Small scale, economic operation ready to go.
Sterling mine was in operation recently, in 2015, as an underground mine with heap leach
processing and already has significant infrastructure in place (power, ADR plant, etc – Figure 1). The prior operator, Imperial Metals (TSX:III), had
permitted the next phase of operations (both mine and leach pad expansion), which is an open-pit. Using a 1.0 g/t Au cut-off grade, the current pit
contains 1.958 million tonnes at 3.67 g/t Au (231k ounces Au). While the current resource model suggests a high strip ratio (~9-11:1), the high-grades
and exceptional metallurgy (88% historic recovery from run-of-mine) suggests that this project would be economic. Considering that restarting this
mine is likely to primarily consist of pre-strip, new heap leach pad construction and the addition of a new surge pond, we expect capex to be around
US$30 million assuming the project to deliver 30-40k ounces per year for a 5-6 year period. The company is currently executing a drill campaign at
the Sterling mine, in an effort to optimize the resource (and strip ratio) along with completing some additional metallurgy to test the impact of different
crush sizes (vs. historic run-of-mine). We expect an updated resource in Q1 2018, followed by an econmic study (PEA or PFS).
More to find in this large, underexplored land package.
The prior operator was focused on restarting operations, not expanding existing
resources or exploration. Consequently, there remains both near-mine and regional exploration upside. At Sterling, there are a few high-grade holes
around the planned pit, that have not been pulled into the existing resource, as well, the company has been actively drilling around the Sterling pit.
Looking to the northern part of the property, known as the Crown project (Figure 2), Daisy, Secret Pass and SNA deposits all contain small resources
with past production at Daisy and Secret Pass. Given the lack of modern exploration and production being stopped by a falling gold price in 2001, we
believe the Crown project has signficant exploration upside. Supporting our view is the recent exploration results (September 18
and October 4
) which have returned
impressive widths and grades, suggesting significant resource growth (currently 440k oz at 1.8 g/t Au). We also note that the same 1 g/t cut-off used
at Sterling was applied in this area, but this is under review and may be reduced which should result in more ounces at lower grades. In our view,
this brownfield exploration project has significant upside potential; however, the market is currently applying little value to it, based on Northern
Empire’s share price.
Current valuation does not appear to reflect near-term operating potential and the exploration upside.
In our opinion, the current
EV of ~C$31 million does not accurately reflect the company’s assets as they currently sit, or the upside potential. Assuming there is no exploration
upside or strip improvements at Sterling (both of which are possible) we view the fully financed value to be between C$50-60 million. For the Crown
project, if we were to apply the typical ~C$50/oz that exploration/development companies trade at, we would get a value of ~C$22 million and considering
the exploration upside that we believe exists based on our site visit, we would consider this to be a discounted value for these ounces. Consequently,
our view is at the current valuation, the market is ascribing value to either the exploration potential of the Crown project or the permitted Sterling
mine, but not both.
Derek Macpherson | VP Mining Analysis
Victoria Ellis Hayes | Associate
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Northern Empire Resources Corp. - TSXV: NM - 1
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