Imperial Gold Project
1. Introduction
KORE Mining Ltd. (KORE:TSX.V; KOREF:OTCQB ) is a pretty unusual gold junior, as it started trading after the RTO (reverse takeover) in November 2018 owning two advanced heap leach gold projects in California, and an interesting gold exploration project in British Columbia, together containing no less than 4.9 million ounces (Moz) of gold (Au). As they were quietly building the company, it flew under the radar for quite some time.
I first noticed the company at a large conference in Zürich in November 2019, and was immediately impressed by James Hynes, who is a very serious and professional guy, and their projects, strategy and management, as they hired the former chief development officer of Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT), Scott Trebilcock, for CEO, and former CEO of NewCastle Gold Ltd. (CTMQF:OTCQX), Marc Leduc, for COO.
Having Eric Sprott as a 26% shareholder (worth a cool CA$49 million at the moment) doesn't hurt either, as Sprott doesn't usually take on positions over 19.9%. After completing positive preliminary economic assessments (PEAs) on both the heap leach projects, it dawned on investors that KORE Mining could be undervalued substantially, and lots of buying over the summer caused a significant re-rating, especially after the COVID-19-related drop of the share price to an almost insane $0.14 in March of this year.
As I was curious if California permitting, material of legendary tales of the past, could still play a role in this excellent development play, I asked a lot of questions in this regard. Read on to found out more about this, future plans and revaluation potential.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
2. The Company
KORE Mining is a mineral acquisition and exploration company focused on two heap leach gold projects in California, Imperial and Long Valley, and an exploration gold project called FG Gold in the richly mineralized Cariboo District of southeastern British Columbia (B.C.), Canada. All three projects sport a NI 43-101 resource estimate on the mineralized envelopes, and the company completed PEAs on both the flagship Imperial and Long Valley projects.
California might not be very familiar as a mining jurisdiction, but hosts several producing gold mines, most of them heap leach operations (Mesquite, Castle Mountain, both owned by Equinox Gold Corp. [EQX:TSX; EQX:NYSE.A]). As permitting can be difficult, the ranking on the Policy Perception Index according to the last Fraser Survey of Mining Companies isn't very high, coming in at #52 out of 76 jurisdictions worldwide. More on this later.
British Columbia is a much more familiar mining jurisdiction, and has a medium ranking on the Policy Perception Index according to the last Fraser Survey of Mining Companies, coming in at #36 out of 76 jurisdictions worldwide.
The company is basically controlled by the two founders, James Hynes and Adrian Rothwell, plus Eric Sprott and Macquarie Bank, who together with management own 64%. James is a geological engineer with a lot of experience in the mining and metals sector, and a successful entrepreneur who made his big break in 2017 by setting up and selling an aggregate mine to Lafarge, where he worked previously as head of exploration of the Northwest Division.
Some basic information on share structure and financials: KORE Mining has a decent 106.03 million (106.03M) shares outstanding.
The fully diluted share count stands at 118.83M shares, as there are 7.7M options (on average CA$0.27 strike price) and 3.5M warrants (CA$1.50 exercise price, all owned by Eric Sprott). The current cash position, according to management, stands at CA$6M; the company has no debt. The current share price is CA$1.78, resulting in a current market cap of CA$188.78M.
Share price 1 year time frame; Source tmxmoney.com
The stock had a great run this year, as it peaked at CA$1.96 in August, after bottoming at an extremely undervalued CA$0.14 during the March COVID-19 selloff, creating a 14-bagger in less than five months. The ounces were already there of course, but strong catalysts in that period, like ongoing investments by Eric Sprott and Macquarie Bank, and the Imperial PEA, put the stock firmly on the radar of investors. As a recent stimulus package from the U.S. government to fight the COVID fallout has a positive effect on gold, the share price is closing in again on the earlier highs. The stock is still being held tightly by management and board, which owns about 38%, and Eric Sprott, who has a 26% position, as mentioned.
4. Projects
KORE Mining has two major gold projects in their portfolio, both located in California. These are the flagship Imperial project, and the Long Valley project, both relatively simple heap leach projects and both developed into PEA stage, with economic studies completed this year. The company also very recently announced the spinout of their FG Gold/South Cariboo project in British Columbia into a privately held explorer to be named Karus Gold.
Here is a quick oversight of locations and resources:
Both resources are Tier II size and grade for heap leach deposits, so material for mid-tier producers looking for new deposits. The Imperial project is the flagship project, as it is more advanced in development and permitting, and economics are much better than Long Valley. FG Gold has a small near-surface resource of about 700,000 oz Au at 1.5g/t Au, but this is deemed historic now. Here is the sensitivity for both heap leach projects:
As an after-tax IRR (internal rate of return) of 20% at US$1250/oz is an important threshold for producers, notwithstanding the fact that base-case gold prices often are set in the US$1,450-1,600/oz range nowadays. With gold hovering around US$1,900/oz, this means that both Imperial and Long Valley are very robust. When looking at US$1,600/oz, the combined after-tax NPV5 (net present value 5) is CA$1020M; when looking at today's spot price for gold (US$1,884/oz), the combined after-tax NPV5 is even closing in on CA$1500M. The current market cap is still just CA$189M for comparison, although PEA economics always have to be discounted for their early stage of development, with increased risks compared to operating mines, where the NPV5 more or less equals market cap. I will discuss metrics with peers further in a peer comparison.
Imperial
Here is a map indicating the proximity of Imperial to the Mesquite Mine of Equinox:
In my view, KORE Mining is setting this up for Equinox to acquire someday, and truck Imperial ore to the Mesquite plant when it runs out of their own ore, although Imperial and Long Valley could very well be stand-alone operations considering their economics, especially with their pretty low capex numbers (Imperial US$143M; Long Valley US$161M), although not unfamiliar for heap leach projects.
This was reinforced when I recently talked to CEO Scott Trebilcock, asking about end goals/exits. He made it clear that Imperial and Long Valley are being set up for a two-stage pipeline production, and this is the reason they brought in COO Mark Leduc, who has done this many times, including heap leach projects in California.
Personally, I do believe it is the same reason they decided to spin out FG Gold, as Equinox probably doesn't have much interest in an early-stage exploration project. To be clear, I don't see Mesquite as having a very short mine life, as they have four years of reserves and another three years of resources, but it would be a very easy and relatively cheap way for Equinox to acquire Imperial and prolong the Mesquite Mine, with potentially at least eight to 10 years, assuming 1.3–1.5Moz can be converted into reserves in the future.
As to the potential question of why Equinox didn't buy this land themselves, the answer is very simple: Equinox wasn't around then.
Notwithstanding the sublime figures and probable exit strategy, there is something that has to be discussed, and this revolves around the California permitting situation. Although several mines have been permitted the last five years and things are improving, California has been known to cause problems. Therefore, I asked Trebilcock if he could elaborate on some questions I had around this issue, when I read the NI 43-101 resource reports and PEAs. Here we go:
TCI: It seems, in my view, that Imperial was sold extremely cheap, for such a resource at the time (2017) with that gold price:
"In March 2017, KORE Mining acquired Imperial USA Corp. from Newmont Goldcorp (formerly Goldcorp) (the "Vendor") for an initial payment of US$150,000, and future payments of US$1,000,000 payable upon the announcement of a revised Preliminary Economic Assessment (PEA) or similar report, and US$1,000,000 payable 30 days after the date that gold is poured from ore mined from the related properties. In addition, the Company has committed to incur US$5 million in exploration and evaluation expenditures (which includes permitting and development activities) on the Imperial Project on or before March 2022, the fifth anniversary of the date of the agreement. In the event the Company does not incur these expenditures within this timeframe, the Company must then pay US$1,000,000 to the Vendor."
How come? Could this be related to the Glamis permitting issues from the past?
ST: GoldCorp sold the asset on arrival of David Garofalo, who was cutting overhead and getting rid of non-core assets. With staff evaporating they just wanted them gone. They also sold good assets to Orla and Bluestone at the same time for peanuts. Big companies.
TCI: Well, we all know what happened to Goldcorp under Garofalo. Well done by Hynes though to see this opportunity. The Glamis permitting issues involved an Imperial project that had an FS (feasibility study) done already, but was sidelined because of a new backfill law, rendering it uneconomic. Was this the only issue or were there more issues, for example, environmental concerns, or other?
ST: Glamis ran a running battle with the desert protection lobby, a major political campaign by enviro NGOs (non-governmental agencies) in the 1990s. The straw that broke the camel's back was $300 gold and the backfill law.
Using leverage from funding the Clinton campaign, the NGOs threw roadblocks through the BLM (Bureau of Land Management) at the project from every angle. No environmental impacts stuck, but they did get traction with First Nations cultural "viewscape." Through all this, the majority of the local community was supportive of responsible development.
What is different? Sweeping laws in California have not protected massive areas of desert habitat and the issue is no longer a major campaign. It takes projects off the funding radar for NGOs outside the county. Second, backfilling solves cultural viewscape impact as greenfield site reclamation standard. We are engaging with all stakeholders in the community, building social license. There will always be detractors to mining, but the will of the majority should prevail if the project does not attract political attention, as it did in 1990s.
TCI: The backfill item in the PEA surely is impressive for budget, so you should have that covered. What exactly does this mean: "While the SMARA backfilling regulations have a profound effect on mine planning for the Imperial Gold Project, these regulations are currently under review and may be revised in the near future. However, any project development will need to overcome the legislative barriers also placed in from on the Project."?
ST: This is a general statement, stemming from the backfill law, basically terminating open pit operations when it was introduced. Because of the high gold price, deposits like this have a good chance again.
TCI: I actually didn't know there were tribal people, or First Nations, in the U.S. that have to be dealt with actively, like in Canada. Can you elaborate: "Proactive social and community engagement will be essential to any future mine development, especially with respect to tribal engagement."?
ST: Like anywhere else in North America, there are "Tribes" in the U.S. that have cultural history on all land. All federally permitted projects (like Imperial) in U.S. have to consult with local tribes. KORE has two tribes regarding Imperial, one to the north and one closer to the southeast, near Yuma, Arizona: the Quechan. The Quechan opposed the project in the 1990s but were also not consulted by Glamis. KORE is in dialogue with Quechan currently.
Several large projects in Imperial County were opposed by the Quechan and have proceeded including the Mesquite landfill and a large windfarm, so their support is not mandatory. However, KORE would prefer to get to an agreement at some point. To be clear they have no legal rights over the land; they are a stakeholder.
TCI: The USACE (U.S. Army Corps of Engineers) is known to cause problems in permitting in the U.S., as Imperial needs to redo all environmental studies. Is this a real factor for KORE, also timeline-wise? Is it likely that a CWA Section 404 permit will be needed?
ST: Our team is not concerned about the Corps. In recent years their activities have reduced, particularly in California. They oversee regulation of dry desert washes (dry river beds) for the project. Marc Leduc had no problem with them at Castle Mountain, as mitigations are already built into the plan for impacts to washes.
TCI: Will the change of government in the U.S. be important regarding permitting?
ST: A Biden government will likely unwind most things Trump did, but BLM proceedings will stay the same.
TCI: I have read about substantial needs for water for heap leach operations. This has undoubtedly consequences for water permits regarding groundwater. What do you anticipate regarding this issue?
ST: No problems. Water is regulated by the county and there is a large aquifer on the property with an existing production well (Glamis installed). It is the same aquifer that Mesquite has drawn from for 25 years. KORE is already in talks with Equinox about using it.
It all sounds positive so far, with KORE being able to handle the backfill regulations with a large, assigned budget, and Leduc already handling an open pit permit at Castle Mountain in California. The proof is in the pudding however, especially with Biden for president. A very important milestone will be the environmental permit as part of BLM permitting:
TCI: If they can pull that off, it will be relatively smooth sailing to production in my view, especially if the gold price stays above US$1,200/oz, which seems a given considering the continuing need for extremely low interest rates, resulting in ongoing negative real rates. Let's have a quick look at Long Valley now.
Long Valley
Most of the subjects discussed above will undoubtedly consider Long Valley as well, but since this project is less advanced, Trebilcock told me they need to do a lot of geological and hydrogeological exploration first, before they even get to permitting over there. KORE is also busy establishing a social license on the project at the moment. The company expects to receive drill permits at the end of Q1/2021.
After going through the reports, I had a few more technical questions for COO Marc Leduc:
TCI: Do you need to mix up the ore in order to avoid Pan Mine-like issues from the Midway days because of the clay, or does the agglomerator takes care of the clay, as the PEA says: "In much of the deposit, mineralization is associated with zones of clay alteration and/or silicification."
ML: The requirement for agglomeration comes from the makeup of the mineralized rock and how that percolation changes over time and pad loading. So, at Long Valley, we have mineralized rock units that were deposited into a collapsed volcanic caldera (big volcanic hole). These rocks are a combination of ash fall deposits (tuffs) or reworked sediments that form in a volcanic lake. What you can take from this brief geology discussion is that these are very fine-grain rocks that either are composed of clay or degrade over time into clay. What this all means is we should not be surprised that a deposit comprised of these basis rock types has very poor percolation if just dumped on the pad, (i.e., run-of-mine).
Second, heap leaching required solution to first come in contact with the microscopic gold grains, then get the gold to dissolve into the solution, and finally pass through the pile of rock and be collected. So poor percolation interferes with the basic kinetics of how a heap leach works.
Finally, at Long Valley, the finest-grade material contains more gold that the coarse material (test show the fine material has 280% higher grade), so it is imperative that we get the solution kinetics to work. So, what do we do with these facts—i.e., the fine-grain nature of the rock (clays) and gold occurring predominantly in the fine material? Answer: we use an agglomerating drum.
The material is first "crushed" (the stuff is pretty soft, so maybe better to just say broken, but we do use crushers). Then we put the crushed material into a big rotating drum and add a slurry of cyanide, lime and Portland cement (we call this an agglomerating drum). The agglomerated material (i.e., coarse sand and gravel mixed with the fines) forms small balls of agglomerated material that then pass along a conveyor belt and are placed as carefully as possible onto the pad and allowed to cure for a few days before we add solution to the pile. This method is well understood and practiced throughout the world for the past three or four decades.
At Pan (this is my understanding from secondhand discussions with those who worked there), one of the deposits was very clay-rich and higher grade, and the other zone is lower grade and not clay-rich. One of the deposits needed agglomeration and the other did not. Their test work clearly showed they needed agglomeration (as does our test work at Long Valley) in their clay zone.
When they built the deposit they were running low on capital so they cut the crushing and agglomeration circuit out and went to straight run-of-mine (i.e., no crushing) and this caused the project to fail and their heap leach to become a big block of impermeable clay. Their solution now is to blend coarse low-clay ore with clay-rich ore at the top of the heap and push it over, and this works well for them because they have a source of coarse low-clay ore (we do not at Long Valley).
So, after that long preamble, the short answer to your question is: Yes, the agglomerator fixes the issue, and we do not need to "mix-up" the ore prior to it entering the crushing and agglomeration circuit. In operations we may learn that some ores need less or some more Portland cement to behave well on the heap. In our case, the test work shows that a composite sample of our material will behave well with a dose of 2.5kg of cement per tonne of rock. This dosing of cement was confirmed at two separate labs in two phases of testing.
TCI: Looking at the ramping up schedule, full nameplate capacity (22,000 tpd) is reached after six months. Isn't that too optimistic for heap leach operations? I believe these take longer to ramp up to nameplate capacity, at least 12–18 months.
ML: The six-month ramp-up, I feel, is appropriate here. I say this because we are basically operating just two circuits. The first is a crushing-agglomeration-conveying-stacking circuit (i.e., a material handling circuit). This will be delivered as one package by a vendor and these are pretty much off-the-shelf systems (at our throughput). So, in my experience, they will come up to speed relatively quickly if they are designed and sized correctly in the first place. The second circuit is the gold recovery plant and, in our case, this is a Merrill-Crowe circuit. The Merrill-Crowe method is not very complicated, and the commissioning should be accomplished within six months.
As for mining, the operation has a relatively low stripping ratio, so ramping up the mine to meet capacity I also see as not a significant problem to achieve over a six-month period.
TCI: It would be the first time for me to see a construction period of just 6 months for a medium sized heap leach operation, so I will be tracking Long Valley from now on, as it will take about 3 years before construction could start.
Others
The third significant project owned by KORE Mining is the FG Gold/South Cariboo project, which, as mentioned, will be a spinout called Karus Gold. This exploration company will initially be held privately, but when upcoming drill results might indicate solid economic resource potential, there is every intention of monetizing the value for shareholders by a listing, according to Trebilcock. The South Cariboo area is the southern part of the Cariboo district, which is host to the project formerly owned by Barkerville Gold Mines Ltd., recently acquired by Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (now organized into a new entity called Osisko Development).
When I spoke to executive chairman James Hynes over a year ago for the first time, he actually seemed to be the most enthusiastic about the exploration potential of FG Gold. The concept of mineralization is, indeed, pretty interesting, as they found the same geology at both sides of a mountain ridge, and only drilled very little of one side.
As can be seen in the schematic section, management hopes to find mineralization throughout a zone that runs from side to side, under this ridge. Current drill results were encouraging, returning 14.35m at 6.44g/t Au, 35.5m at 2.72g/t Au and 10m at 3.9g/t Au, with assays of 14 new drill holes pending, with results expected in the beginning of Q1/2021.
I asked Trebilcock why he recently mentioned FG Gold as potentially becoming the most important project for KORE. If this is the case, why did KORE decide to spin it out shortly afterwards? He answered: "In 2020, KORE pursued all three assets with vigor, increasing scale of opportunities and adding value by exploration and development activities. With the success at FG drilling and district-scale land consolidation, against the backdrop of the creation of Osisko Development, KORE's Cariboo assets are positioned to sustain a stand-alone exploration vehicle. Investors want to get the risk-return expected from investing in exploration and the Cariboo assets need drilling capital. Diluted inside KORE, risk investors would not get the same torque to drill success, new discovery etc. So, therefore we decided to do the spinout."
As I mentioned earlier, I do believe it could also come in handy for a suitor like Equinox to have FG Gold already set apart, but I certainly follow the reasoning of management here, as any exploration success would be watered down between the two flagship projects with PEAs, preventing the sought-after five- to ten-baggers of pure exploration plays.
5. Peer comparison
As promised, here is the peer comparison for KORE Mining. As I always repeat, with peer comparisons, one has to be careful and avoid blind acceptation of the companies that are compared. There are many ways with peer comparisons to cherry-pick companies with relatively high metrics, which generate high averages, which almost always make analyzed companies look better.
Another hot item with peer comparisons is finding the most equal companies regarding quality and size of projects, jurisdictions, financial situation, backing, management, permitting—in short, everything that makes every project and company so unique in this space. The better the resemblance, the more useful the company for a comparison.
Please note I selected not only open-pit heap leach projects, in order to provide the audience with a wider array of advanced gold explorers and developers and their valuations. On a side note, the working capital isn't always up to date, as I didn't communicate with the companies, so I made assumptions based on financials, presentations and news involving financings. Here we go, the first table shows the basics:
The second table is a more important one, as it generates the enterprise value (EV)/oz metric, the most important metric for advanced explorers and developers without economic studies:
It can be seen that KORE Mining has a pretty low EV/oz for PEA-staged projects, especially considering the profitability of Imperial and Long Valley. The only project I could find that could match or even supercede KORE Mining for metrics and quality was O3 Mining Inc. (OIII:TSX.V), which I might analyze at another time. Highly profitable projects tend to have better metrics as they are more robust, valuable and sought after. Plus, there is, according to management, a lot of exploration potential on both projects, and this isn't taking into account any value for the assets being placed into the upcoming spin out Karus Gold.
To get an impression about NPVs (net present values) and IRRs and the resulting P/NAV, my favorite valuation method by the way as it is much more accurate compared to EV/oz, have a look at the following table:
Again KORE Mining has the best metrics on a P/NAV basis for quality PEA developers, although I still need to look at Rockhaven Resources Ltd. (RK:TSX.V), as their metrics are ridiculously cheap at seemingly good basic numbers. Falco Resources Ltd.'s (FPC:TSX.V) low IRR and high capex says it all.
At US$1,500/oz gold, KORE Mining is trading at a P/NAV of 0.23, where consensus for quality PEA developers seems to range between 0.30 and 0.45. Not unimportant: When gold prices were trading in the US$1,100–1,300 range, these same developers had a PEA-range of 0.15–0.25, so it will be clear that sentiment is much more positive now, and valuations follow suit.
As KORE Mining progresses Imperial and Long Valley, and advances to PFS/FS stage, a P/NAV corresponding with those stages would be 0.60–0.90. according to the table above, resulting in a hypothetical share price range of CA$4.6–6.9, although the gold price should still be above US$1,700 in my view, to expect these metrics.
6. Conclusion
KORE Mining is a remarkable, relatively new developer, coming out of the woodwork last year with almost 5Moz Au in resources, of which over 4Moz are heap leachable. The PEAs on flagship Imperial and Long Valley proved that both projects were pretty economic as well.
Eric Sprott investing several times in the company was a strong signal, as his holding translates to a CA$49M holding nowadays, making it one of his top ten holdings, if I am not mistaken.
The fast, professional and modest way of operating by management is something to be noticed, and their network is very good. As such, I believe Californian permitting will be dealt with accordingly, paving the way for much higher valuations. If Equinox or another suitor allows them to, that is, as a 4Moz heap leach development pipeline is extremely rare.
I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter at www.criticalinvestor.eu in order to get an email notice of my new articles soon after they are published.
The Critical Investor is a newsletter and comprehensive junior mining platform, providing analysis, blog and newsfeed and all sorts of information about junior mining. The editor is an avid and critical junior mining stock investor from The Netherlands, with an MSc background in construction/project management. Number cruncher at project economics, looking for high quality companies, mostly growth/turnaround/catalyst-driven to avoid too much dependence/influence of long-term commodity pricing/market sentiments, and often looking for long-term deep value. Getting burned in the past himself at junior mining investments by following overly positive sources that more often than not avoided to mention (hidden) risks or critical flaws, The Critical Investor learned his lesson well, and goes a few steps further ever since, providing a fresh, more in-depth, and critical vision on things, hence the name.
[NLINSERT]Critical Investor Disclaimer: The author is not a registered investment advisor, and has a long position in this stock. All facts are to be checked by the reader. For more information go to www.KOREmining.com and read the company's profile and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.
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