Last week I was back in the high desert to tour projects controlled by Rye Patch Gold. This is an explorer that has been around for a while, but the company gained some notoriety a while back when management discovered that property held by Coeur D’Alene had lapsed and RPM was able to claim these . Coeur operates the Rochester open pit silver mine and without ownership of these claims it pretty much was halted in terms of continuing mining this significant producer. Something had to give and there was anticipation that a takeover bid was coming to resolve the situation. RPM shares were bid higher.
Last month the dispute was resolved with a friendly settlement that effectively makes RPM a partner with CDE. The deal put $10 million in cash into the treasury for RMP, securing its financial position for the immediate future. In addition this deal grants a net smelter royalty payable from Rochester, which will amount to roughly another $28 million in the years ahead. RPM was also awarded title to a package of land holdings contiguous to its other projects in the immediate area, a win because it locks up all of the prospective structure for a potential new discovery that could create much greater overall value.
I regard this deal as extremely positive for RPM but the market had discounted a takeover bid and the stock sold off on this news. I have used the opportunity to begin accumulating a position. I plan to buy more shares shortly, as I was very impressed with the story after this tour.
Junior explorers live or die based on discovery potential. In that regard RPM is in very good shape. Company president Bill Howald is an experienced geologist who was in charge of large scale projects working with senior mining companies in several different countries before starting his own junior. Sometimes I am skeptical of this type of arrangement because those who have a history working with larger companies often find it a difficult transition to lead a smaller explorer, with less access to funding, and the need to wear many hats. The skill set to running a junior exploration company is entirely different than achieving a specific project target as part of a large company. Bill understands this and has a clear focus with Rye Patch.
I also met Ronaldo Silva, the Senior Exploration Geologist for RPM, and Radu Conelea, a consulting geologist that works with the company. The way it works on these tours is you get the opportunity to ride around for hours in trucks with the geos and can ask detailed questions about the projects. Both of these men are experienced and talented geos with a strong working knowledge of the area, and a passion for discovery. Combined with the experience of Bill Howald, I feel that RPM has a very high caliber team running the exploration and that puts the company in good shape for the future.
The other variable of importance for a junior explorer is to have control of several good projects. I would define a good project as one that has documented showings of some mineral resource, along with clear indications that something of substance may be defined. In addition, this must be located in a jurisdiction where property title is respected, and where advancement through to development is possible with minimal regulatory obstruction. Nevada is one area where this comes together and RPM has several good candidates in the state.
We spend the day in the Western corner of the state, about 2 hours from the city of Reno. These properties are located within prospective trend of gold and silver deposits that the company has presented as the Oreana Trend. Exploration in Nevada is very much a matter of following established trends, based on geologic structure where the conditions are ideal for emplacement and enrichment of gold alteration. These trends represent areas of weakness in the earth’s crust, related to very early tectonic development of the continent, when these parts of Nevada once represented the continental margins. Heat, pressure, and molten rock related to hot spots deep underground eventually penetrated these old structures and allowed gold bearing fluids to permeate in favorable rock layers. This means that when one can identify known gold formations within these trends, there is a higher potential for additional gold (and silver) deposits to be discovered within nearby formations.
Rye Patch staked ground holdings specifically to take advantage of this reality, and they have been able to lock up some excellent prospects in close proximity to other significant mines. Within the Oreana Trend there is the Rochester Mine controlled by Coeur, the Florida Canyon Mine controlled by Pershing Gold, and the growing Silver Valley deposit that is advancing through the development curve with Barrick Gold.
We visited the Wilco Project first, where a past producing open pit mine was in operation through the late ‘80s and early ‘90s. Wilco is situated just minutes from I-80, the major east-west highway in Nevada. About 300,000 ounces of historic gold resources remained at this project and the prior operators did little exploration below the margins of the old pit. Rye Patch acquired the project and drilled to deeper rock horizons, encountering new gold zones overlooked by the previous owner of the mine. Two distinct deposit areas have now been defined: the Willard Zone in the vicinity of the historic pit area, and the Colado zone to the northeast on the opposite side of a low ridge. Project geos believe that the narrow gap between these zones is also mineralized, and if so that would contribute to a higher total resource, plus open the potential for better economics by allowed development of a super pit with lower strip ratio to access the deeper deposit zones. Total resources currently stand in the range of 1.3 million ounces of gold in all categories, plus nearly 17 million ounces of silver.
The resources are low grade, bulk tonnage, disseminated alteration located near surface. This makes the entire deposit area ideal for a development of a large open pit mine that is common for low cost extraction in Nevada. For most other junior explorers this type of asset would be considered a flagship, high value development candidate. RPM is continuing with exploration work with the expectation to present even better fundamentals as more results are presented. Extensive fieldwork and geophysical surveying suggests that additional resource zones will be encountered as drilling is stepped out to test these new zones. The company is awaiting permitting approval to commence the next phase of drilling.
We drove past the Florida Canyon and Rochester mines, about half an hour of travel time, to arrive at the Lincoln Hill, Blue Bird, and Goldridge properties. These projects surround the large pit structure of the currently producing Rochester Mine. The important thing to consider about this area is that Coeur has been focused on extracting resources from its immediate deposit area at the mine, and has completed very limited exploration work in the surrounding area. This is common with senior producing mine companies, where management is tasked with achieving optimum efficiency for existing operations and often is less interested in systematic exploration.
RPM geos are thrilled to have so much untested exploration potential within their project area. The same structures that yield the large silver-gold resource at Rochester have been mapped directly onto the holdings controlled by RPM. In addition, a number of significant historic mine workings have been outlined within this area, dating back over a century. These old mines were focused on high grade showings and did not extract any of the lower grade resource material that is so profitable to mine in bulk tonnage operations today.
Some wide spaced drilling was completed by Newmont Mining a few years ago on Lincoln Hill before they vended this off to Rye Patch. They were interested in the discovery of 5 million ounces or more, and when they hit isolated resource zones they gave up. For RPM this opens the potential to follow up on historic results, with a more focused drill program. It is very common for large companies to overlook profitable discoveries because they do not complete enough thorough exploration to define resources. For a junior, the prospect of a million or two million ounces of gold in proximity to a major mine would have great value. By assembling additional adjacent property holdings there is even greater potential for a breakthrough discovery in this area.
RPM has completed extensive sampling and geophysical work. Some showings have outlined extremely high grade silver zones that have not been followed up on. In addition they have done some shallow drilling work in this area that has proven gold and silver resource zones extend through the favorable rock formations beyond the deposit area of the Rochester Mine.
The current resources at Lincoln Hill amount to roughly 500,000 ounces of gold and 15 million ounces of silver combined in all categories. Again this potential is subject to be expanded significantly as the company continues to follow up on exploration targets. There are plenty of untested zones that could represent high profile discovery areas. And any significant, near surface deposit zones will be of interest to Coeur in terms of possible development to extend the Rochester processing plant operation.
We did not travel to Eastern Nevada to tour the properties in the Cortez Trend. These projects are noteworthy in that they too are located within highly prospective geologic trends, in close proximity to large deposits and mines operated by senior producing companies. And these projects have a work history with gold showings outlined in favorable rock formations that give confidence that high value discoveries may be realized with further exploration work.
Putting the pieces together, my interpretation of this company is a strong management team with great technical expertise for exploration; control of large, highly prospective properties in proximity to significant operating mines, in the right rock formations, with attractive deposits outlined; and the funding in place to carry out aggressive work programs for several years despite the challenging market conditions. This opens the door for the company to create value for shareholders in the years ahead.
What is more compelling to me is the very low share value right now. Just looking at the settlement with Coeur, I would estimate about 25 cents per share in cash value. Now add in the advanced exploration with significant gold and silver resources at multiple properties, that are currently not even priced in at all. Now add in the potential for additional discovery, including a possible asset sale if they can outline a high priority development target…
Right now all of the junior explorers are priced in bargain range, but many of these companies are impaired and some may not survive the current downtrend. For those that remain active, access to drilling companies, assay labs, technical consulting services, etc. is much easier and less expensive. Having a well funded company with such positive factors to achieve further success to me is a very good opportunity to speculate on a strong rebound later in the cycle. The bear market conditions will not persist indefinitely for this sector and when a bull market resumes RPM has the potential to trade at a much higher market cap. I see it today as a lower risk shot at a big upside down the road.
Disclaimer and personal disclosure: I have made all efforts to provide an accurate and factual summary of the current fundamentals for this company, plus my interpretation of the future potential. There is a possibility for errors or omissions and this report must be considered as a personal opinion only. Do you own research. I do not accept any liability for individual trading decisions. I own shares of RPM and will likely add to my holdings in the weeks ahead. I have based my commentary on information provided by management and trust that this is accurate and complete. I was reimbursed for some of my direct travel expenses. I have no relationship with the company and was not paid any form of compensation for the presentation of this report.
July 29, 2013
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