Palisade Research - Tue, May 3, 2016

Palisade Mine Tour III - Guns, Meth, and Gold in Arizona

distance pic of 2 tiny people on top of a huge rock at West Oatman

It's coming, at long ever last the bull market, the problem now is how to invest.

The Majors and Producers have already made a pretty significant move. And if you feel like you missed it, you are not alone. Although, there is still room to make some serious gains with the big boys, we at Palisade always want to stay ahead of the pack. Time to turn the gun to the developer, the PEA or feasibility stage up-and-comer, looking for a little snack of equity financing and some debt financing to construct. The scramble is on for the alternative financing companies to stroke cheques and build mines. Like a perfect knee jerk reaction, the rush is on. They want to deploy and we want to be in it first.

There has been quite a bit of consolidation in the sector over the last five years of depressed markets, most of which occurred with brownfield feasibility-stage companies; the "next tray of brownies" to get eaten by the market. Most of the names we knew and loved are gone, eaten up and absorbed by the big boys. But there are some goodies left, companies that have scratched and scraped through the tough market and are now ready to go.

Our search has brought us to Arizona, to see a little company called Northern Vertex Mining (TSXV:NEE). A soon to be 42,000 ounce per year, little heap leach project, toting an after-tax NPV of US$55 million and IRR of 44% at $1,250 gold. They are ready: resources drilled up, bulk sample and test plant successful, de-risked, cashed up and debt financing for mine construction in place. All for a one time offer low price of C$0.30 share, and an embarrassingly low market cap of $31M. We are HEAVY buyers. Here's why:

"Cha-ching! cha-ching! cha-ching! . . . The sound running through my mind all weekend. I flew into Las Vegas, drove for about one and half hours, to see the next mine in the Palisade portfolio boys. Like a little desert slot machine that actually spits out gold coins, have a look a NEE, Northern Vertex, the bee's NEEs. It's a money maker!?

We landed in Las Vegas on Friday night and lost about $500 on roulette as per usual before bed. We were up at the crack of dawn and on route to the mine site with Chairman Ken Berry and GM Joe Bardswich. The trip was about an hour and a half by car and once we arrived in Bullhead City, we were about a six miles dirt road ride off of the highway.

On route to the operation; there were power lines, wild donkey's called "burros", and a few random groups of USA's finest freedom patriots of liberty, training for World War Z in the desert as a family. They say a family that slays together stays together in those parts. Almost everything had bullet holes in it.

wild burro pic

Photo - Behold, a wild burro in his element

slow way traffic ahead sign with bullet holes pic

Photo - Nothing says 'I love you' like an elephant gun blasting holes through mining signs.

I'm pretty sure I also saw a sketchy little Winnebago trailer in the middle of nowhere, perhaps on a mission for meth? To be determined . . .

Breaking Bad jokes aside, the area was incredible. Very easy to work landscape, with little vegetation, and breathtaking scenery. Almost everywhere we went was an old mine from the civil war, a shaft with a forgotten biker in it . . . There were gold showings everywhere; this area was a very prolific mining district in the past. Aside from Northern Vertex and a few others in the area, overall, the area has seen very little modern exploration.

Where Is Northern Vertex At Today?

These guys have one of the only true "horse-before-the-cart" stories we've ever seen. They had a showing and concept, drilled it, defined a starter resource, tested the metallurgy, made a plan, built a leach pad, and tested the plan, all while experimenting and fine tuning to the process. This culminated with pouring 5,000 ounces of gold, conducting a bankable feasibility study, advancing the permits.

bulk sample process - 3 pics of a test pit, heap leach pad and 2 gold bars

Photo - The bulk sample process - From the test pit, to the heap leach pad to gold

No skipping steps. No cutting corners. What you see is what you get. The team is professional, the work is clean and organized. Like a well-oiled machine - our money is in safe hands.

photo of a heap leach pad

Photo - Heap leach pad

photo of a small processing plant with an on-site assay lab

Photo - Plant setup and the on-site assay labs

Feasibility In A Nutshell:

2P Reserve: 238,010 AuEq (oz)
Grade: 0.82 g/t
Recovery: 82%
Capex: US$33 million
After-Tax IRR: 44%
After-Tax NPV: US$55 million

What Is The Negative? Why Is This Undervalued?

The simple answer is size. Unfortunately, the market is still hung up on resource size. So much so that a 240,000 oz open pit heap leach cowboy ATM machine is well . . . not big enough. The truth of our business is that there are a lot of 'experts' out there deciding what is good and what is not good, big enough or not, with ZERO industry experience or technical knowledge and expertise.

With the market heading to where it's headed, we will all be soon subject to once again the horde of tight fitting suits with the latest GQ haircuts, talking about mining companies to each other along with everyone else, sharing some pretty deep insight on the who's who, and the what's what . . . ughh . . . has it really been five years?

For us, our job is to pick the real quality projects, and let them all think we got lucky yet again, because folks the cream always rises! J Investing in the mining and exploration sector does not and should not be throwing darts at a dart board. We look at fundamentally sound, under-promoted, long-term investments and so should you.

Size doubt so obviously absurd.

geological map of the Moss vein and area targets

Photo - The Moss vein in the baby blue patent claims in the middle, but look at all the other targets: Old Timer, New York, Bighorn, West Extension, Gold Hill, Ruth, Generator, West East Extension, and the Moss Look-Alike, West Oatman.

Guess what? NEE has almost exclusively explored the patent component of its claim group allowing the company to expedite the mining process. We all know that patents are easier and faster to permit than non-patented claims. Hence; why it focused on the Moss Showing, and why this postage stamp covering only 5% of the larger overall claim group, has received 99% of the exploration and evaluative work.

There are three other trends that are visually obvious on the landscape off of the patent claims rattled with historic mining. They exhibit the same traits and roughly the same size and grade.

*Warning, back of the envelope calculation time*

So then let's triple the resource to 750,000 ounces. Now we haven't even taken into account secondary mineralization and high grade structures that host the historic mines in the area. Let's bolt on another 400,000 ounces of high-grade totally arbitrarily and we are sitting with an easy 1-1.2 million ounces of material to feed the mill and grow the operation. To show this perhaps we are looking at $2-3 million of exploration drilling and work. This is just contemplating surface ounces.

So let's get into the deposit and the geology a little bit:

The whole area is giant caldera, like a huge volcanic sinkhole if you can imagine that. This is responsible for a variety of deposit types and styles of mineralization. Specifically, from what we could see on the Moss property; mineralization appears to be monzonite hosted, mineralized epithermal sourced banded/crustiform quartz and carbonate veins (moss vein), breccia zones and stock-works.

Moss vein closeup pic

Photo - All that beige is Moss vein

What is really interesting is that the mineralized veins are particularly harder and more resistive to surface weathering effects compared to surrounding rocks, so they stick up like spines or ridges out of the landscape - like the back of a stegosaurus. So the discovery and delineation of the main Moss vein deposit is extremely simple and straight forward. Anyone can see it looking out at the landscape. Delineating Moss was a visual process, defining Moss was simply a drilling exercise.

sky pic of Moss vein and surrounding area

Photo - North York crossing swords with Moss. Clearly visible dark brown veins protruding out of the landscape, exploration will be a cinche

What NEE discovered when drilling was that there were opposite dipping high angle vein sets to the main Moss Vein (70 degree south-dipping). These vein sets were higher grade, up to 1 ounce per tonne and were the reason for the scattered shafts of historic mining spanning close to hundreds of meters away from the main Moss trend. Because these veins are typically thin and possibly discontinuous, they don't show themselves out of the landscape like the Moss vein does.

At the turn of the century 1 g/t open pit heap leach were not a thing, hence, no one really cared too much about the obvious Moss vein, and save one mine, was left more or less untouched. Old school miners were more focused on high-grade hanging-wall veins and stringers. We ended up going underground into one of these old mines to check it out. Veining was everywhere, and was a wealth of information. It was a structural geologist's wet dream with all kinds of information and measurements available to really figure out what is going on, both on a local scale and perhaps on a regional scale.

underground pic with GM Joe Bardswich and Chairman Ken Berry

Photo - Underground with Joe Bardswich, GM, and Ken Berry, Chairman

Directly to the south, just off of the patent boundary is a second trend. NEE creatively call it the Moss Look-Alike. It's a parallel spine of quartz, same width and size and grade as the Moss vein with similar surrounding stock-work from preliminary surface sampling. This area will be the next to prove up and hopefully double the resource. Ken has already started the permitting process in the area, but there is no rush for now though since they have five years of mining ready to go on Moss to tackle first.

Summary

In our opinion the exploration upside of Northern Vertex is the best part. It has a nice little mine to generate cash flow that is fully permitted, de-risked, and partially financed. In the meantime it can grow the resource by a least double, if not quadruple, based on what is immediately available to follow up on for an absurdly low cost of exploration.

Northern Vertex just closed a C$2.7 million financing and has no debt on the books. Ken and company plan on using some of the proceeds to explore the Moss Look-Alike, West Oatman. NEE wants to prove to the market that it has plenty of more gold in the ground - we can't wait till these results hit the newswire.

distance pic of a tiny Ken and company on top of a huge rock at West Oatman

Photo - Ken and company at West Oatman

On September 15, 2015, NEE announced that it had signed an Engagement Letter with for Macquarie Bank to provide project financing of up to US$20 million. Once this debt has been finalized, (which we expect will happen in the near future), Northern Vertex is off to the races, beginning with building out the heap leach pads.

Other than the risks involved with investing in a smaller cap, less liquid company, we can't find a good reason why not buy this right now. Anyone who wants to invest and doubts the integrity, production expertise or exploration upside and size potential of this deposit. I urge you all to contact management or us, and set up a site trip. Fly in and out from Vegas. Quick and dirty, bring your bride for some romantic gun shooting and desert mine education.

pic of a donkey's head in a truck's open passenger window with the driver holding a half eaten sausage

Photo - Wild donkey trying to sneak a bite out of Joe's sausage! Haha

Disclaimer:
Palisade Global Investments Limited holds shares of Northern Vertex. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information.

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