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Otis Gold: For valuation anomaly read opportunity

Friday, October 28, 2016 6:25
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(Before It's News)

The market is often very good at distorting reality – and where it does it creates anomalies.

A case in point is Otis Gold (CVE:OOO, OTC:OGLDF). There are a couple of areas where investors might recoil slightly; minor negatives.

But they’re not the sort of dampeners that explain the current discount rating of the company and its main asset, the Kilgore Gold Mine Project in Idaho.

You suspect if Kilgore was located over the south-western border in Nevada, where there’s seemingly a gold mine on every corner, Otis’ value might be higher.

A market capitalisation of US$22.5mln suggests the company’s main asset is worth around US$35 an ounce of gold in the ground.

Comparable projects at the same stage of development change hands on average for four or five times that figure.

Kilgore is currently sitting on a resource of 820,000 ‘indicated and inferred’ ounces of the yellow metal.

The ore is the oxide variety, which means the metallurgy is straightforward. 

Specifically, gold recoveries are expected to be in the order of 85% with the ore crushed down to one-and-a-half inches for treatment on a simple leach-pad.  These sort of recoveries compare very favourably with the rank and file oxide, open pit, heap leach mines.

The mine development is expected to be fairly straightforward too. The site is out of the way, yes, but accessible by road.

Otis’ management want to develop a cheap, low-strip-ratio open-pit producing 70-100,000 ounces of the yellow metal a year.

Operations of this size and simplicity tend to cost between US$70-75mln to build and analysts estimate an operation of this kind would produce at an all-in-cost of around US$700 an ounce.

So, where’s the catch? Size and grade could be cited as detracting from the lustre of Kilgore.

Anything below one-million ounces tends to receive a blanket discount, while the grade comes in under the notional one-gram per tonne deemed a requirement for an open pit development.

Let’s consider the former complaint (if you can call it that) first.

The latest 10,000-metre round of drilling should get Kilgore closer to the magic one million-ounce mark, if not beyond it.

Turning to the grade ’issue’, it should be pointed out the average open pit globally operates at around 0.7 grams a tonne.

And, as chief executive Craig Lindsay points out: “In the US, open pit, heap leach projects produce at half a gram per tonne all day long.

“How do you offset a slightly lower grade? A low strip ratio and world class metallurgy.”

Kilgore has both. The grade, by the way, is 0.6 grams per tonne, although this will undoubtedly rise as the results from the latest round of drilling are included in an updated resource statement.

It has uncovered some impressive near-surface intercepts on Kilgore, which was host to historic underground production in the 1930s.

For example, there was one section of nearly 95 metres that weighed in at 4.24 grams per tonne of the precious metal, while another came in at 1.55 grams over 120 metres.

“These are pretty attractive intercepts and assays that will enhance the grade of the deposit, and bring up the resource size,” says CEO Lindsay.

In all, 33,000 metres of drilling has been carried out by Otis, which has access to the results from a further 22,000 metres-worth of historic data.

In the 1980s and 1990s a number of gold companies saw the huge potential of Kilgore.

One in particular, Echo Bay Mines, was ready to press the trigger on a 45-50,000-ounce operation in the late 1990s that would have survived at US$350 gold.

The development was shuttered when the price of the yellow metal tanked.

The former owner suspected it had uncovered not one deposit, but a number of gold, ‘volcanic-hosted’ targets potentially containing 2-3mln ounces of gold.

“Geologists will tell you epithermal systems are like grapes: they come in bunches and you never find just one grape on the bunch,” explains Lindsay.

“When someone asks what I can see, I am comfortable talking about the potential for a 2-3mln ounces assuming one or two of the additional targets achieves the size of the existing target. Talking about anything bigger at this stage is difficult.”

So what’s next?

Well, the assay results from the last drill round should be out by the end of January and an updated NI-43-101 resource statement also should follow as early as April.

After that you would expect the company to start cracking on with a preliminary economic assessment of Kilgore.

This would allow the Lindsay to talk about the investment required to build a mine and its day to day running costs.

The Otis CEO won’t be drawn on the exact timeline for the PEA at this early stage – but it is a priority.

You suspect also the company has had more than a little interest in the asset from gold producers looking to replenish their inventory.

If there have been approaches, Lindsay is keeping tight lipped on just who has been kicking the tires.

He and the team are planning, at this stage at least, to take Kilgore all the way along the road to production.

Idaho, unlike Nevada to the south, is not currently a hot bed of gold production.

That said there is a long history of prospecting for and extracting precious metal (mentioned earlier Kilgoreproduced in the mid-1930s) and the state is host to large phosphate and molybdenum operations.

All eyes will be on Midas Gold Corp’s Golden Meadows project, which received US$55mln from the New York hedge fund Paulson & Co to bankroll the permitting phase of development.

This will be the first new gold mine in Idaho since Meridian Gold shuttered the Beartrack operation in the early 2000s.

“If we were in Nevada then Kilgore would have a very different profile and valuation and would probably be in production now,” says Lindsay.

“It is not. But then what you have here is still exciting and interesting; an oxide deposit approaching one million ounces in size – which is a rarity in itself.

“We have a very clear path to grow the resource and increase the grade.”

Story by ProactiveInvestors

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