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Wednesday, October 04, 2017 Derek Macpherson

Site Visit: NM’s Sterling Mine - There’s Something Out There


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Recently we visited Northern Empire Resources Corp.’s (TSXV:NM) Sterling mine and Crown project’s which interestingly is close to the fabled Area 51, Barrick Gold’s (TSX:ABX) past producing Bullfrog Mine (2.3M oz Au produced), and Corvus Gold’s (TSX:KOR) North Bullfrog (1.5M oz at 0.29 g/t Au and 6.6 Moz of at 1.25 g/t Ag) and Mother Lode (within Northern Empires claims) projects in Nevada. In our view, the company benefits from both an economic permitted small scale operation (30-40k oz Au/year) at Sterling and an exciting exploration project on the northern portion of the property (Crown project). Based on our site visit, we believe the current EV of ~C$31 million the market is ascribing, values either the exploration potential of the Crown project or the permitted Sterling mine, but not both.


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
 
Red Cloud Klondike Strike Inc.
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Northern Empire Resources Corp. - TSXV: NM - 1

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