We had the opportunity of visiting Novo Resources Corp. (TSXV:NVO) Karratha Project in Western Australia. The main goal of our visit was to determine if the recent significant increase in the share price (up 240% since July 10th) was warranted and in our opinion, it was. Based on our trip, the company’s recently acquired Comet Well property (80% owned), has the potential to host more than 10 million ounces of gold. We highlight that it is very early days, and the company has a significant amount of work to prove us correct. As well, the exceptionally nuggety nature of the deposit is going to provide challenges to determine a true resource grade and the potential exists that an initial NI 43-101 compliant resource could understate grade. We highlight that our view on the project’s potential has been adjusted for these factors and does not include the additional 2km of strike on the adjacent Purdy’s Reward (option to earn 50% from Artemis Resources Ltd. – ASX:ARV). We are comfortable with this opinion because of the pervasiveness of gold nugget discoveries across the trend. Important catalysts remain on the horizon for the company, including the initial bulk sample results from Purdy’s Reward, and the start of exploration at Comet Well.
Quietly have assembled a massive land position in Western Australia. Novo has been acquiring land in Western Australia over the last several months, whether by staking, acquisition or option agreement. This land package is focused on the conglomerates both underneath and adjacent to basalt contact. The later basalts sit unconformably on top of the conglomerates and in some areas, particularly at Comet Well, where a significant amount of the conglomerates are exposed. The Karratha area is historically known for the discovery of gold nuggets and has a cottage industry of locals who find gold nuggets with metal detectors. While interesting, the hard rock source of these nuggets was previously undetermined; however, Novo believes they have located the source and has aggressively acquired land in support of this thesis.
Comet Well has +10M ounce potential. The recently completed property acquisition includes 6km of strike length of the favourably hard rock conglomerate horizon. This horizon is exposed (or is near-surface) before dipping (at approximately 10 degrees) underneath the nearby basalts for 500 to 1000m over this 6km strike length. Based on initial investigations by the company, it appears to be between 10m and 20m thick. With respect to grade, despite the pervasiveness of nuggets, we have tempered our assumptions to assume that there is only disseminated gold, to account for the expected statistical challenge of incorporating the nuggets into an initial NI 43-101 compliant resource. Consequently, we have assumed grades similar to Beatons Creek. Figure 1 shows a previous prospectors hole, the favourable conglomerate horizon with the basalts in the background. Figure 2 provides a typical sample of the conglomerate. Figure 3 shows the land holdings and approximate location of where the conglomerate goes underneath the basalt.
Risks to our thesis. This is an early stage project and consequently there is significant risk to our opinion at this point. In particular, we have made some assumptions about the continuity of mineralization and the assumption of disseminated gold within the conglomerate that are only supported by the extent of prospector holes and trenches across the property and some very preliminary work. On the flip side, the impact of the nuggets, could result in our grade assumption being significantly understated, as well, we have assumed only 6km strike, excluding 2km of known strike on Purdy’s Reward (option to earn 50%), plus additional potential strike length that the company has staked and acquired over the last few months. Also, we have assumed an open pit only scenario; however, the conglomerate dips underneath the basalts which could provide a future underground scenario. The bottom line is that Novo needs to complete a significant amount of work (which it plans to do) to demonstrate this potential.
Next steps for Novo in Karratha. The next catalyst for Novo is the bulk sample results from Purdy’s Reward. We note that this initial bulk sample was completed at Purdy’s Reward because it is one of the few areas along the trend where permits have been granted. We expect this to be followed by the completion of the definitive agreement that would provide Novo an option to earn a 50% interest in Purdy’s Reward and some of the other Artemis properties in the region by spending A$2 million. Once complete, we expect the company’s exploration efforts to be focused on Purdy’s Reward, until exploration permits are granted for Comet Well in the fall. At which time we expect the company to undertake an aggressive exploration program at Comet Well that is likely to include both drilling and trenching. Once this aggressive exploration program begins, we expect the company to have steady news flow, which is likely to provide further momentum for Novo’s share price.
Is there upside from the current share price? The company’s fully diluted market capitalization of ~C$447 million assumes a lot of exploration success in Karratha, but does not appear to fully reflect our view of the project’s potential. Peers typically trade between C$50-70/oz, which based on our opinion of the potential for +10 million ounces this implies an EV of between C$400-C$560 million (80% ownership). However, this provides no credit for Beatons Creek, which despite having smaller ounce potential, is likely to be low cost, low capex producer. Our preliminary estimates suggest Beatons Creek could be worth C$150-200 million. This suggests to us that while Novo’s share price has significantly outperformed over the last few months, the potential exists for further appreciation. We note that our view depends on Novo delivering exploration success in Karratha.
Priced as of prior trading day’s market close, EDT (unless otherwise noted).
All values in USD unless otherwise noted
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Company Specific Disclosure Details
Novo Resources Corp. – TSXV:NVO – 1,2,3,4
Artemis Resources Ltd. – ASX:ARV – None
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