 The Bluest of Blue Sky Potential
Paul the Benjaminite
September 30, 2003
As the bull
market in gold proceeds, the market gradually turns its attention
from large blue chip mining stocks, to second and third tier
stocks and then to precious metal exploration stocks. It is at
this stage that the market is now. Rewards from investing in
a good exploration company can be fantastic. Up to one hundred
times return or even more is possible. However, they are inherently
more risky than an established mining company because they have
no income from mining until they put a mine into production.
A good drill result may attract media attention, but could turn
out to be an isolated incident and uneconomical to mine. An exploration
stock with proven ore bodies nearing production is far less risky
and, yet, may still bring fantastic returns. I think I have found
one of those that is likely to bring huge returns on investment.
Imagine a gold exploration company with its first planned production
coming by the end of 2004. Imagine a company with, not just one,
but seven, advanced stage and highly prospective properties.
Four of these properties are along trend from world class gold
mining projects and all of them have produced exciting results
to date, most with at least some proven resources as well. There
is absolutely no question that gold exists in substantial quantities
in at least five of these sites. In fact, they all have the potential
to be world class gold projects containing multi-million gold
ounce resources. The only major questions that remain are just
how much gold there is and how soon these projects can be put
into production. The seven properties have exploration and mining
leases that cover a total of some 290 square kilometers of some
of the most highly prospective land on earth. The company has
almost no debt and has just completed an equity financing. And
yet the market capitalization of this company's publicly traded
shares at this date stands at something around 11 million Canadian
dollars fully diluted.
The name of
this company is New Guinea Gold. (NGG on TSX Venture Exchange)
Major shareholders are Macmin Silver and Goldcorp.
Papua New Guinea hosts several giant gold ore bodies: Lihir Island's
45 million ounce resource (Rio Tinto and others), Porgera's 25
million ounces (Placer Dome), Misima's 5 million ounces (Placer
Dome), Morobe's 5 million ounces (Harmony) and others.
We first invested in NGG way back in April of 1999. Since then
we have considered it to be the best investment we have, assuming
the company would survive. Yes, during those dark days of
the precious metals bear market and extreme price manipulation
of gold and silver, many mining and exploration companies went
out of business. Although we could see the fantastic blue sky
potential of this company, we hesitated to recommend it to others
without better assurances of its survival. Fortunately, NGG has
survived by cutting their expenses down to the barest minimum
and with the help of its major shareholder, Macmin Silver, Ltd.
But, since 1999 this company has made major improvements. Macmin
has increased their interest in New Guinea Gold and, in turn,
New Guinea Gold has acquired Macmin Silver's wholly owned subsidiary,
Macmin (PNG) Limited (Macmin (PNG) ), and has increased its holdings
from two major properties to seven..
Conservatism is the key word of the management of this company.
The company has lived very conservatively for the past several
years, and so it has managed to keep its head above water. But
as of two weeks ago, they have completed an equity financing
through Canaccord Capital which, not only assures that the company
will survive, but will allow them to proceed with their Business
Plan. This plan involves putting a small part of three of these
projects into production within the next three years or so. This
will require another equity financing in the spring of 2004,
but only in the amount of about 5 million Canadian dollars. With
the rising share price and gold price, this future financing
should be minimally dilutive. Management plans to put some high
grade ore at all three sites into production first with an expected
before tax earnings of approximately 36 million Canadian dollars
over a period of four and a half years. (First production is
expected in late 2004.) The proceeds will then finance further
exploration and development on these properties . This plan will
not only avoid diluting shareholders' interests in the company,
but also will avoid taking on excessive debt. Note that the expected
earnings for 2005 exceed the current market capitalization, fully
diluted.
Before considering what the properties are like, let's consider
a few points about how gold gets from deep within the earth to
near the surface where it can be mined, and why, in the case
of New Guinea Gold, it makes their properties so prospective
and exciting.
Getting Gold Near
the Earth's Surface
(Note: I am not a geologist. But my formal educational background
lies in other sciences including physics and chemistry.) Gold
is among the heaviest of the elements. In fact, the elements
with atomic weights from 74 to 79 (tungsten, rhenium, osmium,
iridium, platinum and gold respectively) are all very heavy with
densities between 19.3 and 22.57 g/cm3 at 20 degrees C. In the
molten state within the mantle of the earth, beneath the earth's
crust, these elements will tend to settle downward because their
densities are higher than the elements that make up most of the
mantle. Certain uplifting forces, however, can move gold, along
with these other dense elements, toward the surface. Along the
way, these heavier elements will also tend to be the first to
be deposited as magma solidifies. So, the more upward forces
involved, the closer these heavy elements and their compounds
can get to the surface. Uplifting forces include upward moving
magma in subduction zones (see picture below), in fracture zones,
and in convection currents due to radioactive hot spots. In addition,
high pressure hot springs can carry soluble compounds of these
elements further upward.
Consider an
example of a place where two, perhaps three, major uplifting
forces resulted in huge gold deposits near surface. The Incas
of South America, in what is present day Peru, were conquered
by the Spaniards simply because they had so much gold. Why was
there so much gold there?
Because the Incan emperors liked gold so much, the Incas' located
their capital city, Cuzco, near where the highest concentrations
of gold could be found. There is a subduction zone that runs
the entire length of the western portion of the South American
continent and results in the Andes Mountain Range. Numerous gold
discoveries have been made throughout the length of the Andes.
But under water off the coast of Peru, at almost right angles
to that subduction zone, in the part of the ocean nearest to
Cuzco is a geological structure known as the Nazca Ridge. The
uplifting forces that produced that ridge also lifted gold to
higher positions in the crust. As this ridge was subducted, further
lifting forces then carried huge quantities of gold near the
surface. Convection currents due to radioactive hot spots may
have been involved in the original Nazca Ridge deposits as well.
The mountains of gold ore found near Cuzco illustrate how effective
these combined forces can be in getting gold near surface.
This brings
us to the Feni Islands. These islands are right at the intersection
of a fracture zone and an old subduction zone. Just as in the
case of Incan Empire gold finds near Cuzco, 'X marks the spot'
where the golden treasure is likely to be found. The fracture
zone that created the island chain containing the Lihir and Feni
islands produces a "gold corridor" with several major
gold deposits, most notably on Lihir Island with some 45 million
ounces proven resources. This combination of upward forces, in
my opinion, means there is a strong possibility that the Feni
Islands have as much or more gold than Lihir Island. More details
about Feni and the other properties NGG has follows:
The Properties
A picture is
worth a thousand words, so take a look at this map of Papua New
Guinea from the New Guinea Gold website. First, notice the pink
areas, the gold corridors, and the resources of major gold mining
projects within those corridors. Then notice the seven NGG projects with their titles
in blue color:
Let's examine
some important details at these projects one at a time just to
see what kind of true potential this company has.
1. The Feni Property
The Feni Project covers 37 square kilometers on two islands in
the gold corridor between Lihir Island (45 million ounces of
gold) and Bouganville (16 million ounces of gold). The mineralization
there is geologically similar in grade, mineralogy, and alteration
to the mineralization that was found on Lihir Island before
the large scale deposit that Lihir is presently famous for
was discovered. The best diamond drill hole intercept on Ambitle
Island, the largest of the two islands, was from 68 meters in
depth to 256.5 meters encountering an average of 1.2 g/t gold.and
ending in plus one gram mineralization. The proven resources
stand at 450,000 ounces of gold. However, an airborne radar survey
suggests that the Kabang mineralization could be more than 1.5
km long and 0.5 km wide. With over forty known gold occurrences
and anomalies on these islands, the prospect for finding a Lihir-like
deposit is excellent.
NGG has found a joint venture partner, Vangold Resources Ltd.
(VAN on CNDX), which can earn up to 75% of this project by continuing
the exploration over the next three years. For details read the
News Release dated 16 September 2003. For further information
about Vangold Resources please read Vangold Resources at 321gold.
The management
at New Guinea Gold plans to put the three projects described
next into production over the next three years or so. NGG's conservative
approach is to start up three mining projects on auriferous (gold
containing) oxide deposits, which are the easiest and least expensive
to process. Each of these near surface deposits are found within
much larger deposits that can be further developed from the cash
generated from these startup projects. Total production is expected
to be about 121,000 ozs. of gold over a period of four and a
half years at a cash cost of CDN$240/oz (US$177/oz). These three
projects will be at the Sinivit, Normanby and Sehulea properties.
Gold grades at these three near term projects range from 4.5
to 7.3 g/t.
2. The Sinivit
Property
Sinivit is in the northern portion of New Britain Island. This
is the first project that NGG plans to operate on its own. The
recent financing will allow the revising an outdated Sinivit
Gold Project feasibility study. The initial open pit mine is
expected to recover 50,000 oz. from gold oxides.
The mining lease and permits to begin mining for the Sinivit
Project covers 355 hectares . However, the vein system is known
to be some 26 km in length. So NGG also has the exploration leases
covering an additional 43 square kilometers in the areas to the
north and south of the mining lease along strike. This is a quartz
telluride gold system with proven resources so far of 131,700
oz gold at an average grade of 5.05g/t gold. Typical drill intercepts
included 22 m at 4.4 g/t; 14 m at 9.75 g/t, and 5.8 m at 13.54
g/t. Much of the mineralization starts at the surface including
an approximately 100 ton bulk sample which assayed 14.1g/t over
a width of 2.2m.
The area is highly prospective, to say the least. Recent geological
mapping has improved the understanding of the hydrothermal system
responsible for the mineralization in the area. Three types of
gold bearing sulfide targets are to be further explored. See
the Business Plan for more details.
3. The Normanby Property
Now, if you thought Feni and Sinivit sounded good, check this
out: The Normanby Project, on Normanby Island, is one of the
three projects mentioned above that are going to be put into
production over the next three years or so. The Normanby Prospect
has several prospective areas, three of which are currently management's
focus: Imwauna, the Knob and Wahola. The best results so far
are at Imwauna and nearby at the Knob, where production is planned
in the near future. Again, a gold bearing oxide system is to
be worked first generating the cash needed to continue development.
Normanby Island is in the Misima Corridor along strike from the
Misima.
At Imwauna, a high grade vein swarm deposit has been discovered.
It appears to be similar in size to the Misima project. Auriferous
veins and gold disseminations have been discovered over 10 square
kilometers. Drill intercepts included 3.8m at 25.3 g/t, 7.2 m
at 16.5 g/t and 1.4 m at 7.2 g/t. In the SW corner of the property,
rock samples have yielded up to 5800 g/t (186 oz. per ton)
So far, 200,000 ozs in resources have been proven at 6.3 g/t
gold equivalents (including some silver).
The initial open pit, vat leach mine is to recover 66,000 oz.
over 18 months.
The picture below illustrates the size and near surface nature
of many of the veins at Imwauna.
4. The Sehulea Property
This project, like the Normanby Project above, is also on Normanby
Island. NGG recently acquired 100% of this prospective area.
The Sehulea Property covers 30.5 square kilometers and includes
the Weioko Prospect and the Gwamogwamo Prospect. Surface trenching
results at Weioko have been pretty amazing ("Channel sampling
results included: 164m of 3.96g/t gold (inc. 16m of 20.03g/t
gold); 28m of 5.19g/t gold, 26m of 5.70g/t gold; 20m of 2.69g/t
gold; 16m of 2.67g/t gold; and 12m of 3.02g/t gold."). Limited
drilling has included drill intercepts of 1.5 m at 19.9 g/t,
46 m at 1.57 g/t and 72 m at 0.96 g/t.
Resources stand at 84,000 gold equivalent ounces oz at 1.5 g/t
[corrected]. The initial open pit heap leach production will
recover about 60,000 oz. of gold.
5. The Crater
Mountain Property
This property is along trend from and similar in geology to the
25 million ounce Porgera Mine. Minimal work has been done on
the area so far, but drill results so far have revealed wide
gold intersections in drill holes, such as 115m at 1.83g/t gold
and 24m at 6.55g/t gold, within a 12 sq kilometer prospective
area (known to be gold anomalous). Most is completely unexplored
except for some surface geochemistry. NGG is looking for a joint
venture partner or partners to develop this project and the remaining
two below.
6. The Simuku
Property
This property containing a copper and gold porphyry deposit on
New Britain Island has a resource of 1 billion tonnes of 0.35%
copper with small quantities of gold, silver and molybdenum present.
Potential exists for finding higher grade copper and gold.
7. The Mt. Nakru
Property
Mt. Nakru is also on New Britain Island. Preliminary results
include 74 m of 0.78% copper and 0.8g/t gold. Trench values include
36 m at 2.54 g/t. Potential exists for finding a major copper-gold
system.
Counting only
25% of the proven gold reserves at Feni and the gold reserves
at Sinivit, and Normanby, and Sehulea, NGG has about 528,200
ounces of gold reserves. In the 1990's, the general rule of thumb
for determining a gold mining company's fair value was that gold
in the ground was worth about $100 Canadian per ounce. If the
market capitalization was too far above that, the company was
overvalued, and too far under that the company was undervalued.
(Near surface, high grade, or oxidized deposits would increase
the value.) Fully diluted, NGG would have about 44.8 million
shares out. Based on the 1990's standard of valuation, NGG should
be a $1.18 (Canadian) stock just on the very preliminary
results in so far on just four properties. Remember, this
does not include the vast mineralization in evidence around the
proven ore bodies at Sinivit and Normanby. Nor does it include
the fantastic potential at Feni. Nor does it include the copper-gold
properties in the gold corridor on New Britain Island (Simuku
and Mt. Nakru). Nor does it include the extraordinary potential
of the Crater Mountain property in the Grasberg Porgera gold
corridor.
With seven
great projects, NGG is very likely to end up with several million
ounces of gold resources, if not tens of millions, and could
be a medium-sized gold producer within four to five years. The
bull market in gold is still young. And there are still a lot
of great buys in gold mining stocks. But it is rare to find this
kind of blue sky potential in any gold mining/exploration company.
Paul the
Benjaminite
September 30, 2003
New Guinea
Gold website
New
Guinea Gold chart
321gold Inc
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