Summary
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The volatility within Novo Resources shares shouldnt concern investors as it is expected with the company's low share count and limited float.
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The company should release drill results in the upcoming few weeks and we expect them to be good considering the proximity to previous good drill-holes.
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If the company is successful in expanding the gold-bearing reef with some of its further out western holes, it would significantly help the feasibility study.
Investors in Novo Resources (OTCQX:NSRPF) have experienced quite a wild ride in 2015 as seen in the YTD chart below.
The stock climbed around 50% to close to $1.20 per share in the span of a month, to lose all of its gains and more, to settle at its current price of 59 cents per share. This is the kind of volatile performance we expect from a company with a relatively low outstanding share count with insiders holding just under 50% of the float.
Source: Novo Resources
This has led to extreme volatility in the shares as 10% daily price swings on no news and small trades are pretty much the norm with Novo, but that is the nature of small capitalization explorers - so investors shouldn't be surprised with the volatility.
The recent plunge in the share price was due to the poor results of a deep drill hole at the company's Beaton's Creek project as the hole showed only narrow, deep intercepts of gold. Investors punished the company with the loss of around 50% of the company's market capitalization. We thought this was a bit extreme considering that it was one deep drill hole and the company is working with two projects (Marble Bar and Beaton's Creek) that total close to 2,000 square kilometers - the failure of a deep drill hole doesn't make or break this project or the company's hopes of discovering a new significant gold region.
Investors need to understand that one of the main goals of the company is to advance its Beaton's Creek project to a feasibility study by 2016 to earn-in on the project. That means it has to build and expand the current resource at Beaton's Creek, collect the remaining environmental data, complete metallurgical testing, and submit the feasibility study. This is all quite a lot to do, but according to the most recent corporate presentation, the company does expect to be able to submit the feasibility study by the end of 2015.
The first question that needs to be answered here will be related to the resources, as nothing else matters if they cannot be show to be economic. But we think there is a nice speculative, opportunity for investors here to pick up shares in advance of drill results that we believe may be very promising.
Upcoming Drill Results
The most recent drill results were not bad as they did hit some high grade, oxidized intercepts at very shallow depths:
Intercepts include 3 m @ 2.37 gpt Au in hole BCRC14-065, 3 m @ 3.54 gpt Au in hole BCRC14-266, 1 m @ 5.74 gpt Au in hole BCRC14-272, 1 m @ 4.91 gpt Au and 2 m @ 4.05 gpt Au in hole BCRC14-286, 7 m @ 3.55 gpt Au including 1 m @ 20.41 gpt Au in hole BCRC-291, 1 m @ 40.07 gpt Au in hole BCRC14-293, 3 m @ 3.51 gpt Au in hole BCRC14-296, 2 m @ 3.98 gpt Au in hole BCRC14-322 and 1 m @ 6.61 gpt Au in hole BCRC14-323 (please see Reverse Circulation Drill Results table below). Importantly, most of the aforementioned gold intercepts occur at shallow depth in thoroughly oxidized gold-bearing conglomerate horizons (reefs) that are potentially amenable to open cast mining.
But looking forward, the company expects to release the final 74 holes by the third week of March (this upcoming week) and we think these may be the best of the batch. Investors should take a look at the location of this final batch and note that many of them will be in close proximity to previous good drill holes.
(click to enlarge)
Source: Novo Resources
The red holes are the ones that were announced in the latest news release, the green ones are previously announced drill holes, and the blue holes are the ones that are remaining to be announced. If we zoom in on the section of blue holes we see the following:
Source: Novo Resources
Some of the upcoming results are in what we think is one of the most promising sections of the project. Drill holes BCRC14-322 and BCRC14-323 returned 2 meters of gold at 3.98 grams and 1 meter at 6.61 grams per tonne respectfully - which is not bad considering they are 23 and 13 meters from surface.
But even more interesting are the two green holes (BCRC14-075 and BCRC14-076 from a previous release) returned what looked like multiple layers of near-surface gold ranging from .76 to 3.71 grams per tonne. The green hole from the same release (BCRC14-098) was the standout of the bunch at 6 meters of 8.77 grams per tonne gold starting at 11 meters from surface. All the other red holes in that area seemed to be returning all respectable amounts of gold from a gram or so all the way up 20.41 grams for hole BCRC14-291.
Clearly there is an excellent hit rate in this area - which is very important and leads us to believe that the next batch of results may be quite good. This next release should include all the remaining blue drill holes (and the large section in between the aforementioned holes) between the previously successful holes - if continuity of the reefs are maintained then that will be a big positive for the deposit.
Additionally, investors should be watching some of the other "longer-extension" holes that seem to be meant to see how far the reefs extend.
(click to enlarge)
The blue holes on the left side of the map are what we are referring to as "longer-extension" holes and are 600-700 meters away from the holes we were discussing. We have no idea what will be released for these holes, but if they can extend these reefs another 600-700 meters, that would be a significant positive as it would mean a widening of the known reefs.
Saved The Best For Last
In summary, we believe that the upcoming drill results have the potential to be very good considering the location of these drill holes and their proximity to some of the better drill holes the company has previously recorded. This wouldn't be surprising as if we were the company executives we would also want to save the areas with the most potential until the end of the drill program results release - end on a good note. We believe these are the last results being released for this particular drill program so it would fit with that thesis.
Additionally, we're very curious if the company will be able to extend the resource with of the "longer-extension" holes hundreds of meters to the west. We have no idea how these holes will perform as they are much further away and you simply do not know what lies beneath the ground here until you drill. But if, and we stress the uncertainty here, the company can find good mineralization this far west of previously good drill holes then that would go a long way in building the potential of Beaton's Creek and the upcoming feasibility study.
Conclusion For Investors
One thing investors need to remember with Novo Resources is that the company has a huge area that it is trying to explore and there is no way this can happen overnight. With the significant lack of capital in the industry, Novo needs to take a disciplined approach in its exploration in the Pilbara basin and that means developing the known resources and creating an income source to help fund future exploration.
Beaton's Creek is the company's priority now and getting the feasibility study out by 2016 to earn in their 70% interest in the property. That means holding off on some of the riskier exploration of the rest of the company's properties and focus on expanding the known Beaton's Creek resource and getting the technical details of the mining plan figured out.
Thus investors need to be focused on the things that will help make Beaton's Creek economically feasible as a deposit - that means a focus on the drill results coming out of the current drill program. Also, investors need to remember that this deposit is a paleo-placer deposit and thus we do not expect to see very long, deep intercepts, but rather shorter intercepts over larger areas. In our opinion, this is absolutely key because it's about the width of the area here NOT the depth as these are reefs - so even 1-2 meter hits over long areas should be fine. Investors need to remember the attractiveness of this particular deposit is that these gold-bearing reefs are within a few meters of the surface and make mining costs much cheaper than those seen in deposits that investors are more familiar with that lie hundreds of meters beneath the surface.
The next release of drill results are going to be important, and we believe that the proximity to previously announced good holes as we have shown earlier, will help these results stand out as quality holes. Additionally, some of the holes that are hundreds of meters to the west may also extend these reefs significantly and add to the potential resource for the upcoming feasibility study.
Of course we want to emphasize that whenever it comes to drill results it is mere educated speculation and absolutely nobody knows what will be found beneath the earth. We think the probability is good that we'll see some strong results, but we are talking probabilities here not certainty. Thus investors need to make sure that their positions in Novo Resources are kept at the appropriate levels for the high-risk investment that it is.
But for investors looking for educated speculation in a company with large insider ownership and an industry-respected CEO (which we have discussed previously), we think Novo Resources may provide a very good opportunity to get ahead of the release of positive drill results that can help improve the viability of the deposit.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.