Tuesday, March 29, 2011

Northern Gold Mining: A Thin But Deep Deposit (Updated)

Northern Gold Mining has had the knack of landing drill holes with long intervals of thinly-graded gold. The latest hole from the Garrcon deposit on its flagship Garrison gold property graded 58 metres of 1.08 g/t gold.

To somewhat experienced eyes, 1.08 g/t is a pretty thin grade. Normally, mining companies don't get excited over grades that are less than 3 or 4 g/t. A prudent person would advise a cut-off grade of about 6 or 7 g/t. Then why is the company proceeding? Why bother going to the trouble of putting together a resource estimate for the deposit, composed of 207,000 ounces of gold indicated and 776,000 ounces inferred? Why the cut-off grade of only 0.5 g/t gold in the resource estimate?

The answer is, because the deposit is very close to the surface. The rock can be strip-mined, which is far less costly than burrowing underground and hauling the rock up to the surface. That's the rationale behind deeming near-surface grades as low as 0.5 g/t to be economic.

I should say that this deposit does not have any preliminary economic assessment behind it yet: no estimate as to how much the net present value is or what the capital costs are. Northern hasn't advanced that far yet.

Still, the market has put a fairly generous value on what the company has. The drilling Northern's now doing on Garrcon is fairly low-risk in terms of getting numbers, as it's "infill" drilling. Infill drilling is designed to move resources from the "inferred" category to the stronger "indicated" category. The new holes will make for a solider resource estimate even if the total stays the same or shrinks a little.

Northern is moving towards another estimate. A preliminary economic assessment isn't planned as yet.

Here's a one-year chart of the stock, from Stockwatch.com:

The Moral Of The Story: Putting together a resource calculation is an important intermediate step for a junior explorer. The financial numbers aren't there yet, but a resource calculation is expected to use a cut-off grade that approximates economic viability. Some speculators like to jump in at this point, particularly if the resource has at least a million ounces of gold all told. [Garrcon has 207,000 + 776,000 = 983,000 oz.] Others, backing away from the excitement prefer to wait for later in the deal sequence - in part because many properties fall off. I don't see the Garrison property falling off excpt through lack of financing, but Northern's stock may drop in the interim because of a gold pullback or because the project becoming boring. Waiting while bored can be profitable.

Disclosure: None.

Update: Jay Taylor, in the March 17th edition of his Gold, Energy & Tech Stocks, put a buy recommendation on Northern Gold. According to a Stockwatch summary,
The Garrcon deposit... appears to have the potential for a bulk-minable open pit. It holds 674,000 ounces at 0.94 gram per tonne gold. This resource estimate includes data from drilling to a depth of 200 metres, in an area measuring 760 m by 300 m. Mr. Taylor expects the Garrcon resource to substantially increase when the results from holes beyond that area are made compliant. He also predicts a stripping ratio of zero and a recovery rate of at least 90 per cent for the Garrcon operation.
He does qualify his recommendation of Northern, saying it'll work out only if gold keeps rising over the next few years. Taylor seems to have sized up the Garrcon as a high-cost deposit despite its attractive qualities.

No comments:

Post a Comment