Very few people had heard about Rye Patch Gold (RPM.V) before the company staked claims on the land Coeur Mining (CDM.TO, CDE) forgot to make the payments on. Rye Patch secured the claims and after a long negotiating process, both companies agreed to a deal which will be very advantageous for Rye Patch the next few years as Coeur will pay a handsome amount of cash based on its production numbers at the Rochester mine.
We spent two days with CEO Bill Howald and three of his geologists in Nevada touring the company’s main assets, and this allowed us to learn so much more about these projects.
The Oreana projects
We first visited the company’s projects on the Oreana Trend. This trend doesn’t enjoy the same recognition like some of the other trends in Nevada (Carlin Trend, Battle Mountain Trend, etc), but seems to be an upcoming district as several gold and silver occurrences have grown out to become profitable mining operations. Rye Patch owns two main projects in the region; the Lincoln Hill project and the Wilco project. We consider the Lincoln Hill project to be Rye Patch’s flagship project so we will discuss both projects separately.
A) Lincoln Hil
Rye Patch’ Lincoln Hill project literally looks out over the back side of the Rochester mine operated by Coeur Mining. The project contains just over 350,000 ounces of gold in the measured and indicated resource with an additional 255,000 ounces of gold in the inferred category. There’s also a very nice silver kicker as Lincoln Hill also contains almost 20 million ounces of silver. The resource estimate is based on a gold price of $1350/oz, and as the average gold grade of less than 0.4 g/t might seem low, the PEA on the project clearly shows the Lincoln Hill project is viable.
How is that possible? Very simple. Rye Patch Gold designed its pit shell based on an extremely conservative gold price of $775/oz. Due to this cautious approach, the total amount of processed material obviously goes down to 148,000 ounces of gold and 2.96 million ounces of silver. This should result in a total amount of recovered gold and silver to respectively 106,000 ounces and 2.2 million ounces of silver.
Using a pit shell based on a gold price of $775/oz offers several advantages.
First of all, you can easily update your mine plan based on the prevailing gold price. This means the higher the gold price is at any given time during the mine life, the more tonnes of low-grade material which didn’t make the cut for the $775 pit shell will be (or at least could be) processed. This will increase the total amount of gold produced (albeit at a higher production cost per ounce). Secondly, the economics of the project will be more robust.
That’s clearly visible in the PEA which was completed on the Lincoln Hill project. By aiming for the high-grade zones (which, very conveniently, are located on top of the hill), the economics of the Lincoln Hill project are definitely superior. The initial capex is just $26.2M and this gets you a total gold equivalent production of 140,000 ounces at an all-in sustaining cost of less than $800/oz. This leads to a pre-tax IRR of 76.5% when using a base case scenario with a gold price of $1350/oz, but even at a lower gold price of $1148/oz the project would remain viable with an NPV5% of $46M and an IRR of 57.5%. The PEA at Lincoln Hill is the text book example of a ‘very robust’ mining operation.
There’s so much more to tell about the Lincoln Hill project and we’d love to go into the technical details but we’ll save it for a follow-up report as this site visit report is mainly meant to express our thoughts about the company as a whole.
But if there’s one parting thought we’d like to share after visiting Lincoln Hill and combing through the Preliminary Economic Analysis of the project, it’s this one: this will be a profitable gold mine before the end of this decade.
B) Wilco
Just a few miles away from the Lincoln Hill project, Rye Patch Gold also owns the Wilco gold project. Perfectly located literally AT an exit of the Highway 80, Wilco’s access to infrastructure couldn’t be any better as the Colado zone is just a few hundred meters away of an existing power line as well, providing the state prison of Lovelock with electricity.
Rye Patch Gold has earned a 100% stake in the project after completing its earn-in agreement with Newmont Mining (NEM), but Newmont has a back-in right to regain either a 60% or 70% ownership by spending respectively $15M or $20M in exploration expenditures. However, this back-in right will only be triggered once Rye Patch will complete a feasibility study, and that’s not something Rye Patch is planning right now as it’s fully focusing on proving the value of the Lincoln Hill project.
It doesn’t mean you should discount the Wilco project as it contains almost 2 million ounces of gold with almost 1 million ounces in the oxide zones. The average grade in the measured and indicated resource for both the oxide and sulphide zones is respectively 0.41 g/t and 0.33 g/t with an additional 0.1 ounces of silver per tonne of ore. This is indeed low, but it should be doable to make sure the Wilco project is profitable at the current gold price as the excellent access to infrastructure will result in a relatively low initial capital expenditure.
Rye Patch Gold isn’t doing any work on the Wilco project right now as it doesn’t really make a lot of sense to spend $10M+ on completing a feasibility study at Wilco, only to risk to see Newmont exercising its back-in right. In our opinion, it would be better if Rye Patch would try to re-negotiate the original deal it made with Newmont to improve the terms of the original deal.
The Cortez Hills trend – a ‘nearology’ game
All of Rye Patch’ official resources are located on both the Lincoln Hill and Wilco project, but the company also owns two very early-stage exploration projects in the very prolific Cortez gold trend, almost literally in the shadow of Barrick Gold’s (ABX) Gold Rush deposit. It’s really amazing to drive through the Cortez trend as there are several multi-million ounce gold mines and projects located just a few kilometers away from each other.
The Garden Gate Pass project is just a stone throw away from the Goldrush deposit, one of the very few greenfields discoveries that turned out to contain in excess of 10 million ounces of gold. But what’s more important here is the fact the Goldrush South discovery is also trending towards the South-East, right in the direction where Garden Gate Pass is located (see image on next page). Considering in excess of 50 million ounces have been discovered on this Northwest-Southeast trend in just a few dozen kilometers, it’s absolutely not unlikely the Goldrush mineralization is continuing towards the southeast onto the Garden Gate Pass property.
Barrick Gold has drilled a few holes close to the border with the Garden Gate Pass project, but the result of these holes are unknown. But even if the Barrick holes came up empty and even if Rye Patch Gold is unable to identify any mineralization at Garden Gate Pass whatsoever, the land package still has a strategic value as one of the access roads used by Barrick Gold is running right through the property. To secure and ensure the continuous use of this road, Barrick could be interested in the GGP property as a strategic investment. The proof will be in eating the pudding, and we expect Rye Patch Gold to drill a few holes at the Garden Gate Pass project right after the summer months.
Perhaps more speculative but definitely not inferior is the Patty land package, just a few kilometers away from the Garden Gate Pass property. Rye Patch is earning a 60% interest in the Patty project by completing a $5M exploration program by November 2016. The company has completed 3 holes at Patty right before the summer. Whereas we were hoping to see the assay results by the end of June, there were some technical issues resulting in a delay. Rye Patch is waiting for all assay results before announcing the results of this round of drilling.
Both the Patty and Garden Gate Pass projects are ‘nearology’-plays, whereby Rye Patch hopes to make a major discover on the extremely prolific southeast trend line which is the home of dozens of millions of ounces of gold, literally just up the road. We consider both projects here to be high risk/high reward as GGP and Patty should be seen as greenfields exploration projects.
But you should keep the old adage ‘the best place to discover a new mine is in the shadow of an old mine’ in mind and there are plenty of shadows to choose from on the Cortez trend!
The royalty on the Rochester mine will ensure the near-term future
Let us take you back to the fall of 2011. Coeur Mining had forgotten to pay the annual claim fees to extend its rights on the claims where its Rochester gold-silver mine was located. Obviously, when a claim owner doesn’t pay the annual fee, the claims become forfeited and no longer belong to the previous claim owner but can be staked by anyone who wants to do so.
Rye Patch realized the potential and staked the open claims which were owned by Coeur Mining until someone forgot to make the payment by August 31st 2011. What followed was a two year legal battle and eventually Coeur Mining caved and offered Rye Patch Gold a 3.4% Net Smelter Royalty on the first 39.4 million silver-equivalent ounces to be produced at the Rochester Mine as well as a $10M cash payment. Not bad for a $100,000 (staking plus BLM fees) in staking open ground!
The $10M cash infusion was obviously very welcome, and the 3.4% NSR will ensure Rye Patch Gold can stay afloat the next few years. The company received an $1.85M cheque from Coeur Mining in the first quarter of this year, and if we are to believe Coeur’s updated mine plan the royalty payments could increase from next year on as Coeur will be focusing to boost its production in 2016 due to ‘high-grading’ the asset. This should increase the incoming cash flow for Rye Patch even more.
Rye Patch intends to use 10% of the royalty income to repurchase its shares. This means that based on the royalty income in Q1, Rye Patch has a quarterly budget of C$185,000 to repurchase shares. Using a share price of C$0.16, Rye Patch could potentially repurchase almost 1.15 million shares per quarter, or 4.6 million per year. As that’s roughly 3% of the total amount of outstanding shares, this share buyback could definitely move the needle. Rye Patch has already repurchased and cancelled 923,000 shares in the first two months after its Normal Course Issuer Bid started.
Unfortunately the NSR is limited to just the first 39.4 million silver-equivalent ounces that will be produced from the Rochester mine. Based on our current information, it looks like the NSR will come to a conclusion by the summer of 2019 and from then on Rye Patch will have to secure its own financial security again.
The Rye Patch Gold team
Bill Howald – President, Chief Executive Officer, Director and Co-Founder
Mr. Howald is a co-founder of Rye Patch Gold. Prior to joining Rye Patch, he was General Manager of Exploration, United States and Latin America, for Placer Dome Inc. During his tenure at Placer Dome, Mr. Howald was an integral part of the teams that delivered over 80Mozs of gold resources to the Placer portfolio. A number of these resources are now being mined; these include Pipeline, Turquoise Ridge, and Bald Mountain Mines in Nevada, and Puren in Chile. Others, such as Pueblo Viejo in the Dominican Republic, Donlin Creek in Alaska and Cortez Hills in Nevada, are in the feasibility stage and are heading for production decisions. Mr. Howald has 22 years in the international gold exploration and mining industry gained primarily in Nevada, Mexico, and Central and South America.
John Porterfield – Project Manager Lincoln Hill
Mr. Porterfield brings over 30 years of experience in the gold mining industry and was previously employed by Barrick Gold Corporation and Placer Dome Inc. While serving in various operational and project roles, John has coordinated and managed a number of feasibility studies and projects. These include the Mooney Basin expansion of the Bald Mountain Mine, the Yankee Mine expansion of the Alligator Ridge Mine, the restart of the Turquoise Ridge and Getchell Underground Mines in Nevada, and the Stage 1 construction of the Porgera Mine in Papua New Guinea. John, who completed Bachelor of Science degrees in Mining Engineering and Geology from Mackay School of Mines, University of Nevada, Reno, has held senior operational positions at the Bald Mountain Mine, the Porgera Mine, the Alligator Ridge Mine, the Turquoise Ridge Mine and the Ruby Hill Mine.
Conclusion
We were amazed by the quality of Rye Patch Gold’s exploration projects as the company now has four irons in the fire. Two of those irons contain in excess of 3 million gold-equivalent ounces with a high-quality PEA completed on the Lincoln Hill project, which we consider to be the flagship project. It’s still early days on the two exploration projects on the Cortez trend, but we should know more after this year’s drill program at both the Patty and Garden Gate Pass projects.
But what probably was even more interesting to see was CEO Howald’s unlimited enthusiasm when talking about the projects. He is a guy who definitely knows what he’s doing and Howald is determined to make this work, even in the low gold price environment we’re experiencing right now. Sometimes it’s not just about the horses in the stable, but about the jockey who’s riding them.
Rye Patch is trading close to its 52 week lows and should be trading much higher based on its current enterprise value of C$14M and all exploration plans being funded by the cash inflow from the 3.4% royalty on the production at the Rochester mine. The buyback program should support the share price from here on, and after repurchasing in excess of 900,000 shares in the second quarter of this year, Rye Patch has already repurchased almost 200,000 shares in the first half of July. On top of that, CEO Bill Howald has purchased 22,000 shares on the open market and even though the Dollar amount of that purchase isn’t high, it’s an excellent (symbolic) vote of confidence.
We see a lot of value in the Lincoln Hill project and will release a separate in-depth report on the flagship project of Rye Patch Gold.
Disclosure: Rye Patch Gold is a sponsoring company, we own shares. Please see our disclaimer for current positions.
