Kaiser Watch Episode March 29, 2024: Is $2,000 finally the floor for gold? discussed the unusual situation where gold has been making new highs since bottoming at $1,985 in mid February despite the absence of any new reason for gold to break out. High interest rates, continuing US dollar strength, and inflation in the 3%-4% range, well off the 2022 high of 9.2%, do not explain why physical gold is being bought so aggressively that this week gold breached $2,400 on the LBMA. Central banks prefer to buy discreetly in a manner that does not drive an uptrend. In the absence of a clear explanation for gold's uptrend investors have been reluctant to embrace resource juniors, fearing an abrupt reversal that knocks gold back below $2,000. With regard to non-producing gold juniors I presented two examples of the extreme ends of the gold junior spectrum.
At the very high risk end is the discovery-oriented exploration junior, and my favorite in that regard is Solitario Resources Corp whose Golden Crest project in South Dakota on the western side of the Black Hills could host a gold endowment mirroring the 90 million ounce bounty identified and mined during the past century by Homestake and others on the eastern side. Surface sampling during the past three years has revealed previously unrecognized widespread gold mineralization. The USFS is in the final stretch of responding to comments lodged against the FONSI it issued in December for Solitario's Golden Crest Plan of Operations. A drill permit could be in hand by the end of April, in time for drilling to start in May when road access opens up. But until Solitario has a drill permit and starts to intersect ore grade mineralization, this play remains high risk, but with extraordinary upside reward potential.
At the other end of the spectrum sit the shovel-ready ounce-in-the ground projects waiting for higher gold prices to spark a buyout frenzy. My favorite in that regard is West Vault Mining Inc whose Hasbrouck project in Nevada just outside of Tonopah is fully permitted and backed by a PFS updated early 2023. Under the mining plan Hasbrouck would produce 560,000 ounces gold over 8 years, though there is room for resource expansion by the future developer. I have created a DCF model which shows how the after-tax net present value per share varies at different gold prices. The graphic shows the tremendous leverage West Vault's stock price has to gold prices as high as $4,000, assuming inflation stays at current levels. Whereas with Solitario you have to worry that a drill permit will never get granted or surface values prove misleading about what is at depth, with West Vault you just buy the stock and forget about it. The worst that can happen is that gold tanks below $1,500.
In the middle of the gold junior spectrum sit projects with an emerging gold discovery whose upside has not yet been capped by a maiden resource estimate. Arizona Gold & Silver Inc is my favorite in that category. The junior is conducting a final drill program at its Philadelphia project in Arizona which will allow it to deliver a maiden resource estimate for the 1,500 m long Philadelphia vein by the end of 2024. The resource would extend only 300 m down dip because since acquiring the project in 2019 Arizona Gold's drilling has been confined to the three patented claims which represent a fraction of the overall property. The drill permit application filed with the BLM is in the final comment response stage and a permit could be in hand by May when restrictions related to bighorn sheep calving are over. If Arizona Gold receives this BLM drill permit, not only will it be able to test the Philadelphia vein along strike beyond the patented claims and test the down dip extent by drilling from BLM ground to the southeast, it will also be able to test the hypothesis that under the barren cover rock there sits a stockwork hosted bulk tonnage gold system whose open-pittable endowment could be substantially larger than the underground mineable high grade vein resource. Higher gold prices are not needed for the vein exploration target, and may not be needed for the bulk tonnage target if the grade is high enough and consistently distributed. Investors who distrust the current gold uptrend, and fear the price will sink back below $2,000, confirming that $2,000 is still the ceiling and not yet the floor, can buy Arizona Gold just for the emerging high grade gold discovery, and the possibility of the bulk tonnage scenario being confirmed by drilling. At the same time, if the gold uptrend is sustainable, Arizona Gold's stock price will undergo a substantial upwards revision as investors swarm off the sideline.
Gold closed at $2,401.50 in London on Friday, a new all time high, but the action Friday in the NYSE-listed GLD ETF was on the downside with heavy volume and closing down roughly the equivalent of $29 per ounce from the prior day. The GLD volume, which in April has ranged 10-13 million shares daily, soared to 30.7 million shares, the highest since 47.2 million traded on March 8, 2022 as the world gasped at Russia's invasion of Ukraine. During 2020 the GLD traded a peak volume of 44.4 million shares on August 11, 2020. This pales against the 117 million that traded on March 12, 2010 as gold's assault on $2,000 was just getting underway, or the 93.2 million that traded on April 15, 2013 as gold plunged below $1,500. The daily file published by the GLD ETF showed no changes in holdings for Friday, but Monday's data file will be interesting to see if the GLD gained or lost gold ounces. In any case, the GLD did lose ounces this week and is back to being down about 1.7 million ounces for the year.
At the same time the NYSE closed down 476 points on Friday, closing off a bad week for general equity markets. From a closing peak of 39,807 on Friday March 28 the Dow at 37,983 was down 1,824 points or 4.6%. Fueling the decline was this week's inflation report which saw the CPI come in at 3.5% compared to 3.2% in February. Coming on the heels of higher than expected jobs growth in March this indication that inflation is not fading lifted long term T-Bill yields. Clearly the US economy is doing very well despite all the lamentations about what a terrible job Biden has done for the economy. The prospect of sustained high interest rate levels to subdue the economy and its underlying inflation helped the US dollar stay strong against other currencies. Normally these circumstances should discourage demand for gold, and yet the price of physical gold soldiered higher.
The mysterious gold uptrend has so far had little impact on the trading activity of resource juniors. Yes, TSXV resource junior traded value tends to be 60%-70% of all traded value, but overall resource listing traded value has increased only modestly, though traded volume has increased more though without creating a visible uptrend in average traded share price. The market remains on the sidelines and what we are seeing is bottom-fish accumulation by investors who sense a sea change is coming. There is no evidence yet of major money inflows for the resource juniors. It is as though the entire market has chosen to sit on the sidelines like some sort of NASCAR event and wait for the price of gold to crash and burn, though I suspect the audience that might be inclined to buy resource juniors are really waiting for general equity markets to crash. The experience in 2008 was that when the market crashed, so did gold, just as happened in March 2020 when the world realized that the covid pandemic was serious.
With traditional resource junior audiences on the sidelines waiting for a train wreck to unfold, and perhaps rushing in once the accompanying downdraft is over, what should diehard resource junior speculators do today? On the plus side resource junior valuations remain beaten up, and there are lots of stories to choose among that can flourish from evolving project fundamentals. Given the sense of disbelief that the uptrend in the price of gold is sustainable, Arizona Gold and Silver Inc is an ideal Favorite because it is half way between a pure discovery exploration play like Solitario Resources Corp and its Golden Crest project in South Dakota, and a shovel ready ounces in the ground junior like West Vault Mining and its Hasbrouck project in Nevada. Arizona Gold owns 100% of the Philadelphia project in the Oatman District of western Arizona which it has assembled in stages since 2019.
The Philadelphia vein is a low sulphidation epithermal gold-silver system covered by three patented claims staked in the late 1800's which were the focus of small scale mining to a depth of 700 ft from 1915 until 1941 when the War Orders Act shut down gold mining and the shafts flooded. Between 1979-1990 several groups including Crown Resources and Meridian Minerals explored the claims, completing 30 mainly RC holes. Several historic resource estimates were done for the Rising Fawn claim but these were in the order of 30,000-35,000 ounces at a grade of about 1.5 g/t, not very interesting at all. The Oatman District in contrast has a historic resource of 3,695,000 tonnes of 16.5 g/t gold representing 1.96 million ounces gold.
Since acquiring the Philadelphia project Arizona Gold as drilled 35,885 m in 111 holes represented by 43 core and 68 RC holes along the 1,500 m strike of the patented claims. On April 10 Arizona Gold initiated a 26 hole 2,400 m drill program mostly focused on the undrilled Resaca claim. The patented claims cover the northeast trending Arabian Fault which is tracked by the Philadelphia Vein that dips about 70 degrees to the southeast. These claims represent only 3% of the 975 ha land package, most of which Arizona Gold acquired by staking BLM ground.
The problem encountered by Arizona Gold is that to chase the Philadelphia vein deeper than 200-300 metres down-dip it needs to step to the southeast onto the BLM ground, but to drill from BLM land it needs a BLM drill permit for which the junior initiated permitting in 2022. The patented claims are private land and not subject to BLM permitting. An added complication is that the BLM land to the east is characterized as bighorn sheep habitat, which restricts drilling activity during the calving period from January until April. The impetus for the BLM permit application came in 2021 when Arizona Gold recognized the Red Hill target as a potential low grade stockwork zone in the hanging wall of the high grade vein that could be open pit mined with grades in the 1.0-1.5 g/t gold range.
Philadelphia thus represents two types of target. The first is the high grade gold vein which represents a tonnage footprint of 4-6 million tonnes along a strike of 1,500 m to a depth of 300 m with widths ranging 3-5 metres. The current drill program will boost the hole count that can be used for a 43-101 resource estimate to 150 holes. Results should be in hand by June, with a resource estimate possible in Q3 of 2024. Assuming a grade range of 2-5 g/t gold this resource footprint could yield a resource range of 250,000 to 1 million gold ounces. In its corporate presentation Arizona sets itself a goal of 9 g/t gold which would represent a 1.0-1.5 million ounce high grade outcome. If the junior delivers that grade within the vein tonnage footprint it would be a fantastic fundamental outcome.
The second target is the hanging wall stockwork above the Philadelphia vein, a portion of which on the patented claims yielded 116 m of 1.34 g/t gold and 104 m of 1.57 g/t. The potential tonnage footprint is in the order of 100-200 million tonnes, mostly on the BLM land. If drilling confirms the Red Hill hypothesis the high grade resource would become part of the open pit mining resource. The permit application is in the final comment response stage, similar to Solitario's Golden Crest plan of operations with the USFS in South Dakota, and a permit could be in hand by May, setting the stage for a major summer drill program. Even if the Red Hill hypothesis proves a bust for a bulk tonnage scenario, the drill permit will allow Arizona Gold to chase the Philadelphia vein deeper until it reaches that depth where grades in a low sulphidation epithermal system disappear. It will also allow Arizona Gold to chase it along strike beyond the patented claims.
Arizona Gold is cashed up after raising $1.6 million through a $0.30 unit financing, which boosts fully diluted to 97 million shares. The implied value for the 100% owned Philadelphia project at $0.38 stock price is CAD $37 million, which, for a project at the discovery delineation stage that represents the mid-point of the fair speculative value range under the rational speculation model, implies a potential outcome of CAD $875 million or $10.13 per share, assuming no further equity dilution. That is a plausible outcome for a discovery that ends up yielding 1 million plus underground mineable high grade gold ounces. The chart history indicates that the Philadelphia project has not become the subject of S-Curve action. If Arizona Gold were at a peak S-Curve price, it would imply a future outcome value of only CAD $44 million, which is far less than what CapEx is likely to cost. S-Curve market action signals a future mine, which Arizona Gold's current valuation is not at all telling us. This is a reflection of the current bear market, the fact that Arizona Gold has not had permitting liberty to properly delineate the vein target nor test the bulk tonnage hypothesis, and the difficulty investors have stitching vein drill results into an outcome visualization.
In a market context where investors are uncertain about the sustainability of gold's uptrend, this story, which involves rethinking an old high grade system with the help of extensive drilling never done before that has already revealed a well mineralized gold-silver system, and applying a new model with a bulk tonnage potential outcome, is an ideal balance between waiting for a brand new gold discovery and waiting for an existing gold deposit to be dragged well into the money by a higher real gold price. |
