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Monday, 28 January 2013
Terraco Gold sees upward drive in valuation on strong assets
Terraco Gold’s (CVE:TEN) market cap has nowhere to go but up, according to the company’s CEO Todd Hilditch, who expects a realization over the course of this year that its assets are “certainly worth more” than its valuation in the market given by its stock price.
Aside from royalty coverage on a Nevada gold project owned by a major gold producer, the junior gold company is also focused on advancing its near-million ounce Nutmeg Mountain /Almaden (Nutmeg) gold deposit in Idaho.
“The idea for this year is to take the appropriate steps to advance Nutmeg to an economic/production decision,” says Hilditch. “This will be our priority in terms of physical time and work.”
The company is currently completing metallurgical tests at the 3,260-acre Idaho project, which is 126 kilometres north ofBoise, Idaho. Drilling from 2012 has been completed, and Terraco expects to be able to update the gold resource and look at a possible preliminary economic assessment (PEA) by the end of June.
“We took on the project almost 2 years ago where it had 948,000 gold ounces in total gold resources, and our aim is to get it up to over one million ounces,” the CEO says, adding that there is an envelope of gold sitting right at the surface.
“We just have to figure the economics of it, but we think they will be very favourable.”
The company says the advanced-stage asset has “excellent access” and good infrastructure, being located in a “big agricultural area with lots of space and power.”
Hilditch adds that the project’s latest drill results have been some of the best that have ever come out of the property, which he hopes will add some ounces in the near future.
Almaden has a history of exploration dating back to the 1930s. Indeed, Terraco purchased the Nutmeg asset by acquiring Western Standard Metals in early 2011 and it came complete with 887 drill holes, but just 24 of these holes went deeper than 120 metres, Hilditch notes.
“This was more of a matter of the price of gold at the time, but the property has never properly been tested at depth,” he adds.
The company is planning to focus on expanding the near-surface ounces in the short-term, but Hilditch points out that exploration for high grade mineralization at depth could result in the discovery of “feeder” zones similar to Newmont’s (NYSE:NEM) Ken Snyder Midas mine in Nevada or Sumitomo’s Hishikari mine in Japan.
“Deep drilling is expensive to do and in this market unless you really hit a magical feeder hole, you need to be careful about spending big dollars. We will most likely wait for a better market for deep drilling, and advance the project to an economic decision before doing this type of additional drilling.”
And Hilditch boasts that the company is armed with professionals that can take the project further along to a production decision. Terraco’s base of geological expertise includes Ken Snyder, who is credited with the discovery of the Midas mine and “tremendous experience” in Nevada in particular. In addition, the company’s VP of exploration and former Barrick Gold (TSE:ABX) geologist, Charles Sulfrian, has had experience in all levels of Barrick’s Goldstrike mine, including chief chemist and chief geologist.
But aside from bringing this Idaho project toward production, Terraco has a likely lucrative royalty on claims covering the Spring Valley gold project in Pershing County, Nevada – a joint venture between gold giant Barrick Gold and Midway Gold Corp(CVE:MDW).
Barrick has the right to earn a 60% interest in the project by spending a total of US$30 million on the asset before the end of this year.
Hilditch says that the $20 million royalty deal Terraco signed more than a year ago “flew under the radar screen” during December 2011, but it was “the best deal [it has] ever done for the creation of value”. Terraco completed the transaction together with an undisclosed private equity firm, which provided the cash the junior gold company could not afford.
“We also negotiated a $5 million cash infusion and didn’t issue a single share to get it.”
Terraco has an option to acquire a 2.5% net smelter returns royalty (NSR) by December 2016 on claims covering the majority of the Spring Valley deposit, and an additional direct ownership and option for a 1% NSR royalty covering the remaining portion of the deposit in the area that appears to have “some of the best drill intercepts by Barrick”.
It also has a right of first refusal on a half-mile perimeter 1% royalty – covering “all the ore discovered to date, and any upside of it growing.”
When the figures are calculated, the company’s CEO says it paid less than $280 an ounce gold for the royalty, compared to similar royalty deals in the $800 to $900 an ounce range.
“When we look at the part of the company that has near term upside – it has to be the royalty based on the valuations going on in the market,” Hilditch says.
He adds that if you take the valuation of Spring Valley, based on independent research from several brokerage firms, and extrapolate that over the next 10 years in mine life, then apply a discounted cash flow model, Terraco has a $70 million asset on its books.
“This is a huge amount of value that nobody really understands.”
Barrick has so far spent almost $30 million on Spring Valley, with production anticipated as soon as 2017. The asset hosts what the company calls an “evolving” NI 43-101 compliant gold resource of 2.1 million ounces in the measured and indicated category, and 1.97 million ounces in the inferred category.
What’s more, Terraco also controls 35 square kilometres beside Spring Valley, providing blue-sky potential for the junior gold company.
Indeed, the company’s Moonlight property adjoins the Barrick project on the North side, where the currently outlined Spring Valley gold ore body is situated a “couple of miles” away from the property boundary.
“There is a continuation of the same geological structure (the Black Ridge Fault zone) on our property as well.”
The Pershing County district/Humboldt Range in Nevada – where both Spring Valley and Moonlight are located – is also host to Coeur d’Alene Mines’ (TSE:CDM) Rochester mine and has attracted the likes of the “very well run” Rye Patch Gold and Pershing Gold. “The district is evolving into a big mining district, with many junior and advanced staged companies exploring the area around the Rochester Mine, a bulls-eye of silver mineralization and production.”
In the past few years, with limited drilling at Moonlight, Terraco has found signs that additional future exploration is required. The company has seen 3 metres grading 1.38 grams per tonne (g/t) gold, and 1.5 metres of 1.96 g/t gold. A 5-foot chip sample also reported 4.77 g/t gold and 74.1 g/t silver. In addition, the company has hit 24 metres of 35 g/t silver and 10 metres of 72.8 g/t silver, giving thoughts that the silver is dominated on the northerly portion of the Moonlight project.
With $1.6 million in the bank, Hilditch says the company could “easily sustain” 2013, and could go even further if necessary, with its major spending priority being the Nutmeg project in Idaho.
Looking ahead, Hilditch is expectedly bullish on gold when looking at the basic fundamentals of supply and demand.
“Majors are producing more than they are finding, and along with world events and gold being bought up and stored, there is more gold being taken off the market then put on.
“The price has to go up. It’s basic supply and demand – simple.”
Terraco’s CEO believes markets are currently in the midst of a cleanse of the “thousands of exploration companies” out there, but is confident that once that settles out and gold prices remain strong, those that have a strong financing position and experienced management will come out on top.
“Terraco is not out there desperately trying to find a drill hole. We already have a million ounces of gold and a management team that has done it before,” Hilditch says, referring to his previous role as CEO of Salares Lithium (CVE:LIT), which was bought by Talison Lithium in a $340 million merger. Talison is now being taken over in an $800 million deal, providing additional upside to the profile.
Most of the previous Salares management is now with Terraco. “We’ve been fortunate to make shareholders a lot of money before and we hope to do it again,” he concludes.
Shares in Terraco are changing hands at 14 cents, with a market cap of around $18.7 million.