Pilot Gold, Long Canyon and Kinsley Mountain

Bob Moriarty
Archives
Sep 23, 2013

As an investor looking to perform due diligence on a pending investment in a resource stock, you should see if anyone associated with the company has ever succeeded at something; anything at all.

Barbara and I used to be Macintosh gurus. We dealt with the highest of high end users. As the Internet began to flourish, many of our customers suggested we find a business to operate on the Internet. For the life of me, I couldn’t see how being a consultant would convert to being a consultant making a profit by being on the Internet.

Then in 1993 Apple began to sell computers with removable CPUs. PCs had had removable CPUs for years. But with a PC motherboard, you had to pull out a 64 pin chip and carefully insert another 64 pin chip, taking great care at all times to not bend the pins on the expensive little buggers. Apple on the other hand put their removable CPUs on a card easy to insert and extract. It was revolutionary. I realized that Apple had no particular desire to sell upgrade cards but 3rd party manufacturers would.

In the next 18 months several peripheral companies making stuff for Macs entered the arena. When I figured the concept had entered into critical mass of sufficient machines that could be supported by upgrade cards, we began a company named MacCpu and began selling Macintosh CPU upgrade cards. It was the right timing and in six months we were the biggest dealers in the world.

Our primary vendor was a small company in Wichita Kansas named Newer Technology. The president of the company was named James Wiebe. He was at least a few bricks short of a full load. He ran his company like a kindergarden where every error was forgiven. I tallied up their shipping errors for a couple of weeks once and came to the conclusion that in 100 shipments to us they made 115 errors. They screwed up every single order and some of them had more than one error.

In one of my regular tirades complaints about the rotten service we were getting from Newer he mentioned that he hired people deliberately who had failed at some prior employment under the theory that they should at least recognize failure. It was the dumbest thing I ever heard in business. I told him that he should hire at least one person who had succeeded at something so in the off chance they ever succeeded at anything, someone might recognize it. They didn’t and went bankrupt. As was very predictable.

So when you are looking to invest, find a junior where they recognize success. Pilot Gold (PLG-T) is such a company. The company was founded by the management and technical team behind the discovery of Long Canyon for Fronteer Gold and subsequent sale to Newmont for $2.3 billion dollars.

Newmont wasn’t interested in the other assets of Fronteer other than Long Canyon so the management from Fronteer spun them off as the foundation for Pilot Gold. I visited Turkey in the fall of 2012 and wrote about what I saw.

One project Pilot picked up in Nevada after the company was formed is called Kinsley Mountain. It was a production gold mine and went out of production in 1999 due to the low gold prices. Pilot picked up 65% of the project from Animas but the underlying claim owner was a company named Nevada Sunrise. When I was in Turkey a year ago with Patrick Reid I told him I really wanted to see Kinsley Mountain since I had been there almost ten years ago.

I got my chance a couple of weeks ago on a 17-day whirlwind tour of the Western US. Pilot Gold has initiated a 20,000 meter three drill program around the pit. In addition they have submitted an amended plan of operation to the BLM to allow them to target the entire northern portion of the range.

Pilot had completed their 65% earn-in on the project in early 2013 and issued a cash call to Nevada Sunrise to finance the $3.4 million drill program. Nevada Sunrise is out of money and as a result has been diluted down to 22% of the project. In an interesting aside, the Board of Directors of Nevada Sunrise finally realized that founder Bill Henderson had reserved the NSR for Kinsley Mountain for himself years ago. So when the mine eventually goes back into production, Bill Henderson gets the NSR, not Nevada Sunrise.

So Nevada Sunrise had made the property payments for the last dozen years on the project and eventually when they get diluted down to an NSR, they get nothing at production. The Board of Directors fired Henderson just before telling Pilot they were unable to finance their portion of the project. The technical term for their current status is basically they are up the creek without a paddle. But Henderson will do just fine. The nicest thing I ever heard anyone say about Henderson was that he was “ethically challenged.”

One person on the Pilot team I was unable to meet with in Turkey but I was anxious to meet was Dr. Moira Smith, Chief Geologist for Pilot. She was working at Kinsley last year when I was in Turkey but I heard lots of nice stories about her.

Dr. Smith managed the exploration program for the Pogo Mine in Alaska, the Petaquilla copper deposit in Panama and El Limon gold project in Mexico. For certain she would be one of the people with a long history of success in the business that you would be looking for. She knows a rock when she sees one.

As an aside, Patrick Reid, the VP of Corporate Development for Pilot calls Moira “The Rock Whisperer.” After being with her for a couple of days at Long Canyon and Kinsley Mountain, I understood just what he meant. She was the brains behind the Long Canyon discovery and believes Kinsley Mountain is a candidate for a Long Canyon look alike.

Really good geologists are noisy, curious and humble. Quinton Hennigh is one, Moira Smith another and Peter Megaw yet another. Being around any one of them for a day is worth a Bachelor’s and three days will earn a PhD. Really good geos love to pass on their knowledge.

Patrick Smith of Pilot met me at the hotel in West Wendover. That’s just across the state line from Utah and about 180 miles west of Salt Lake City. It’s where all the Mormons from Salt Lake go to sin. On the first day of the tour, we visited Long Canyon where Dr. Smith briefed me on how she found and advanced Long Canyon.

Newmont sees Long Canyon as a 200,000 to 300,000 ounce per year gold mine starting in 2017 and believes it has the potential to add a multiple of the 2.6 million ounces already in a resource. Moira Smith sees it as the beginning of a new trend in Eastern Nevada she calls the Long Canyon Trend. 55 miles to the South-Southeast is the former mine named Kinsley Mountain. It’s on the same NW trend as Long Canyon and shares a similar geologic setting.

(Click on image to enlarge)

We drove down to Kinsley Mountain. It was discovered in 1984 when a prospector found gold in an outcrop. Alta Gold took over the project and operated it between 1994 and 1998 when they went into bankruptcy. Alta produced some 138,000 ounces of oxide gold in total at an average grade of 1.4 g/t.

Moira Smith sees similar rock types at Long Canyon and Kinsley. Interestingly enough, the rock Alta Gold was mining is not the same formation that Fronteer discovered at Long Canyon. Pilot took over the project in late 2011 and immediately began a small 1250-meter drill program. They continued with a 12,000-meter drill program in 2012. The results were highly encouraging.

As Pilot reported in 2012, they showed 5.91 g/t gold over 18.4 meters to 6.03 g/t gold over 13.7 meters. The company was basically operating with one hand tied behind their back as they were operating under a 5-acre disturbance permit from the BLM. This changed in August of 2013 when the BLM approved their 70-acre disturbance plan of operation.

I’ve been to Kinsley now twice. Once back in 2003 and again a couple of weeks ago. The rocks are more folded and crushed than anywhere I’ve seen. This is not a slam-dunk project because the various rock packages have been twisted and turned.

Dr. Smith, The Rock Whisperer, says one of two things will come out of this year’s 20,000-meter drill program. They will either have a nice 500,000-ounce deposit some junior would just love to put back into production or they will have another multi-million ounce Long Canyon look alike. Either is possible. In the worst case, that of a 500,000-ounce mine, Pilot knows how to peddle off projects at a profit. In the best case, they have another company making Long Canyon lookalike.

My opinion, humble as it is, is that Moira Smith is going to hit another home run. The actual Kinsley mine was in the southern 1/3 of the range it is located on. The packages of rocks that contained the bulk of the gold at Long Canyon were the Notch Peak Formation and the Pogonip Group. Most of the mining at Kinsley was done in the Big Horse Limestone and Candland Shales. It’s only in the northern 2/3s of the range that the Notch Peak and Pogonip rocks come to surface. They are the most favorable rocks for gold. Until the BLM actually permits drilling on the northern end of the range, all we are doing is guessing. Those permits are pending and a major drill program will commence shortly.

Pilot Gold pretty much proves my contention that resource investors just don’t get it today. After brilliant assay results from Turkey, Pilot shot up to $2.40 in January of 2013 before plunging to $.71 in late June at the bottom. That was a 70% decline after Pilot released results of 227 g/t over 12 meters and 5.9 grams gold over 137 meters.

Mark O’Dea is the brains behind Fronteer, Pilot Gold and True Gold. He’s young, aggressive, rich and quite willing to hire very bright young people. He is leading the revolution in mining replacing the old farts with new blood and new thinking. He’s introduced an entirely new concept to mining, that of rewarding shareholders instead of milking them.

Pilot has two company making projects and one potential company-making project. I visited Halilaga in Turkey a year ago. The company has completed and released a PEA showing a pre-tax NPV of $675 million with a 26% IRR using $2.90 copper and $1,200 gold.

Halilaga would have a capex of $1.1 billion. It’s too big for Pilot and too small for Teck but just right for a mid-tier copper company looking to go into production. At $3 copper the project would be marginal but at $4 it would scream. Pilot owns 40% so Pilot’s 40% of the NPV would be $270 million. Pilot currently has a market cap of $86 million. Go figure.

TV Tower is the 2nd company-making project. Pilot is earning in 60% by spending $21 million over three years. This year they intend to do 30,000 meters of drilling. The absurdly high-grade intercepts have continued with results of 193 g/t gold over 12 meters reported in December.

As of the end of June, the company was fully cashed up with $33 million in cash giving the company an enterprise value of $52 million as of last Friday. That’s nuts, the company is led by the guy who did the best job for his shareholders over the last 10 years. It has an incredibly bright group of young technical people in a company run by young bright management. It’s nuts, the stock lost $9 million worth of market cap on Friday alone. It sorta makes you wonder when investors will wake up.

We are in a totally irrational market. Investors are throwing money at the major exchanges so they can capture the very last 2% of the climb but totally ignoring the best run and most potential resource shares out there. This situation isn’t going to last for long. Investors will wake up, they will see great value in stocks like Pilot and they are going to make gains they never dreamed of before.

Newmont is in for over 16% of the shares and Teck owns 7%. They get it.

You may safely assume I am biased, Pilot is an advertiser, I have been to their three major projects and I like them a lot. I’d really like to see Kinsley Mountain become a company-making project if only to show the dingbats who ran it for the last dozen years what you can do with real management. Do your own due diligence, the company does an excellent job of communication.

Pilot Gold Inc
PLG-T $.98 (Sep 20, 2013)
PLGDF OTCQX 88.3 million shares
Pilot Gold website

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Bob Moriarty
President: 321gold
Archives

321gold Ltd