lower grade envelope around a very high-grade core. However, it remains to be proven this deposit has substantial dimensions with the high-grade pinching out rapidly. Moreover, at cross section “Red Trace” (shown above) the mineralisation seems to pinch out at depth and grades dropping sharply.
When assuming optimistic dimension over the 100 m strike length of 30 m true width over a vertical distance of 120 m and using a density of 2.7, the deposit would contain less than 1 million tonnes. Using an average grade of 12.8 g/t Au, it would equate to less than 0.4 Moz of contained gold.
Our review of the public information for the Queensway project has thrown up some awkward questions for us, that we hope New Found Gold will address in due course. We understand that the geology of the district is complex and structurally controlled.
Notwithstanding the structural complexity, however, the reported results raise legitimate questions about the distribution of gold within reported intersections, and questions about smearing of grade, and how the Company is treating these high grades. The lack of regular cross-sections in news releases is something that we hope is addressed, for the sake of investor peace of mind. It concerns us.
And finally, the combination of all of the above, leads us to expect a structurally complex high grade resource at Keats, with potential for more pods and bodies of mineralisation in the wider project area such as Lotto and Dome.
All in all, there is much for management to work with, but we do note that New Found Gold has a diluted Enterprise Value of almost C$500 million. This means that the market seems to place a value of around US$1,000 per ounce on the gold content sketched out in our ‘back of the envelope calculation’ arrived at earlier, or at least the exploration potential for the district. A value of US$1,000 per ounce would be a very high valuation for measured and indicated resource ounces, and yet the Company is still in the Blue Sky phase of analysis.
We wonder if the market has got ahead of itself, and whether the structural complexity, and associated challenges associated with grade concentration on thin structures and a lack of continuity of mineralisation have been fully communicated by the Company to the wider public? Caveat Emptor.
Excelsior Mining Update
On 27 January Crux Investor published an Analyst Note about Excelsior Mining (“Excelsior”) (OTCQX:EXMF) (TSX:MIN) (FSE:3X3) following the company’s announcement on 21 December 2020 that it had produced 90,000 lbs of copper cathode with as main messages in the note:
- The Gunnison project of Excelsior is “an example of how old technologies with new applications can be troublesome, how the devil is in the detail, and how not doing enough preparatory work creates major problems for mining companies.”
- The fact that copper has been produced is merely a marketing ploy and it will remain irrelevant until the company has proven its sustainability at a particular level and the cost of production.
This has elicited a response on 4 February on CEO.CA by a shareholder (writing as “Goldfinger”) criticising a number of concerns raised in the Analyst Note in support of the above conclusions. According to the author, the article from Crux Investor was full of holes and “doesn’t do a good job of informing its readers with the real story.”
In the critique, the author notes that he has spoken to Excelsior management, specifically mentioning the CEO, Stephen Twyerould. We use publicly available information that companies provide, notably news releases and Management Discussion and Analysis (MD&A), as well as technical reports. Below are some quotes from key disclosures.
After starting on 31 December 2019 with injection of mining fluids, on 8 January 2020 the CEO announced that "the newest, most orderly, and technologically advanced in-situ recovery wellfield on the planet … is functioning better than anticipated.” Yet within four weeks, on 4 February, Excelsior announced it had initiated several optimisation changes to the production wellfield. The most useful summary was given within a Wellfield Start-up and Commissioning Status update on page 5 of the MD&A for the year ending 31 December 2019, as it pulls together several news releases into one place. Below we have just reprinted the section regarding the reconfiguration:
“In February 2020, in order to improve efficiency for long-term production performance the Company initiated several optimization changes to the production wellfield. The goal of the wellfield optimization is to assist in acid breakthrough and continued copper mobilization. Breakthrough will be achieved when free acid is detected at designated recovery wells; thereby maintaining the desired pH level (acidity level) where copper will remain in solution. Specific optimizations that are being implemented include making the wellfield reversible in terms of fluid flow.
Injection wells are being retrofitted with pumps; thereby, allowing them to be used as recovery wells when needed. In addition, recovery wells are in the process of being reconfigured to allow for injection. By making the wellfield reversible, Excelsior will have the option of moving mobilized copper only a portion of the full distance between the wells before reversing the fluid flow; thereby reducing the effective distance that the copper must travel before it is recovered. This new capacity to move fluids back and forth (push and pull) is expected to help achieve breakthrough, at which point copper would remain in solution throughout the production process. In parallel, infrastructure is being installed that will allow for concentrated acid to be injected into each well, which will dissolve any reprecipitated copper (copper sulphate) in the area of the pumps, thereby ensuring effective fluid flow. Preventative maintenance programs to limit pump and wellfield down-time are also being implemented.”
In other words, acid breakthrough and copper mobilisation, as envisaged in the Feasibility Study is problematic. It also means that free acid was not detected at designated recovery wells, and therefore the pH is not at a level where copper remains in solution, so copper is either not being leached in the first place or it is re-precipitating before it gets to the recovery well. Furthermore, the distance between injector and recovery wells is too great to enable the fluid flow and chemical balances to work satisfactorily. It also implies that copper is reprecipitating near the recovery wells, and that concentrated acid is required to maintain leaching and permeability characteristics of the well-field, along with the added maintenance that the corrosive concentrated acid brings.
You would think with a project exceeding planned performance, such measures would not have been required, no? And note that these optimisation measures were not a minor tweaking, but fundamental changes to the operation. Production was postponed by almost a full year and in effect a full redesign of the mining method was implemented.
The company was surprised by a metallurgical performance that was clearly not as forecast by the feasibility study, which was based on laboratory tests and assumptions only. As we pointed out, the need for six “assumptions” and with 16 mentions of “estimates”, sits awkwardly with a claimed feasibility study level of confidence. According to the Goldfinger critique spending millions of dollars on tests should suffice as “the rock does not lie”. Unfortunately, bringing Gunnison into production in early 2020 was not quite so simple as building it and commissioning it smoothly. Here we are in early 2021, with the operation reconfigured, and investors still waiting to see how Take 2 pans out.
The feasibility study got it wrong with respect to permeability as was demonstrated by the company reporting that the lixiviant (the mining fluid) did not reach the recovery wells. As for target acidity, it is hard to tell the extent of the problem without acid consumption numbers provided by Excelsior, but it has indicated that the target acidity could not be maintained. The Company has had to redesign the wells, retro-fitting them with pumps, using wells as injectors and recovery points, and including concentrated acid injection. So much has changed, including the actual flow direction of the injector and recovery fluids, that it renders the key de-risking document, the feasibility study, largely irrelevant.
The “Goldfinger” critique says it is “absurd” of the Crux Investor Analyst Notes to state that the Feasibility Study is irrelevant, but we are simply cataloguing the company’s own list of changes to the plan. The problems have occurred by relying on laboratory tests work and modelling instead of being based on empirical established numbers from a pilot plant.
Taseko did not make the same mistake at its Florence project. The Florence deposit is conceptually more suited to in-situ leaching than Gunnison with no obvious acid robbing elements and covered “by a thick and intensely fractured oxidized layer”. According to the Florence feasibility study the characteristics of the deposit makes for an “unusual, perhaps even unique (Ed. emphasis by Crux Investor), geological and hydrological combination” ideally suited for in-situ leaching. However, Taseko management did not fully rely on laboratory testwork, despite the much lesser risk of carbonates consuming acids and the absence of large heterogeneity in permeability as evident at Gunnison. Taseko only made the go-ahead decision for commercial production at Florence subject to extensive pilot testing to establish the efficacy and efficiency of in-situ leaching. Excelsior, in contrast, chose to go straight into production.
Goldfinger went on to say that the current pathway to full production is now just a matter of time and money. Maybe we are also absurd to question whether success will come or not? But as a rule we prefer not to celebrate success prematurely. The proof of the pudding is in the eating, or rather in the quarterly results.
The initial capital expenditure of US$47 million as per plan had already been far exceeded when first injection started in December 2019 (US$76 million) with US$6.7 million spent in the nine months thereafter and the clock still ticking until commercial production is achieved. As for suggesting that we embarrassingly did not do our homework, may we respectfully refer readers to the sixth bullet under the EBIT calculation on page 154 of the feasibility study, which specifically includes the drilling cost over the vertical length of the production block over 25 feet, but not the cost of drilling the overburden in the capital expenditure.
Although there are many indications that the Gunnison project is problematic, we would be only too happy to be proven wrong. Being a service for mining industry investors, having successful projects is good for the industry and by extension for Crux Investor.
Project failures are only bad for the industry and result in many losers. We therefore wish Excelsior success. If management feels the need to clear up any misunderstanding in the public market now, it can publish updates about copper production and what the inputs and costs for the first couple of months of production have been, or it can simply wait until it announces quarterly results. On 21 December Excelsior announced that it would target 2 million pounds of copper per month to be achieved in Q1 2021. If the data from the early production shows that the operation is getting close to the target rate, our concerns will be proven wrong, and all will be well.
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