Issue No. 171
Exploration Insights
Brent Cook
Exploration Insights
Posted Jan 11, 2012
Stock Talk
This week we discuss two portfolio companies, Rye Patch and Esperanza Resources. Both are recent purchases that offer modest valuation upside and I think decent downside protection, assuming no major global catastrophes or significant changes in precious metal prices (yeah, right). They are not ten-bagger high risk exploration plays, but rather offer in the order of 50% appreciation if we are correct in our assumptions.
Admittedly, my personal preference is to go for the ten-bagger exploration play here at EI, but very few projects actually make the cut (although nearly anyone could get lucky). It is my view that in the current, rather dour, junior market we need more than a bit of luck and have to be especially critical in selecting these high risk bets. Without success, there is no exit.
This week I took a hard look at a number of early stage exploration plays, including Brixton Metals (BBB.TSX-V) and the Regulus Resources (REG.TSX-V)/Pachamama Resources (PMA.TSX-V) property. Neither made the cut, despite the market excitement they seem to have generated. Time of course will tell, but, based on the limited data available the reward did not warrant the risk-- with my money at least.
Rye Patch (RPM.TSX-V) released drill assays from five reverse circulation holes into their Garden Gate Pass target, Nevada. Although the drilling did intersect alteration, geochemistry, and geology indicative of Carlin Type mineralization, the drilling did not produce a discovery. The drilling tested two geophysical targets located beneath approximately 250 meters of gravel cover (Fig. 1 below).
(Click on image to enlarge)
(Fig. 1- Schematic representation of geology, alteration, and drill holes at Garden Pass. Gold mineralization is postulated to be in those reddish structures just northeast of the drill holes)
As is usually the case with first-pass drilling, the holes just missed the gold mineralization (sarcasm intended here), but the results are “encouraging” enough to warrant a second round of drilling. I am told it took in the order of 20 drill holes and several years before the official discovery at Barrick’s nearby Goldrush discovery. Rye Patch plans to begin drilling again this spring, using a core rig to test the prospective rocks.
A word on exploration for Carlin deposits
Carlin type gold deposits are the “golden grail” for Nevada explorationists and can be exceptionally valuable and large. Nevada’s Carlin Trend has produced over 80 million ounces, and contains in the order of another 80 million ounces. The Getchell Trend hosts in the order of 30 million ounces and the Cortez-Eureka Trend roughly 60 million ounces. RPM’s Garden Gate Pass property lies within the Cortez Trend about 12 kilometers southeast of Barrick’s Cortez Complex (host to 20 million ounces at Pipeline; 14 million ounces at Cortez Hills; and, so far, 3.5 million ounces at the Goldrush-Red Hill discovery). Garden Gate Pass is definitely in the right area, as are a number of other Carlin style projects being explored by junior companies.
Evolving Gold (EVG.TSX-V. $0.33) has been exploring the south end of the Carlin Trend for a few years with some success but have yet to make, or at least prove, a significant discovery. They have drilled nine holes into the Arch Zone and intersected up to 11.7 grams per tonne gold over 18 meters. The mineralization starts between 750 and 1,300 meters depth with each hole costing in the order of $500,000. They plan to spend ~$5 million this year defining the mineralized zone that occurs within an alteration footprint measuring at least 1,000 by 600 meters.
Also active at the south end of the Carlin Trend is this year’s hot Nevada play, Gold Standard (GV.TSX-V. $0.81) who raised $12 million at $0.95 last year. GV drilled 16 holes in 2010 and planned to drill another 20 in 2011 at their Railroad Project. To date they have intersected extensive and “encouraging” Carlin style alteration and geochemistry, including up to 4 grams per tonne gold (within 29 meters grading 2 grams per tonne gold). They will continue drilling this year, with the objective being to find and define high grade zones within this extensive hydrothermal alteration system. The Railroad property is not a new area (I recall walking the ground in 1999 and being excited about the property then) and has been drilled by numerous companies over the past twenty years. Gold Standard is, however, testing some new concepts.
Some of you may recall Rob McEwan’s foray into Nevada that began with the merging of three junior Nevada exploration companies into US Gold (UXG.TSX. $3.78). The stock rocketed to ~$9.00 on the hope that McEwan would be able to work the same magic he did at Red Lake, Ontario-- in Nevada this time. Six years and tens of millions of dollars later, UXG is developing a questionable gold-silver deposit in Mexico and some oxide ounces in Nevada (ignoring the merger with Minera Andes). There has been no significant Carlin Type discovery by US Gold, despite a massive gold anomaly in upper plate rocks that has been drilled and drilled and drilled.
The point to be taken from the preceding commentary is that Carlin type deposits are extremely difficult to discover and even more difficult to define. You are nearly always drilling blind through post mineral cover or un-reactive rocks, which makes for some very expensive “rock chip” sampling. The drilling costs a lot of money and usually produces “encouraging” results that warrant follow up drilling. Even with the positive geochemistry and alteration, most junior companies exploring for these deposits end up blowing out their share structure at progressively lower prices.
I do indeed recognize and congratulate RPM on their success in finding a new Carlin style hydrothermal system in lower plate rocks, and hope the next round of drilling makes the big discovery. However, betting on the outcome of drill holes testing Carlin targets is usually a loser’s game; for my money, it makes more sense to wait on drill confirmation, or play by way of a prospect generator company that is using other peoples’ money to test their ideas.
The Garden Gate Pass property is not why we bought RPM, and therefore does not enter into our reasons for owning it now (see EI January 1, 2012). To hear RPM President Bill Howald’s take on the Garden Gate Pass property, link here.
Travel and appearances
The Cambridge House Resource Investment Conference is in Vancouver January 22nd and 23rd and precedes the geologically focused Mineral Exploration Roundup. Sign up here for the Cambridge event and, here for the Roundup, plus check out this edgy Cambridge YouTube promo here.
I will also be speaking at the Cambridge House California Investment Conference near Palm Springs February 11 and 12, linked here.
I will presenting at a one day Global Resources Investing seminar in Abu Dhabi February 21st organized by Academy and Finance, linked here.
That’s the way I see it.
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Jan 8, 2012
Brent Cook
email: brentcook@explorationinsights.com
website: www.explorationinsights.com
Brent Cook is an independent exploration analyst and advisor. He currently serves on the Advisory Board of several junior exploration companies and acts as a consultant to several institutional investors. Brent Cook produces the weekly investment newsletter Exploration Insights. For more information on Brent's letter please visit www.exporationinsights.com
Brent owns shares in Rye Patch and Esperanza.
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