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National Gold has negotiated a purchase agreement with PDG/KN for the Salamandra property in Mexico. The property consists of seven epithermal deposits with the most advanced being Mulatos. PDG spent US$30 million here drilling 511 holes (295,000 feet) and taking 994 channel samples to outline a 3.4 million ounce deposit using a 0.8g cutoff. PDG took Mulatos all the way through feasibility and came up with a heap leach project with a capex of $120 million ($240 total cost) and cash costs of $150. A large portion of the permitting process was completed, when PDG/KN dropped the ball. There are several big company reasons for PDG’s need to get rid of Mulatos. The low POG forced a lowering of the capex to bring total costs more in line. This in turn lead to a paring down of the deposit size to key in on the high grade portion of the pit at Estrella (1,163,000 oz of 3.1g). At this point the wheels came off for big PDG, as now they were “stuck” with a deposit that is below their size threshold, and that had to be split with 30% partner KN to boot. There was also a tax loss capture to PDG/KN if a transaction could be effected. Clearly Mulatos was going to require a different production model than the one PDG/KN was prepared deliver. Other majors in large measure were in the same boat, and Mulatos slipped into the “twilight zone”, and was shopped to mid-tiers and juniors. And how many of those are there around? Into this breach stepped NGT’s Albert Matter. I spent an hour with him last week not only discussing NGT, but delivering funds to participate in a private placement. In the interest of full disclosure, I purchased 500,000 shares at 15 cents (with warrants to buy 250,000 more at 25 next year), and as an indication of my long term commitment, readers should know that American investors are prevented under US securities laws from selling this “restricted” stock for a full year. So much for the free flow of global capital.. At any rate, it didn’t take me long to realize that Mr. Matter is someone you want on your side of the table in a deal negotiation. And deal with PDG /KN he did, twice in fact. To make a long story short, the first deal was too front loaded, requiring NGT to come up with plenty of hard cash early on. I think Matter was betting that the junior market would be so impressed with the tremendous bargain (I certainly was) he got with PDG, that capital would be priced accordingly. Viewable on the second quarter results (also note the flat working capital) is $166k (CDN) (37k will be returned to 3rd quarter numbers) trying to get the story out. But, in all too familiar drill in this sector, the market delivered it’s verdict: severely underpriced capital. But, rather than folding his tent, Matter went about his game plan spending his early stash of cash hiring Behre Dolbear (BD) and a top geologist to do a through due diligence on Mulatos from the point of view of a mid-tier producer model. The outcome of this can be viewed at the web site under “Salamandra property review” and points to the initial development of the high grade Estrella portion. nationalgold.com The BD report also states that: 1. An addition of a minimum of 500,000 reserves will dramatically improve the economics of the deposit. 2. Capital costs may be reduced without jeopardizing the integrity of the project. 3. Recovery rates of 66% may be increased by 4-6 percentage points. 4. Late stage application (by PDG) of infrared spectrometry accelerated discovery. This will be immensely valuable as the district is explored out later. Of particular note on these aspects are drill holes at nearby targets (see fourth map under “projects” at NGT web site) showing a 26 meter interval of 4.2 grams hit at El Victor, and a 46 meter interval of 3.08 grams at San Carlos. Incredibly, PDG never followed up on this discovery. Longer term extension of mine life is also possible given the prospect for bonanza feeders beneath the delineated deposits. Indeed, this is a very large district (only 15% tested) that has the potential for large additions to reserves and resources. The recovery rates will be examined first hand with a small production test pit at Estrella. Subscribers to Jim Steel’s Mining Insights can also glean additional info on Salamandra as he has thoroughly examined the data. See his initial report from archives in January, 01:http://www.mininginsights.com/GIU%20Vol2%20No1.pdf and updates on 5/20 and 7/20. Next Matter (in his inimitable style) approached the famed (and retired) mining executive Chester Millar about getting involved. In July NGT inked a proposed merger with Millar’s principal Mexican junior, Alamos. biz.yahoo.com Five million new NGT (roughly 500K mkt cap at 15) will be issued and AAS cash of US400K, and 465K in drilling and mining equipment will be folded in. As importantly, Chester Millar now becomes an important shareholder. Millar’s actual direct role at Salamandra is still be determined, and the merger has not been finalized. The final not unimportant part of the puzzle was to go back to PDG and let them know that NGT would be unable to make the installment due, and after tough negotiations, NGT put in a new more favorable deal. biz.yahoo.com The price remains C$ 10.5 million and 250k has already been paid so in US terms about $6.65 million is due. C$7.5 million is owed as a 7% debenture due in 2010 or within 90 days anytime after 10/04 that gold averages over $325 on a nine month trailing basis. PDG collects royalties that really is a factor only at much higher POG. NGT has an important prepayment incentive calling for a reduction of C$2 million if the note is prepaid prior the end of 2004 making the amount due US$5.35 million. Of that total, another C$2.75 million notes are due in 2008, with a lower $300 gold average clause inserted. NGT will also need to return US$420K to PDG for property payments in 2001. The proceeds of the private placement and the AAS cash (assuming merger is complete) will handle that, plus budget NGT adm. overhead and US$250K in work at Salamandra through year end. The NGT story is pretty obvious. They have effective control at a bargain price over a world class deposit that has the potential to be even larger and more robust over time. Salamandra fits my cost perimeters by being in the top quartile and should get only better. And there’s plenty of leverage given that the current market cap (if AAS merger finalizes) is a mere US $2.1 million with 750K (will have to go back to the market near year end however) in the treasury. Matter ‘s objective is to create a substantial producer. He could do that in the short term if the right JV could be structured. Again that’s a strong possibility given his abilities as a deal maker. His other option would be to wait for NGT stock currency to be priced more correctly and raise the development money themselves. The stock’s downside (actually limitation) is that the junior market’s underpriced capital crisis continues on and on. I’m willing to make a bet it won’t for reasons I have discussed ad nauseum on SI. However, in that scenario NGT would have to keep going back to the likes of me for 15-20 cent shares, and dilutes up. With capital scarce, progress would be slow and eventually PDG payment deadlines would enter in, or the balance sheet would start to stress . In addition to the vendor payments, NGT will need US $10 million over the next four years to cover property maintenance costs, corporate overhead, and exploration expenses. To date though, the dilution is a non factor: post-merger and private placement NGT will have 21.8 million shares out, with almost of the warrants and options out of the money (25-35) and expiring over the next couple years. Stock is fairly tightly held, including 1,500,000 shares by Tiger Resources, 3,205,000 by management (I don‘t know want they took in the PP), and 390,000 post merger with Millar. My 500,000 isn’t going anywhere as I feel the prospects for this popping up decisively in a few years as an important new mid tier company with a corresponding valuation is very good. One question will be the 4.55 million shares new shares held by AAS shareholders. This stock is a keeper, but only long term value oriented investors need apply. | ||||||||||||||
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