Palisade Research - Wed, Sep 14, 2016

Nevada Exploration (TSXV:NGE) - Gold Exploration With A Cheat Code

picture of a panning for gold at a stream

With the gold markets finally picking up, Nevada Exploration is finally ready to deploy its magic bullet in a big way.

Working in Nevada, one of the world's prolific gold-mining areas, the company has developed a method to improve early-stage exploration by creating new opportunities—and is positioned to profit incredibly from this know-how.

Good Deposits Are Hard(er) to Find

Gold exploration has become harder and more expensive, and explorers and producers alike are struggling to find new orebodies. We highlighted this phenomenon in our write-up, No More Easy Gold Discoveries, where major gold discoveries have been dropping, along with exploration budgets.

In areas that are well-known for their mining history, like Nevada, this situation gets even worse. Major mining companies have poured hundreds of millions, if not billions, of dollars to develop mines and now find themselves running out of ore. The assumption that there will always be enough is under fire.

Mining executives have been feeling this anxiety for some time. In the years following the credit crisis of 2008-2009, as gold price soared, majors went on a shopping spree and bought projects that showed even a glimpse of promise. And as gold price retreated, the same majors found themselves with projects not as robust as expected and swaths of new debt created to finance those acquisitions.

But the need for mineable ore has not gone away. In fact, the majors need new discoveries more than ever, but where to even begin?

25-year bar chart of the number of major gold discoveries versus global exploration spending

This chart shows that the amount of discoveries is cyclical, and that since 2010 there has been fewer and fewer of them made. At the same time, exploration costs have soared across the world. The following chart from MinEx Consulting sums up this point perfectly:

line chart of the 1950 to 2014 unit discovery costs for gold

A New (But Proven) Approach

Gold deposits come in all sorts of varieties, but for the purpose of this write-up, the two relevant categories are "exposed" and "blind."

Deposits where the bedrock is not covered by a layer of sand, gravel or other materials are the easiest to find. Exploration at shallower depths is cheap, and if there are outcroppings on the surface, it makes the geologists' job that much easier.

The problem, of course, is that this "low-hanging fruit" is harder than ever to come by. (And make no mistake—the fact that you can see outcroppings does not even guarantee anything!)

Now the industry needs to find a solution to locate gold deposits that are under a layer of "overburden." Because this gold is much deeper in the earth, it often does not give away any visual clues about its location. Another approach is needed...

Enter Nevada Exploration - a company that has found a revolutionary solution to this problem.

The idea is simple: deposits covered with layers of overburden come in contact with underground water. Groundwater travels through and around them, picking particles of gold and other elements as it goes.

diagram showing how groundwater can be used to detect covered gold deposits
Source: Nevada Exploration

By taking underground water samples to a laboratory and analysing its "scent", geologists can trace back its path and point to an area where it might have picked up particles of elements associated with gold, and even gold itself.

Nevada Exploration has propriety equipment that can trace even the most insignificant amounts of gold in the groundwater back to its source. Gold is almost insoluble in water, and testing relies on very little particle content. It has been a major challenge, but the company can now trace down to one part per trillion of gold content. To put this into perspective, one trillion seconds is about 32,000 years. Imagine equipment that can work with this degree of precision!

Although this process is very advanced, in essence testing groundwater is already a proven concept, very much like alluvial prospecting. Though, instead of a pan, we are dealing with a state-of-the-art technology.

In addition to higher sensitivity, this also means that prospecting can be done at scale. Taking water samples is cheaper than traditional reconnaissance and drilling, leading to greater areas covered in a shorter time frame.

Another major benefit of groundwater sampling is that it can generate quite reliable targets for further exploration. Due to a variety of reasons, gold in groundwater does not travel very far. It means that if gold is detected, a potential target will be within several kilometers' range.

We'll repeat the company's cautionary statement that at the current level of technology, it's impossible to tell anything about the size and grade of a prospective deposit based on water samples. It simply indicates that a target may be present within close proximity from the place where water has been tested.

Nevertheless, defining targets is a crucial element of early-stage exploration. In Nevada, the amount of land that can potentially host "blind" deposits is too large for any traditional exploration campaigns. Utilising Nevada Exploration's testing technology, explorers can define areas that it would like to focus on a grander level, and then hone in using other tools such as geomagnetic surveys, soil samples, etc.

Nevada Exploration can use the technology not only on its own properties, but also do contract work for other companies; it can provide a value-added services, which means crucial cash flow to fund its own endeavours.

The Team - Over 37 Million Ounces Of Gold Discovered To Date

The management team is a blend of technical expertise and proven gold explorers.

The company's CEO is Wade Hodges, MSc, a mining professional with over 30 years of experience. During his career he was involved in the discovery and pre-mine development of projects with a total of 30 million ounces of gold. For 13 years, he worked as Senior Geologist and Sr. Exploration Manager of Santa Fe Pacific Gold Corp. (now Newmont Mining).

Mr. Hodges' experience as an exploration professional makes perfect sense for a company that has established itself as an innovator in the field of exploration.

Another key member of the company's team is Mr. Ken Tullar, BSc. He has over 20 years of exploration experience in Nevada and has involved in the discovery of five mines with a total of over 7 million ounces of gold.

Lastly, as part of our due diligence, we communicated with the company's President, James Buskard. He has spent almost 12 years with the company, having started out as a member of the technical team responsible for developing groundwater testing methods. He has a background in applied hydrogeochemistry and spatial modeling, and has been a key member of Nevada Exploration's sampling team. His team was responsible for completing the first systematic hydrogeochemistry survey of Nevada specifically for gold exploration.

Capital Structure

The company has about 46 million shares outstanding. As of April 30, 2016, it had almost one million of exercisable options (with an average exercise price of $0.51) and over 20 million warrants. Most of the warrants have exercise prices below the current share price, which may give investors some concerns of dilution. Nevada Exploration currently has C$2.4 million in cash and zero debt.

Assets - Not Only Am I the President, I'm Also A Client!

Obviously, the company's major asset is the technology it has developed for groundwater testing. Having spent over a decade working on it, it can now use it both for its own purpose and for outside partnerships.

Another source of value is its own projects, all located in Nevada. And at these properties, Nevada Exploration puts its technology to test—and so far has been very successful.

Grass Valley property is an early-stage project that the company purchased in 2012, and currently owns 100% of it. The company has outlined a 16 kilometers (10 miles) by 3 kilometers (2 miles) target. Its own hydrogeological testing coupled with information from historic drilling points to the presence of a Carlin-style deposit.

Another promising target is the company's Kelly Creek project. It is located along the Battle Mountain-Eureka gold trend in Nevada, surrounded by multimillion-ounce projects, such as Twin Creeks, Getchell, Lone Tree, Marigold, and others.

Kelly Creek was discovered using the company's groundwater exploration methods. It is covered by overburden in an area that saw almost zero exploration. Coupled with gravity geophysics, the company now believes that it has discovered an area of anomalous gold mineralization.

NGE has spent over 40% of its total exploration budget on Kelly Creek in the year ended in April 30, making it the most important exploration target. The company plans to advance its understanding of the project by conducting aeromagnetic surveys, followed by a drilling campaign.

geo maps of Kelly Creek Basin, Nevada
Source: Nevada Exploration

These projects are excellent testing grounds (pun intended) for the company's tech. If future drill results corroborate with what groundwater tests showed, it will set an incredible precedent.

We have reasons to believe that it will. In the past, groundwater testing has already been linked to a major gold project. Back in the 1990s, David Grimes of the US Geological Survey (USGS) showed that the Twin Creeks gold mine in Nevada is surrounded by groundwater with elevated levels of gold. Working with the USGS at Twin Creeks, Nevada Exploration has spent $12 million and 15 years to build upon this existing work.

David Grimes was able to prove that existing deposits can be surrounded by gold-infused groundwater. Now it's Nevada Exploration's turn to improve on this understanding and open a new chapter in exploration.

From our perspective, the company is in the right place in the right time. The budding resource sector rebound will provide more opportunities for junior companies to finance its exploration activities. This is great both for Nevada Exploration and the industry at large. As early-stage players have more access to capital, and it will spend it on, among other things, groundwork testing. Furthermore, major mining companies are already interested in this technology. McEwen Mining, one of the largest land holders in Nevada, has already worked with Nevada Exploration to do groundwater testing work.

Lastly, groundwater geochemistry can be applied outside Nevada. Another prime location for this type of work is Australia. It, too, has large areas of "covered" areas where traditional exploration methods are not suitable for target generation.

Nevada Exploration will become a household name as discovery-starved majors and hungry upstarts begin to realise the value of groundwater testing. We believe that NGE has all it needs to succeed: the market is ready for disruption and the company's team has decades of experience in the field of exploration. It has at least a decade of active R&D against any competitor that might want to enter the field. Finally and as the icing on the top, it has its own assets that can potentially turn into major gold projects.

As a mining company with a technological twist, we believe that Nevada Exploration offers one of the most unique investment opportunities available on the market. The sky (and water) is the limit.

Palisade Global Investments Limited holds shares of Nevada Exploration. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. 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. Do your own due diligence. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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