A friend approached me a couple of years back about putting some money into a private placement for a young exploration company, Providence Gold Mines Inc. (PHD:TSX.V; PRRVF:OTCBB), that had an option on a number of old gold mines in the California mother lode country. I did and have waited patiently (well, not really patiently) for some time to do a piece about the company and what they have. But there was nothing that would move the price of the shares off TDC until recently. They have a great story but lacked a hook that would grab the attention of potential investors.
Basically the company picked up an option on half a dozen high grade gold mines that shut down in 1916 after production of over 225,000 ounces of gold. The terms call for $1 million CAD spent on exploration in the first two years, an additional $750,000 CAD in the third year to earn 50%. Providence can buy the remaining 50% for $5 million US and there is a 2.5% royalty that can be bought down to 1% for $1 million US.
The six mines were typical high-grade mother lode deposits. Production of 225,000 ounces in total would make them some of the biggest mines in California 100 years ago. Historical records suggest some areas of one of the mines were a high as 15 ounces to the ton.
Production continued until from discovery in the 1880s until 1916 when internal issues caused the mines to be closed and flooded. A forest fire in 1918 destroyed the above ground structures and most of the data from the production. Since then the patented claims stayed in the same family until they were ready to joint venture with a junior.
Anyone looking at California gold production owes it to themselves to be skeptical. After all, California is home to most of the fruits and nuts produced in the U.S. But the lessor is a lawyer who worked as a California permitting expert most of his career. He knows what can and cannot be done.
When I first looked at the story, it was clear to me that with good management this was an easy 2–3 banger and with any tailwind from the price of gold, an easy 10-bagger. Where do you go when you have six high-grade gold mines in an area that needs tax revenue and the company has a $4 million market cap?
But you have to have something that sparks the interest and loosens the wallets of potential investors. I think the company has come up with a near perfect solution.
I was semi-retired from the computer business when Barbara and I started 321gold almost twenty years ago. I got invited on a few site visits where I learned a lot but I lacked the professional credentials held by most of the other letter writers. I was older than most and way too lazy to go back to school so I had to come up with some simple rules of thumb where I didn't have to memorize bits of core to understand a deposit.
Rule 1. The further you go back in history, the higher the grade would have to have been to be economic. We can open pit, heap leach ore as low as 0.3 g/t at a profit in low cost environments such as Peru or Mexico. If you go back 100 years ago in the California mother lode, you would have needed half an ounce or higher to pay for underground gold mining. So any 100 year old mine that was in production and stopped would automatically be economic today.
Rule 2. Nobody ever gets over 90% recoveries unless they are very very good. Some of the minerals are always left in the tailings because at some point it isn't worth spending the money to recover what is left.
If some mines produced 225,000 ounces of gold over a hundred years ago they most certainly would have left at least 10% and maybe as high as 20%. Actually and this is still true, nobody mines to be efficient, they mine to make money. If they can make money on a heap leach at a 65% recovery, they are thrilled and have just left 35% sitting in the pad.
The last couple of years have not been a favorable time for a junior to be raising money. Like their brethren, Providence has been dying on the vine due to a general lack of interest on the part of investors to put money into exploration. But Providence has come up with an interesting solution.
There are stockpiles on the property from the old production at the mines. The largest is about 12,000 cubic meters. After getting an agreement from the owners to pay them a 10% Net Profit interest, Providence ran a major sampling test on the stockpile. Results showed good grade that appear to run about 3.0 grams per ton. Remember that alluvial mining is measured in cubic yards or cubic meters so 3.0 g/t gold is about 7.5 grams per cubic meter and that is wildly economic.
This material has rock about one inch in size and would need crushing before processing. I have suggested to management that they bite the bullet, rent a portable crusher and run some material through just to prove the gold is there. I have commented many times in the past that 43-101 hasn't caused the production of a single ounce of gold. Counting gold is not mining. Mining is the art and science of extracting minerals from the ground at a profit. You can count until the cows come home and it won't put a cent in your pockets.
Providence is at an interesting place. They have about 6 million warrants outstanding. Up until December 11th they can be exercised for $0.15 apiece. From this December until December 2020, the exercise price goes up to $0.20 and in the final year before expiration, the exercise price is $0.25. That creates a giant opportunity for astute investors.
Providence is absurdly cheap at $0.11. It has a current market cap of about $4 million CAD but underground potential for 1–4 million ounces of gold and 20,000–30,000 ounces sitting on surface in the stockpile.
Providence is going to start processing the stockpile in a mini-sample. When those results backup what their testing has already shown, they will scale up. It will cost little more than chump change to start testing and once potential investors see there is gold there I expect the shares to go higher. But those 6 million warrants will be a sort of cap until the 11th of December. Should the price go up to $0.15-$0.20 as I expect, warrant holders may well sell shares to exercise warrants. That will bring in about $900,000 to Providence and fund a serious stockpile production program. That in turn will finance the drill campaign for 2020 without further dilution.
It's a good plan, cheap and doable. I own a lot of shares in Providence bought in the open market and in two prior placements. I see this company as a potential giant home run. The stock will be cheap until the 11th of December and I don't see it being cheap after that.
Providence Gold is an advertiser and I am biased. Do your own due diligence.
Providence Gold Mines
PHD-V $0.11 (Nov 11, 2019)
PRRVF-OTCBB 37.6 million shares
Providence Gold website.
Bob Moriarty founded 321gold.com, with his late wife, Barbara Moriarty, more than 16 years ago. They later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Moriarty was a Marine F-4B and O-1 pilot with more than 832 missions in Vietnam. He holds 14 international aviation records.[NLINSERT]
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