A gold junior with a net smelter returns royalty on a property in Nevada joint-ventured between Barrick Gold (NYSE:ABX, TSX:ABX) and Midway Gold (TSXV:MDW) has been getting traction in the market and is on the radar of at least one influential commodities analyst/ newsletter writer.
In a note to shareholders published on May 30th, Terraco Gold (TSXV:TEN) said that Barrick (NYSE:ABX, TSX:ABX), the world’s second largest gold company by market cap, now holds a 60 percent interest in the Spring Valley project located in Pershing County, Nevada — which it earned by investing over $30 million in exploration expenditures.
That is significant for Terraco because the Vancouver-based junior has a net smelter returns (NSR) royalty at Spring Valley whereby Terraco has the option to acquire up to a 3 percent NSR on claims covering the ore body.
The latest drill results published by Midway Gold on May 29th showed high-grade gold at Spring Valley, including intercepts of 1.47 grams per tonne including 21 meters of 7.54 g/t and 23 meters of 3.02 g/t.
“The Barrick path to production and therefore potential future cash flow from the project should create sizeable value with Terraco’s (up to) 3% NSR royalty and royalty option on claims covering the known ore body at Spring Valley,” Terraco said, noting that Barrick plans to spend another $8 million to further drill the property, which would hike Barrick’s interest to 70 percent.
“Barrick’s continued great work at Spring Valley is a definite highlight for the mining space and the project is one of the fastest advancing path to production gold stories in Nevada.”
The deposit contains an NI 43-101 compliant 4.1 million ounces of gold, with Barrick’s 2009 and 2010 drilling confirming gold mineralization open to the north and at depth.
The market has rewarded both Midway Gold and Terraco for their recent progress at Spring Valley. Midway’s stock has risen 6 percent over the past three months and 20 percent over the past month, while Terraco’s has done even better, with an 11 percent and 25 percent gain over the same time frames.
Terraco has not escaped the notice of House Mountain Partners founder Chris Berry, who wrote in a recent edition of Morning Notes that the growth of the resource at Spring Valley also means significant upside potential for Terraco:
“It appears to us that these drill results indicate a major structure at Spring Valley,” wrote Berry. “Make no mistake, we believe these new intercepts may significantly increase the potential for wealth creation.”
How much wealth? Berry estimates in the note that the royalty interest could be worth as much as $80 million, which is roughly four times the market cap of Terraco, making the company significantly undervalued: “We believe there is a very clear disconnect between the intrinsic value of the company and its market value.”
Berry also observes that the NSR provides Terraco with options to move forward on its other main projects, Moonlight in Nevada and Almaden-Nutmeg Mountain in Idaho. Of those two properties, Almaden is the more advanced, with 864,000 ounces of gold in the measured and indicated categories. Moonlight is about 8 kilometers north of the producing Coeur d’Alene Rochester silver-gold mine and has been minimally explored.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.