Investment Blog for NuLegacy Gold (V.NUG)

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Trip Report: Tour of the Red Hills Project with NuLegacy Gold

Last week I was back in the high desert of Nevada to tour a gold project controlled by NuLegacy Gold (V.NUG). The Red Hill property is located in the Cortez Trend, a belt of favorable Carlin-style geology that has been an extremely prospective area for the discovery of gold deposits. Within this trend, in close proximity, there are several multi-million ounce gold mines in production, and several other multi-million ounce deposits that are still advancing through exploration.

The first stop on our tour was a visit to the edge of the Pipeline Mine, operated by Barrick Gold. This is one of the largest gold mining operations in Nevada with over 21 million ounces of gold defined. I was able to walk this property a couple of years ago, and the pit is more than a mile across, and several hundred feet deep. There is a direct connection with NuLegacy to the Pipeline Deposit that goes beyond the usual ‘close-ology’ story. The geologist credited with the Pipeline discovery is Mr. Roger Steininger, who is currently serving as the COO with Nulegacy Gold, and leading the exploration effort at Red Hill.

Now the Cortez Trend is known as elephant country for gold deposits due to the magnitude of the deposits that have been discovered within a narrow string along this part of Nevada, but also due to the fact that most of the property area in the trend is controlled by senior gold companies. It is very rare to see a junior with a large project in such a highly prospective district. And the reason NuLegacy was able to get its hands on this property comes down to the close relationship that Steininger still has with the people at Barrick.

Back in 2008, as the financial crisis was putting duress on the entire mining sector, even the big established mining companies like Barrick felt the pressure. Some early stage exploration projects were suddenly deemed to be non-core assets and Barrick struck a deal with emerging junior NuLegacy Gold to option the project. Not only is that significant in itself, but the terms of the deal are extremely favorable for shareholders of NuLegacy.

To earn a 70% interest in the properties that comprise Red Hill, NuLegacy must complete at least $5 million in exploration expenditures within 5 years. However, Barrick retains a clawback provision with the Red Hill project such that it may opt to regain 70% ownership of the property after earn in has been completed. Barrick must then carry NuLegacy with its remaining 30% ownership through to production. In addition, the terms of this unique transaction also specify that Barrick must remain active to advance the project with a minimum of $15 million in further exploration funding as part of its clawback provision.

This is a very strong deal for NuLegacy. If Barrick does not opt to clawback ownership, then it will control a majority ownership of a 45-square mile property area in the heart of some of the most productive gold mining real estate in all of Nevada. And if Barrick does clawback ownership, then NuLegacy is along for the ride with one of the largest mining companies in the world, while the expense for project development is carried by its partner. And the clincher is that NuLegacy shareholders are not left to twist in the wind because Barrick is required to fund an aggressive and active program as part of the terms of this deal should it elect to regain control. I call that win-win…

Shortly after our stop at Pipeline, we drove a short distance to the higher grade Cortez Hills Mine operated by Barrick. This is another huge open pit mine, with over 15 million ounces of gold defined so far, and the deposit is still open to depth.

One cannot over-emphasize how important the Cortez Trend is to Barrick Gold. Well over 1 million ounces of gold per year is produced from these mines, accounting for about one third of the cash flow for the worldwide operations of Barrick. The company has around 50 drill rigs active in Nevada and a large chunk of its exploration effort is ongoing within the immediate vicinity of the trend.

We drove further along the highway to the south and saw one of the active exploration projects underway by Barrick at the Goldrush Project. Goldrush sits just on the opposite side of a ridge from Cortez Hills, and less than 5 miles further to the southeast is Red Hill. There are 12 drill rigs currently active at Goldrush, and the resource is estimated at 7 million ounces of gold, in the Indicated and Inferred categories. Again, this is elephant country.

At Red Hill, NuLegacy had an RC drill rig in operation as we arrived on site. Several drill holes have already been completed at various zones of this property, including an interval of 27 meters that averaged 1.4 g/t gold. There are also drill results available from prior operators that had been active on the property area in years past. The work so far has confirmed that Carlin-style gold showings within the project area controlled by NuLegacy. The challenge now is to outline a large enough tonnage of gold with attractive grades to allow the project to advance as a development candidate.

One of the keys to the discovery of gold in this part of the world comes down to an understanding of structural formations, and that is why having an expert like Roger Steininger involved is such an asset. NuLegacy has completed several programs of geophysical surveying, along with soil sampling in areas of interest at Red Hill. The results of these programs have defined targets in four main zones in the central property area. The drills were turning on the Central Mineralized Zone.

Steininger believes the results encountered so far may just be the edge of an alteration zone. There is the potential for a much larger deposit, as suggested by the geophysical target they have defined at the CMZ. This interpretation has led to the area being dubbed as the ‘Iceberg’ Zone, and the current drilling work is hoping to establish that indeed the defined deposit area is just the tip of the iceberg.

While the success of this company will ultimately come down to whether or not they are able to define an economic gold deposit, it is worth pointing out that the share structure is reasonable with about 59.1 million shares outstanding, and 81.4 million on a fully diluted basis. The company has adequate cash in the treasury to complete the current exploration work but it will need to raise more money to fund its full commitment to earn its ownership interest at Red Hill. Management has an incentive for success with significant ownership of shares, much of that purchased in the market.

The company also controls a solid prospect further to the east in Nevada with the Wood Hills South project. But I think this story is going to be driven by the merits of Red Hill in the near term. Overall it has all of the ingredients for a successful speculation:

• It controls a large flagship asset in the immediate vicinity of several major gold deposits
• Strong management, particularly at the exploration level
• An aggressive posture to deploy funding towards exploration work
• Successful discovery results already in hand, with evidence to support further upside potential
• Significant management ownership
• A favorable structured deal with a senior partner
• Reasonable share structure with funding on hand and the potential to raise additional money in the future

The stock is currently trading very much in bargain territory so the upside looks very good if the company is able to deliver encouraging results with further drilling work. And there are at least 3 other target areas still on deck that could carry the ball in subsequent programs. All exploration stories such as this are risky, in that the outcome for success is unknown, and these companies require additional funding in order to continue with exploration work. I currently own a number of junior exploration stories in Nevada and think the area is an excellent jurisdiction for a speculative exploration company. I like the opportunity at Red Hill, and my opinion is that NuLegacy has a good shot at a legitimate discovery.

Now I should take care of personal disclosure items. I am not compensated for my time to tour the project, nor for the presentation of this report. I do not own any shares of the company as I write this although I like the story and will probably look to buy some shares in the market for the speculative part of my personal portfolio. I am not going to bet the farm on this play, but I think there is merit to hold a chunk of shares and see how the exploration work goes.

NuLegacy invited me to participate on the tour, and paid for my immediate travel and lodging expenses. The information presented here is believed to be accurate but may be subject to errors. My comments are my personal opinion, and are not to be considered as investment advice.

Mike Kachanovsky
Wednesday, October 31, 2012.