Bottom-Fish Comment - July 16, 2012: Bottom-Fish Strategy for Freegold Ventures Ltd
Freegold Ventures Ltd was recommended a top priority bottom-fish buy in the $0.50-$0.75 range on July 13, 2012 based on a new strong management team headed by Kristina Walcott and Alvin Jackson who are now tackling the Golden Summit gold project near Fairbanks, Alaska as a bulk tonnage gold deposit which they hope will eventually be bought by Kinross to feed its nearby mill when the Fort Knox gold deposit is depleted around 2016. Freegold has a long history dating back to 1991 when Harry Barr controlled the junior. In the late nineties Barrick had a funding agreement, and in 2004 Meridian Gold took a crack at the gold system, but Barr's last major effort began in late 2005 when he brought Steve Manz and Michael Gross on board to tackle Golden Summit and the Almaden deposit in Idaho. Manz decided to focus on the high grade Cleary Hill vein with a bulk sampling program that amounted to small scale mining. The 2008 Crash derailed financing plans and left Freegold owing $4 million in bridge loans. Western Standard acquired Almaden and Kristina Wolcott joined Freegold as the new CEO in charge of cleaning up the remaining debt. The stock was rolled back 6:1 on August 27, 2010, several private placements were done, debts to Western Standard settled, and in February 2011 Alvin Jackson joined Freegold as exploration VP. The new management produced a 43-101 resource estimate in December 2011 for the Dolphin Zone consisting of 81.7 million tonnes of 0.56 g/t gold indicated and inferred at 0.3 g/t cutoff, with about 21% in the indicated category. This 1,483,000 oz gold resource resided mainly in the Dolphin Zone; a 20,000 m core program expected to finish in late August involves infilling and deepening the Dolphin Zone and connecting it with the Cleary Zones whose high grade veins are interspersed with sufficient disseminated mineralization to be treated as a bulk tonnage resource. A new resource estimate which management hopes will bring the resource as high as 3 million ounces for this combined bulk tonnage zone is expected in October 2012. The gold in the top 60-70 metres is in oxide form, so Freegold is conceptualizing a two stage standalone open pit mining plan starting with heap leaching in the early years, whose cash flow will help pay for the construction of a mill for the sulphides. A PEA is expected by July 2013. This not the financially preferred route for shareholders, because it will entail a high CapEx for the mill that would hurt the NPV, but it is strategically necessary in order to attract a good buyout price from Kinross whose CapEx for the Fort Knox mill was recovered long ago. The real endgame is that Golden Summit would have a higher NPV from Kinross' perspective as owner of the deposit, than the market will assign to the standalone scenario whose destiny Freegold management can control. Assuming the resource estimate meets expectations, and reported results so far suggest these expectations are on track, and the PEA does not contain any unpleasant cost surprises, which I do not expect given the excellent location in terms of infrastructure, I would expect that by mid 2013 Freegold will be priced as a variation of the PEA indicated NPV at the prevailing gold price. If in fact gold is still above $1,500 per oz, confounding the mid 2012 market gloom about lower long term gold prices, the valuation should be well above the bottom-fish accumulation. At that point we could start to look for a bid from Kinross as it decides what to do with a mill that will be idle by the time the Golden Summit heap leach cycle finishes. Freegold, of course, is aware that 5 million ounces is the magic number for gold producers, and plans a $2 million program for the Goose Creek/Too Much Gold zones where the hope is to establish a similar low grade gold resource of 1-2 million ounces. All these zones fed the alluvial gold in the historic Cleary Creek placer operations. When I visited the project in the late nineties it was hard for me to visualize a bulk tonnage mine for Golden Summit with gold crashing toward $300 per oz; today Freegold is a leveraged bet on the gold price doing nothing worse than staying where it is, and perhaps surprising us with higher real prices. Additional discovery exploration joy could come from the Vinasale project where a 10,000 m drill program is underway on an intrusion related system which already has an inferred resource pf 37,260,000 tonnes at 1.11 g/t gold (1,331,000 oz). To fund its plans to the middle of 2013 Freegold will need to raise about $5 million, so one issue is what dilution this will entail.