The merger of NewCastle Gold (OTCPK:CTMQF) and Catalyst Copper presents an opportunity to speculate on a rise in share price that typically follows drilling that substantially increases the mineral resources already identified. In this case, the odds of success are somewhat better than a greenfield project as the property in question already has a history of gold production and an NI 43-101 resource delineated.
I have adopted the following model for this investment:
Source: World of Wallstreet
On 5-26-16 NewCastle Gold merged with Catalyst Copper and emerged as a refinanced NewCastle Gold with about $6.5 million in cash to advance the Castle Mountain Gold Project in San Bernardino County, California. The Castle Mountain mine was operated under prior management for 10 years from 1992 to 2001 and produced more than one million ounces of gold. Catalyst owns 60% of the La Verde Copper Project (remaining 40%-owned indirectly by Teck Resources Limited) in Michoacan State in Mexico. The latter project is currently dead-in-the water with low copper prices. The Catalyst board, having consolidated shares in 2013 and 2014 and having no prospects to develop the La Verde Project, decided to pursue NewCastle which was short on development funds. NewCastle has an NI 43-101 resource for the Castle Mountain Project announced December 2, 2015 which includes Measured Mineral Resources of 17.4 million tonnes grading 0.86 g/t gold containing 0.48 million gold ounces, Indicated Mineral Resources of 202.5 million tonnes grading 0.57 g/t gold containing 3.71 million gold ounces along with Inferred Mineral Resources of 40.8 million tonnes grading 0.58 g/t gold and containing 0.76 million gold ounces.
In April 2016 the boards of the companies agreed on several steps to put the merged NewCastle in position to pursue further development of the Castle Mountain Project, with Catalyst bringing no less than C$3.7 million net cash upon closing the merger. In addition, Catalyst subscribed to a C$600,000 private placement of NewCastle shares and agreed to issue a C$400,000 convertible note. NewCastle entered into a new royalty and subscription agreement with Franco-Nevada totaling C$3.4 million paid to NewCastle that replaced five preexisting royalties with one 2.65% royalty covering all Castle Mountain Project claims together with a sale to Franco-Nevada of "Subscription Receipts" that entitle the latter to NewCastle shares and purchase warrants exercisable for shares at $C0.65 for five years after closing.
The post merger board includes Richard Warke, currently the Executive Chairman of Arizona Mining Inc. and who was involved in the sale of Augusta Resource Corp. and Ventana Gold Corp., sold respectively for $666 million and $1.533 billion. It also includes Jim Gowans formerly Co-President of Barrick Gold Corporation from July 2014 to August 2015 and Executive Vice President and Chief Operating Officer from January to July 2014.
Since the merger David Adamson, President and Ceo of NewCastle has resigned and Richard Warke, the Executive Chairman, will act as CEO.
Drilling to expand the resource will take place in several phases, with the first phase initiated on 6-9-16 and is expected to conclude in September 2016. The second phase will follow and is expected to be completed by Q2 2017. The July corporate presentation provides details of the drilling programs as well as data suggesting NewCastle is significantly undervalued relative to its peers.
Some speculators may find this an opportunity to risk funds on the prospect that drilling will substantially increase NewCastle's resources and that the new board members are highly motivated to develop and market the company. The shares have run up considerably since the merger was announced and completed, but have fallen back recently. I believe the shares could rise to as much as $C1.50 upon good drilling results.
Be advised that drilling may be unsuccessful in expanding the resource and if so, NewCastle may be unable to pursue development of the Castle Mountain Gold Project. In that event, none of the projects under NewCastle management may go forward and the share price will decline precipitously. Also, it is possible that the state of California will not issue the required permits to reopen the Castle Mountain mine.
Disclosure: I am/we are long NEWCASTLE GOLD.
Additional disclosure: I have been a shareholder of Catalyst Copper. My shares were converted to NewCastle Gold shares upon the merger of the companies.
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