Newcastle Gold: A Leveraged Bet on Gold
- SmallCapInvestor
- Apr 26, 2017
- 5 min read
Updated: Apr 14, 2023
Newcastle Gold offers investors leveraged exposure to gold prices and a partial hedge against broad market risk.
Size, location, grade, and already permitting status of the Castle Mountain project make it a sought after deposit for major gold producers like Barrick and Rio Tinto who have similar projects in the area.
World-class management team with past experience advancing large-scale mining projects.
A Leveraged Bet On Gold
Gold mining stocks are basically a leveraged bet on gold prices. Because every marginal dollar gold miners get for extracting gold beyond their break-even point has an even bigger impact on profitability than the last, a rising-gold-price environment means industry earnings scale up at a rapid rate. This process is described as operating leverage and it is one of the main reasons why gold stocks have remained attractive to investors over the years.
For example, Newcastle Gold has an all-in sustaining cost of $855/oz of gold. So with the current price of gold at ~$1255, the company stands to profit $400 on every ounce. If the price of gold rises to $1655/oz (a 30% increase), the company’s profitability per oz would increase to $800/oz (a 100% increase), since the costs to mine each ounce have not changed.
Gold stocks also offer investors a way to protect their portfolios against market risk, since gold is generally viewed as a 'safe haven' asset by investors and tends to perform well during times of uncertainty and instability. In light of the aggressive diplomatic policies that the Trump Administration has displayed so far, in combination with uncertainty surrounding the European Union, it is likely that gold prices will remain buoyant in the future. As an investor looking to expose your portfolio to gold, Newcastle offers a unique way to do so.
The Castle Mountain Project
NewCastle Gold's flagship project is the 100% owned Castle Mountain Gold Project. The project is located just 120 km south of Las Vegas in the mining-friendly jurisdiction of San Bernardino County, California. The project offers a unique combination of resource size and quality, expansion potential, safe jurisdiction, and status as already permitted.
A Large Resource with Expansion Potential
Castle Mountain produced more than 1.2 million ounces of gold between 1991 and 2001 at a head grade of 1.47 grams/tonne before production was halted due to low gold prices. Today, the project has a complete resource estimate of 4.9 million ounces of gold at an average grade of 0.59 grams per tonne and a pit that remains open in all directions. In simple terms: this is a very large gold resource with potential for significant growth through exploration. Last week, the company announced another set of positive drill results from the southern portion of the Oro Belle Trend. The most notable of the drill holes was CMM-195, which intersected 31.19 grams per tonne (g/t) gold over 29.0 metres. The recent drilling has expanded the 2015 resource pit at depth, and grades continue to come in slightly higher than the 2015 resource estimate grade. The company expects to have a pre-feasibility study completed by the end of 2017.
Access to Infrastructure
Castle Mountain is an open-pit mining project so access to large amounts of water, power, and infrastructure are essential to the feasibility of the project. Since the mine is only ~120 km south of Las Vegas, access to infrastructure will not be an issue. In addition, last week the company announced the success of an ongoing drill program that was aimed at identifying bedrock water sources, so water should not be an issue for the company either.
Already Permitted Status
The other part to the Castle Mountain investment thesis that de-risks the story is the federal mine permit that's already in place. In July 2013, Castle Mountain was granted a five-year extension to its Mining Conditional Use Permit and Reclamation Plan No. 90M-013 (the "Permit") by San Bernardino County, which is now scheduled to expire in 2025. The Permit allows for open-pit mining of up to nine million short tons of mineralized material per year with no pit backfill requirements. This tells us that there shouldn't be any issues in obtaining the other necessary permits, and the government is not opposed to a mine at Castle Mountain.
World-Class Management Team
The management team at Newcastle Gold is nothing short of world-class and includes names like Gerald Panneton (Former CEO at Detour Gold), Frank Giustra (International mining financier), and our personal favourite, Richard Warke.
The last time Richard put his weight behind a gold explorer was in 2006, with Ventana Gold. He'd taken over a gold property in Colombia with significant exploration potential and started an aggressive drill campaign. Strong results sent the stock flying and it eventually led to a US$1.54 billion takeout by a major gold producer in early 2011. For every $1,000 invested in Ventana Gold in the early days, investors could have made $928,570 if they held on until the end. And it's not his only big mining success of late. He also developed the Rosemont copper deposit in Arizona from an exploration property to a $555-million takeout by HudBay Mining in 2014. His project Arizona Mining made a major lead-zinc-silver discovery and currently has a market cap above $450 million.
From Ventana to Augusta to Arizona, Warke has achieved an unmatched track record of success in developing world-class mining projects while creating billions of dollars in shareholder value in the process. He has a keen eye for natural resource projects, a bold approach to exploration, and a skill at advancing assets to the point of acquisition by a larger company. He is also a prime example of "skin in the game". He will hold a large stake in all of the companies he runs, helping to align his interests with those of his shareholders. He is one of the few managers that I have seen to consistently buy shares on the open market without selling a single share. He is a long-term believer in his own companies and he lets his shareholders know. His last open-market buy came on January 23rd, 2017, when he purchased 318’500 NCA shares at a price of $0.75 for a total value of $250’000. The purchase brought his total share count to 20’556’486 or 11.2% of the company's outstanding shares.
Takeover Potential
The Castle Mountain Project is one of the few +4 million ounce open pit gold deposits in North America not held by a major or intermediate gold producer. Of these, only two are amenable to low-cost heap leaching, one of which is castle mountain. For companies looking to add a North American Gold Deposit to their portfolio, Newcastle should be near the top of their list. Another interesting feature about Castle Mountain is that it is surrounded by gold mines run by major companies. There is New Gold's (NYSEMKT:NGD) Mesquite Mine to the south, Rio Tinto's (NYSE:RIO) Borax Mine to the west, and Silver Standard's (NASDAQ:SSRI) Perdito Mine to the northwest. Newcastle should be able to draw interest from these nearby producers as the close proximity of Castle Mountain should allow for supply-side economies of scale if an acquisition were to take place.
