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This week, we have chosen to take a third look at New Found Gold.
Executive Summary
In February 2021 Crux Investor issued an Analyst’s Note on the exploration results from New Found Gold’s (“NFG”) Queensway Project in Newfoundland. Following additional reported drill results, predominantly from the Keats Zone, an update note was published on 28 April 2021.
At the time, Crux Investor cautioned its readers that the valuation had outpaced the underlying progress of the project. With over five hundred drill holes completed since then, Crux Investor hereby provides a third update.
The geology at Queensway has not changed since last year. Mineralisation is structurally controlled in an area of extreme structural complexity. Establishing a resource requires very close-spaced drilling and is therefore a slow and expensive exercise.
The complex geometry of mineralisation at Queensway will mean that defining mineable tonnes within a geological resource will be a further challenge.
None of the targets along the JBP Faults zone appear, at this stage, to be of economic interest.
Of the targets drilled in detail along the Appleton Fault zone, only the Lotto Zone, Golden Joint Zone and Keats Zone appear to be of potential interest.
The Lotto zone is, at this stage, of no immediate economic interest. The continuity of high-grade zones seems insufficient to create a consistent, mineable deposit.
The Golden Joint Zone may potentially host 0.2 Moz gold. There is an impressive high-grade shoot, but it does not continue over significant strike distance. It seems that the favourable “damage zone” caused by a NE-trending cross-cutting fault is of limited dimension here.
Keats is the dominant zone within Queensway and may potentially host 0.8 Moz gold. Although there are many impressive intersections, continuity is still difficult to determine. Drill densities are very high and NFG is carefully managing the news flow. Worryingly, many holes are unreported, and disclosure has deteriorated since last year.
Using the potential resource of 0.8 Moz at Keats and 0.2 Moz at Golden Joint, Crux Investor puts resource potential for the Queensway Project at around 1.0 Moz gold.
At a share price of C$5.01 on 20 July 2022 the diluted Enterprise Value of NFG is above US$660 million. For a resource base of one million ounces, the valuation equates to US$660 per potential resource ounce. Crux Investor believes US$660 per resource ounces is very expensive, even for Measured and Indicated resources. Queensway is still at the pre-resource stage of definition.
Crux Investor continues to believe that NFG needs to backfill valuation by growing good grade resources quickly. The complexity of the geology, the mineralisation, and the way that NFG is having to choreograph the flow of results to maintain ‘good news’ means that this, in our opinion, is impossible. The logical conclusion is that the market valuation of NFG will eventually fall to match the lower resource size potential as indicated by Crux Investor analysis.
Finally, Crux Investor worries that NFG plans to push on to the bitter end without a strategic review. NFG is approximately halfway through its planned drilling programme, and there is every sign that any resource growth is extremely hard-won after a lot of close spaced drilling.
Crux Investor suggests that NFG should initiate a comprehensive review of results, firm up on the geological model, commission a resource estimation and then determine what makes economic sense. From this strategic review it will become clear what areas should be targeted, and how to drill test them, and indeed, whether to continue drilling or not.
Introduction
In February 2021 Crux Investor issued a first Analyst’s Note on the exploration results from New Found Gold’s Queensway Project in Newfoundland. Following additional reported drill results, predominantly from the Keats Zone, an update note was published on 28 April 2021. Some of the drill intercepts from Queensway showed spectacular results with extremely high gold grades over considerable widths.
The market liked what it saw in early 2021. The share price kept rising, and by the time of the Crux Investor Update in April, NFG had a market capitalisation of C$1.02 billion. At the time the company had completed approximately 150 diamond drill holes at Queensway.
The market seemed to be anticipating a potentially large and high-grade resource at the project. Our analysis of the publicly available data, however, was more circumspect. Using optimistic assumptions Crux Investor arrived at an upper limit of 0.4 Moz of potential resources established at the time. This is not a large number.
At the then prevailing market capitalisation, the look-through valuation equated to C$1,500/oz (US$1,218/oz). At the time the valuation was deemed to be very high for Measured and Indicated Resources, and way-out-of-line for the actual status of exploration success achieved to date. Crux Investor cautioned its readers that the valuation had outpaced the underlying progress of the project.
Since the end of April 2021 NFG has completed much more drilling. Drillhole numbering is now in the 600’s. An updated review is therefore of interest. Here, Crux Investor reviews the share price performance on one hand, and the progress of the project on the other hand. With over six hundred drill holes completed, Crux Investor draws a number of conclusions from the work to date and makes a number of observations.
The work has been carried out independently and using publicly available information. Here goes.
Share Price Performance and Market Capitalisation
Look at the share price since early 2020 in the chart below, which goes back to a time before the discovery holes were made. From a low starting point the price peaked above C$13 per share in mid-2021, after Crux Investor issued its cautionary note. By then the market capitalisation of the company had reached close to C$2 billion.
To be clear, the price rose by another C$6 per share after our update note in April 2021. The Crux Investor caution, if heeded, would have missed out on significant upside! Nevertheless, we believe that the share price run reflects classic market over-exuberance associated with discoveries. The phenomenon has been well documented and is an established part of the Lassonde Curve (see Figure 2, below).
Since the peak in late May 2021 the share has been on a downward trend reaching C$5.01 on 20 July 2022, which exceeds a 61% drop. Note, however, that the company issued shares to fund its activities, so the overall number of shares issued rises with time. This means that the market capitalisation has not dropped to the same extent as the per share value. The current market capitalisation is 58% lower than at the peak.
It is clear that NFG shares are now less aggressively valued than they have been for much of the past year. But are they over-valued, or has the project caught up? Has the work on the ground back-filled the valuation? That is the current question.
Geological Background of the Keats Zone of the Queensway Project
Figure 3 shows the exploration targets of the Queensway project to illustrate that, according to NFG, the mineralisation is controlled by structure.
On a macroscopic scale the intersections of the ENE and NNE faults with the Appleton Fault Zone and the JBP Fault Zone are known to be favourable locations for gold mineralisation. The location of the Keats Zone is shown as being on such an intersection. NFG refers to the cross-cutting structure as the Keats-Baseline Fault Zone (“KBFZ”). According to NFG, this fault forms an extensive “damage zone” that controls the development of a complex network of high-grade gold vein arrays.
Drill Results
Introduction
Figure 4 (below) has been included to show the wide distribution of holes drilled along the two main fault zones. Note the relative density of holes at various locations. You can see that there have been many holes drilled at Keats, Lotto, and Knob along the Appleton Fault Zone, and at 1744, H-Pond and Pocket Pond along the JBP Fault Zone.
It is beyond the scope of this note to discuss the results at all locations in detail. What is telling however, is that NFG has gone very quiet on Knob, Cokes, Dome, Logan, and H-Pond. In the world of junior mining, good news travels fast and bad news is buried. When prospect names drop out of news releases, it broadly indicates that results there have been disappointing.
In addition, the results at 1744 and Pocket Pond are underwhelming, with very limited average widths (respectively 1.96 m and 2.60 m) and low average grades (respectively 5.64 g/t and 4.29 g/t). The gram x meter numbers are 11.05, and 11.15 g x m. In highly heterogenous, structurally controlled geology such as this Crux Investor does not believe that gram x meter figures of around 11 g x m are economic.
All told, results from Logan, Pocket Pond, H-Pond, and 1744 along the JBP Fault Zone are either unannounced or not great. Accordingly, we do not recommend holding your breath waiting for good results from any further drilling along the JBP Fault Zone.
With the JBP Fault Zone in the ‘technical success’ but ‘economic disappointment’ category, the focus shifts to the Appleton Fault Zone. In particular, we need to look at the main prospects of Lotto, Golden Joint, and Keats.
Lotto
At the time of the release of this note New Found Gold has drilled 51 holes in this area with two holes for which no results could be found. Figure 5 contains the latest longitudinal section provided by the company, which has a number of holes with “pending” results indicated as diamond symbols. Crux Investor has updated this section for new drillhole results, adding the grade-appropriate colour circles as per the legend.
What you can see is a clustering of high-grade results (the purple dots) surrounded by low grade intercepts (the orange dots). The bar scale in the figure corresponds to 50 m strike length, which is roughly the distance over which the high grades are found. Hole 311 at 200 m vertical depth is the deepest hole for the high- grade section in the structure.
As we noted in the original Analysts Note on New Found Gold in February 2021, the Queensway Project has highly complex geology. “The penetrative tectonic fabric, the tight folding, and the intense deformation is important, as it has a real effect on the distribution of mineralisation, and therefore on the economics of the ore body.”
We are seeing the impact of the geological complexity on drill-spacing. The longitudinal section, above, shows very close-spaced drilling with pierce-points approximately 20 m, but sometimes as close 5 m, to each other.
So what? Why does this matter? Well, the key attributes of a good project are scale and grade. To achieve scale a resource needs to exhibit good continuity of mineralisation, and a predictable distribution of the mineralisation. Continuous, or at least, predictable mineralisation means that resource tonnages can grow quickly as the spacing of exploration drillholes can be wide enough apart for the envelope of mineralisation can grow equally quickly.
Seeing a Company drill many holes into a small area while still at a pre-resource stage of evaluation indicates that grade variability is extremely high, the geology is complex, and the costs of growing large a resource base by drilling will be either very high or potentially even prohibitive. NFG is poking a lot of holes into a very small space.
Figure 6 below is comprised of two images provided by NFG in its latest press releases, a plan view at the top and the corresponding cross-section at the bottom. Crux Investor now relies on these kinds of images to be able to independently verify some of the results in section as NFG has lately ceased to disclose co-ordinates, azimuth and dip of the holes.
Look at how closely-spaced are the drillholes! On the section you can see that holes 44 and 83 are collared within 5 m of each other and are drilled parallel to each other. By any measure this shows a company having to spend a lot of money through drilling to eek out any gain in the form of additional information.
Note also that much of the mineralisation appears to be intersected at oblique angles to the drilling, both to the strike and dip. This means that intersections shown in the news releases overstate the true width of the deposit.
Figure 7 has been independently drawn up by Crux Investor and only shows the intercepts that were reported by the company. Contrast the number of Crux Investor hand-drawn “reported hits” with the higher number of NFG “hits” that were included in the picture but not reported in the drill results.
The sections above identify three impressive intercepts with grades above 10 g/t Au, albeit over short distances, but which are not supported by similar intersections in adjacent holes. The best intersection is 6.5 m @ 18.1 g/t. This occurs on the left-hand side of Figures 6 and 7, called the Sunday Zone by NFG and picked out in a blue circle by Crux Investor.
The Sunday Zone is given a nice shaded area, running sub-vertically. Crux Investor notes that vertically above the best result is an intersection of 2.65 m @ 1.86 g/t and immediately below it there is no intersection at all.
In conclusion, based on this cross section, the high grades at Lotto lack the type of continuity needed to define a resource likely to support an economic operation.
Golden Joint
At the time this note is distributed this area has been drilled by 43 holes of which four holes are awaiting assay results. Figure 8, below, shows the latest longitudinal section that dates from 24 March 2022.
The same dense spacing of pierce points as at Lotto is evident. Ominously, the very high-grade results appear to be more isolated than they were at Lotto. Close inspection of the section shows the better results are surrounded by many low-grade results.
The scale bar in the figure is 200 m long. This implies that the width of the high grades (red and purple dots) is again only 50 m. The deposit was targeted from 100 m vertical below surface downwards with hole 401 the deepest at 300 m vertical depth.
Figure 9 shows a drill collar location plan and the cross-section D-D’ provided by New Found Gold in its 24 March 2022 press release. Again, one can see how closely spaced the drilling is, with drill fences 25 m apart and collars along the fences generally 25 m apart.
The section shows that drilling is roughly perpendicular to the Golden Joint Hanging Wall zone. Note, however, that the drilling in the Golden Joint zone intersects at a low angle. The oblique intersections of the Golden Joint zone may be a function of targeting other mineralising structures such as a NE-trending cross cutting fault zone in the same drillholes. As with the Lotto zone, many of the intersections from Golden Joint reported in the news releases will overstate the actual true thickness of the mineralisation.
In a similar exercise to the one carried out for Lotto, Crux Investor has hand drawn a section (Figure 10). Here, the section only shows the intercepts that are considered relevant, leaving out short, low-grade intersections, or those that seem to be isolated and not supported by other results.
The section shows that, whereas the Hanging Wall Lens seems inconsistent and generally with low grade intersections, the Golden Joint structure itself (sketched in as a sub-vertical zone) has some very impressive grades over decent widths. Crux Investor does note, however, that some of the reported numbers have been substantially smeared. For example, 70% of the gold in the 14.15 m intersection with 69.15 g/t Au is present in two intervals of 1.3 m and 1.9 m.
The high-grade portion of the Golden Joint structure has (in this cross section) been defined over a 150 m vertical distance with an average width of 6.0 m and a weighted average grade of 47 g/t Au. These calculations did not attempt to weight for distance between the intercepts, but give a rough idea about potential.
Keeping in mind that the structure is being drilled obliquely and the true width is less, these rough grade x widths remain of economic interest if the zone persists sufficiently along strike. With reference to Figure 10, the cross section is through the best results and extends southwards at most 50 m. Putting some very rough numbers to this, one could use 50 m (strike) x 6 m width (optimistic) x 150 m depth x 2.7 density = 121,500 tonnes at 47 g/t Au = 184,000 oz Au contained. Crux Investor, with an optimistic view, believes that Golden Joint could contain 0.2 Moz of gold.
Keats
The Keats target has by far the most potential with a drill proven strike length of at least 450 m as shown in Figure 11 with the westernmost high-grade intersections at depth at coordinate 450 and the easternmost high-grade results close to surface at coordinate 900. Results for recent shallow drilling east of coordinate 900 are still pending.
Crux Investor has identified a number of areas of concern when it comes to the Keats Zone.
Firstly, like Lotto, there is an issue of drill-density. A quick glance at Figure 11 shows how closely spaced the drilling has been. NFG drill density increases where attractive grades were encountered (denoted by purple dots with their relative size reflecting width of intersection). The spacing of the pierce point for holes with no gold to low-grade results on the left (south) is between 15 m and 25 m. This drops to down to 5 m in the clusters with many purple dots.
As the frequency of such high-grade results dropped over time, drilling would revisit areas with very good grades. For example, hole 474 for which assays are outstanding was drilled close to hole 85 depicted as a purple dot. The latest release includes hole 593 which was drilled in the uppermost cluster of purple dots, virtually guaranteeing a good headline for the press release of 6 June 2022.
Secondly, NFG seems to rush the assays on good drillholes. After drilling this many holes project geologists typically have their ‘eye in’ and know when very good results are expected. Abundant visible gold is normally a giveaway. NFG has developed a habit of prioritising the better holes for assay. This practice ensures has led to, for example, the result of hole 593 being reported together with much earlier drilled holes with much poorer results, such as hole 405. Note that 187 holes were drilled in between these two holes that were reported in the same news release.
Another feature of the way that NFG manages its news flow is that many drill hole results are not reported, or were never analysed, for example holes 61, 75, 77, 81, 82 etc. Presumably New Found Gold chose not to report these due to a lack of mineralised intercepts. Still, NFG has a duty to report all of its results. The “disclosure standards for companies engaged in mineral exploration…” from the TSX comments that: If the company releases partial results, e.g., the first two holes of a six hole program, it must ensure that the balance of the results are disclosed in a timely manner whether the results are positive or negative. Quite!
The assaying, reporting, and drilling appears to be an exercise in careful curation. For the record, Crux Investor does not like the kind of managed information flow as is evident here.
A careful review of the location of the drillholes shows that NFG has either struggled to unlock the key controls on mineralisation at Keats, or it has made some poor planning choices. Evidence for this can be found in the progression of drilling from shallow in the East to deep in the West. Over time drilling progressed westwards and tested deeper ground because there is a southward plunge to the high-grade mineralisation.
Lately, as the chance for high-grade results diminishes with depth and having to drill ever-deeper, the shallow area to the far right (East) has been receiving much attention. Crux Investor can identify one of these short holes as #640. When the geology is simple these relatively cheap holes are typically drilled early in a well-planned exploration campaign.
As was done for Lotto and Golden Joint, Crux Investor has provided a hand drawn section outlining areas of fairly consistent good results from news releases, in Figure 12. Remember long-sections are useful to show strike and depth extent projected onto a plane, but they rarely provide information on thickness and grade. Before presenting Figure 12, it should be noted that the analysis has not been helped by the way in which New Found Gold presents data. Specifically:
- There is no table or spreadsheet available with all drill results, as, for example, Great Bear Resources had put on their website for the Dixie project.
- The drillhole numbering does not allow to determine what target was tested.
- The drilling sequence is haphazard, not drilling out a certain fence and moving then to the next. This could be a function of multiple rigs targeting a highly discontinuous mineralising style.
- NFG no longer consistently provides drill collar co-ordinates, azimuth, dip and end-of-hole information for each hole reported on.
- There are several unreported holes, which are completely absent of data.
- There is no overall, comprehensive drillhole collar plan.
- There are numerous holes for which the company does not provide results, presumably because the results were negative, or not impressive enough.
For the Analysts Notes in 2021, Crux Investor could rely on the longitudinal sections and drillhole location plans provided from time to time and compile a masterplan for holes drilled at Keats. Now the resolution of the latest longitudinal section (see Figure 10) no longer allows for identification of hole numbers. For this reason, two sections provided by New Found Gold in its latest press release were used. The first is Cross Section B-B’ is in the north with shallow mineralisation (see Figure 10).
The cross section nicely illustrates the Crux’s point of the extremely close-spaced drilling within high-grade mineralisation. Strangely, New Found Gold did not include hole 46 in its cross section. Crux Investor knows hole 46 was located 50 m northwest from hole 49, and it is included in the section above.
The hand drawn section highlights the +10 g/t Au intervals in blue and shows other intervals, where relevant, to give outline to a consistent structure. As can be seen, correlation of the very high-grade intersections at shallow levels is not straightforward, and the continuation at depth is relatively narrow and with large grade variations.
Cross Section C-C’ (again refer to Figure 10 for its location within the longitudinal section) is shown in Figure 13 with Crux Investor only showing the high-grade, +10 g/t Au intervals, and other intervals that can be correlated to generate a consistent structure. As can be seen from Figure 10 the cross section has been chosen to transect two high grade areas.
It is strange that New Found Gold has chosen this particular cross section as it includes two drillholes (208 and 484) for which no results were published in press releases.
The picture presented is one of very patchy mineralisation. There are two very attractive intervals, but continuity is poor. For example, along hole 448 (5.1 m @ 55.1 g/t Au) continuity is not evident in hole 48 in the exact same spot where there is a total absence of grade. It should be noted that 98% of the gold content in the 5.1 m interval is present in only 0.45 m. The high grade was probably caused by grains of visible gold. This might explain why hole 484 which also targeted the same zone in almost the same point did not intersect mineralisation. A classic case of extremely high nugget effect.
Keats Zone Conclusions
At Keats the damage zone is extensive resulting in very high grades present over approximately 450 m strike extent. Despite this, the high-grade portion of the mineralisation is of limited dimensions. This feature was observed by Crux Investor in early 2021, and the extra data have not changed the perception.
Actually, plotting the data on a fresh cross section shows that mineralisation changes over very short distances in attitude, form and size both along strike and perpendicular to the strike. The sections also illustrated how the mineralisation is thinner and lower grade away from the densely drilled strike extent between 4750 N and 4850 N (800 m and 900 m in the new presenting style shown in Figure 10).
The initial Crux Investor projection in February 2021 used dimensions of 100 m along strike length with 30 m true width over a vertical distance of 120 m. Fresh data in April 2021 showed these assumptions to have been far too optimistic. Nevertheless, Crux Investor set an optimistic resource potential of around 0.4 Moz, or 400,000 ounces of contained gold.
Today, an argument can be made for 175 m of high-grade strike length, at a width of 30 m. Away from the central area of 4770 N – 4820 N the width is clearly far less than the average 30 m previously assumed. Nevertheless, taking into account patchy results in the far west and at depth, along with an increase of strike length, Crux Investor is happy to give Keats Zone the benefit of the doubt. The resource potential at Keats could, optimistically reach 0.8 Moz.
Queensway Project Conclusions
- The geology at Queensway has not changed since last year. Mineralisation is structurally controlled in an area of extreme structural complexity. Establishing a resource requires very close-spaced drilling and is therefore a slow and expensive exercise. The complex geometry of mineralisation at Queensway will mean that defining mineable tonnes within a geological resource will be a further challenge.
- None of the targets along the JBP Faults zone appear at this stage to be of economic interest.
- Of the targets drilled in detail along the Appleton Fault zone, only the Lotto Zone, Golden Joint Zone and Keats Zone appear to be of potential interest.
- The Lotto zone is at this stage of no immediate economic interest. The continuity of high-grade zones seems insufficient to create a consistent, mineable deposit.
- The Golden Joint Zone may potentially host 0.2 Moz gold. There is an impressive high-grade shoot but it does not continue over significant strike distance. It seems that the favourable “damage zone” caused by a NE-trending cross-cutting fault is of limited dimension here. Mineralisation appears to be confined to a narrow area.
- Keats is the dominant zone with Queensway and may potentially host 0.8 Moz gold. Although there are many impressive intersections, continuity is still difficult to determine. Drill densities are very high and NFG is carefully managing the news flow. Worryingly, many holes are unreported, and disclosure has actually deteriorated.
- Using the potential resource of 0.8 Moz at Keats and 0.2 Moz at Golden Joint, Crux Investor puts resource potential for the Queensway Project at around 1.0 Moz gold.
- At a share price of C$5.01 on 20 July 2022 the diluted Enterprise Value of New Found Gold is above US$660 million. For a resource base of one million ounces, the valuation equates to US$660 per resource ounce. Crux Investor believes US$660 per resource ounces is very expensive, even for Measured and Indicated resources. NFG is still at the pre-resource stage of definition.
- Crux Investor continues to believe that NFG needs to backfill valuation by growing good grade resources quickly. The complexity of the geology, the mineralisation, and the way that NFG is having to choreograph the flow of results to maintain ‘good news’ means that this is impossible, in our opinion. The logical conclusion is that the market valuation of NFG will eventually fall to match the lower resource size as indicated by Crux Investor analysis.
Finally, according to NFG, the company is approximately halfway through its planned drilling programme. There is great risk that the law of diminishing returns applies with high-grade intercepts becoming scarcer and deeper. Currently the entire JBP Fault Zone has returned very narrow intersections with mediocre grades. The Lotto area results are highly variable and mediocre, albeit with some depth potential. Golden Joint is only a little better. The vast majority of the holes at Keats have given unattractive results and are not of economic interest. Continuing stubbornly in the same manner of drilling is, in the opinion of Crux Investor, wasteful. NFG should rather initiate a comprehensive review of results, firm up on the geological model, commission a resource estimation and then determine what makes economic sense. From this strategic review it will become clear what areas should be targeted, and how to drill test them, and indeed, whether to continue drilling or not.