Please see list of Risk Factors at the bottom of this article.
Bullfrog Gold Corp, Small Company, Big Leap Ahead?
In the past several months I've done a great deal of work on Bullfrog Gold Corp, (OTCQB:BFGC). Although a small company, Bullfrog has key financial backers in Dr. Philip Frost and Barry Honig. Bullfrog also has an extremely knowledgeable and versatile CEO with 49 years of experience in most aspects of the mining industry. David Beling, PE has either engineered or managed 12 open pit mines, 9 underground mines and 14 plants. Beling has also done his fair share of corporate development, capital raising, marketing and deal making.
Frost and Honig insist on having top notch management, consultants and technical people. Frost and Honig have demonstrated again and again their support of the companies they invest in. At a time when the environment for funding junior companies remains highly challenging, Bullfrog's access to capital is a tremendous competitive advantage.
With 40 million shares outstanding and a market cap of just $16 million, Bullfrog Gold does not have to become the next Allied Nevada (NYSEMKT:ANV) to be a great investment. Any of Bullfrog's three highly prospective projects could be company makers and 2013 could be the year the company is made!
Not All Junior Gold Miners are Extremely High Risk
Bullfrog Gold deserves more respect. It trades like a highly speculative exploration company, but based on my extensive due diligence, I think the risks are less than they may appear. Evidently, I'm not the only one who feels this way; ask Rick Winters, President of RMB Resources, a financing unit of Rand Merchant Bank. In December, Winters led a deal team through a substantial amount of due diligence resulting in a $4.2 million credit facility to fund Bullfrog Gold's Newsboy project. This was a huge de-risking event that was largely ignored by the market. Bullfrog stock traded up to the mid-to-upper $0.40's in January, but closed at $0.40 on February 4th.
Why would RMB, with hundreds of natural resource projects to choose from, loan cash to a high risk exploration company? Newsboy is Bullfrog Gold's most advanced project. Like me, RMB appears to think that the Newsboy project is closer to an early-stage development project than a pure exploration play. My due diligence and the validation of the Newsboy project from the RMB facility gives me high hopes for this project. Located in the same region as the Yarnell, Congress, Vulture and other historic high-grade gold mines, Newsboy is in good company.
Read All About It, Newsboy Alone Worth Up to $2 Per Share
In a recent interview, Mr. Winters stated that he believes the Newsboy project could be worth up to $90 million. Armed with this $90 million figure, I asked Beling what he thought Newsboy might be worth. Mr. Beling stated,
"Our Newsboy Project has a solid data base from work performed by several recognized mining companies and professional engineering firms during the past 25 years. Bullfrog has also drilled more than 50 holes in the past 14 months. Newsboy encompasses several square miles of host rocks that have been intensely altered by hydro-thermal mineral solutions that deposited gold, silver and other minerals. The main deposit has been defined by nearly 200 holes, yet remains open on the east where thicker higher grade mineralization was discovered in 2012."
"The Queen of Sheba and several other exploration targets within three miles of the main deposit are highly prospective with indicative higher grades from surface samples. RMB Resources has thoroughly examined the property and stated publicly their view of a preliminary estimated NPV of $90 million, based on a $1,700 gold price and a 5% discount factor."
It appears that Beling and RMB think that the Newsboy project alone could eventually be worth close to $2 per outstanding share. To better understand the $90 million NPV figure, I developed my own financial model for the project, effectively backing into RMB's prospective valuation. Then, I risked that valuation by incorporating a lower gold price assumption and a 7% discount factor instead of 5%. With these changes, my calculated NPV is approximately $70 million.
Of course, a junior miner never trades at 100% of NAV, at least not until it is in production. Junior gold miners with first production in three years or more are trading at 25%-75% of analyst-derived NAVs. With that in mind, I believe the Newsboy project alone should support a stock price equal to 50% of its NAV, or $1 per share.
Bullfrog and Klondike Projects Offer Substantial Upside as Well
Bullfrog Gold's other two projects offer added upside and excitement that make the stock an attractive and compelling investment. Valuing the company's Bullfrog and Klondike projects is admittedly more art than science. However, neither the Bullfrog nor the Klondike projects are green field, "grass roots," exploration plays. Each has evidence of gold, silver and other mineral deposits.
Here's what CEO Beling had to say about the Bullfrog, "BF," project,
"While the Bullfrog Project does not have drilled resources, it is strategically located adjacent to Barrick Gold's highly profitable operations from the mid-1980s to late-1990s. In total, roughly 2.3 million ounces of gold at an estimated grade of 0.081 opt was mined. As the mineral trends and structures mined by Barrick are striking to the NE on to Bullfrog Gold's property, the value of this project has the potential to be substantial."
Investors no doubt would like to know what the word, "substantial" means in this case. Unlike the huge amount of historical work done and money spent to date on Newsboy, including a Feasibility Study, the BF project is clearly a few steps behind. Still, the BF project has the next best thing to direct historical data… extremely close proximity to a past producing gold mine.
From Beling's comments and through studying Bullfrog's SEC filings and press releases, I believe the odds are fairly good that this project will also become a mine. Notably, the BF project is located less than a mile from a Barrick Gold (NYSE:ABX) mine that produced 200k ounces per year for more than a decade until 1999. Furthermore, Barrick's Montgomery-Shoshone open pit mine is immediately adjacent to Bullfrog Gold's property. Barrick stopped mining for three simple reasons; gold prices were falling, (from an average of $388 per ounce in 1996 to $279 in 1999), strip ratios were rising and they had reached pit limits or land boundaries.
Gold Prices Today are 600% Higher Than in 1999!
Despite events working against Barrick by 1999, today Beling's BF project is looking increasingly promising. Gold prices at about $1,675 per ounce are six times higher than they were in 1999. Importantly, the BF project controls essential acreage that Barrick did not have access to.
Until further drilling is completed at the BF project later this year, an estimated NPV is impossible to calculate with any degree of accuracy. However, Corvus Gold's (CORVF.PK) North Bullfrog Project, situated 10 km north of Beatty, NV, and 8 km north of Barrick Gold's former Bullfrog Mine, is quite close to Bullfrog Gold's BF project.
Conservatively assuming that Corvus Gold's North Bullfrog project is three times the size and three years ahead of Bullfrog Gold's BF project, the BF project has substantial potential value. Corvus Gold's North Bullfrog NPV (7.5%) is $186 million. Dividing that figure by 3 equals $62 million. $62 million discounted back three years at a conservative 15% discount factor is $41 million. Corvus Gold's project is by no means extraordinary, its economics are well within reach of Bullfrog's BF project. I argue that any gold mine that makes it into production in this region should be worth well into the $10s of millions.
Bullfrog Gold's Third Key Project--Klondike!
Beling describes the Klondike property this way,
"The Klondike property covers nearly all of the historic Alpha Mining District (District) in central Nevada and has shallow, relatively high grade silver with potential byproducts of copper, lead, zinc and barite in several exploration target areas. As a result, the Klondike project may also develop substantial value."
"In this regard, there are many examples of world class silver / zinc deposits around the world including San Cristabal in Bolivia, Penasquito in Mexico and Cordero, also in Mexico. These massive silver / zinc deposits provide clues that the mineral mix at Klondike has the potential to be vast."
Klondike has the most risk of Bullfrog's three assets and the potential is huge. Make no mistake, it's still early, but just a few drilling campaigns this year and next will provide very valuable information. Klondike could have multiple ounce silver grades within 50 feet of surface. The economics of just two opt silver are compelling as two ounces are worth $60 per ton in today's market. It's reasonable to assume that near-surface silver could potentially be mined and heap leached at an operating cost of about $15 per ton, so clearly robust margins are possible.
The occurrences of significant quantities of barite (used in drilling muds) in much of the District could likely be a valuable by-product if conventional milling or gravity separation processes are applied at Klondike. The market for barite is strong, with prices near $150 per ton for drill grade and $300 per ton for chemical grade products. While the possible size of this deposit is of course unknown, Bullfrog controls close to 5k acres at the foot of the Sulphur Springs Range.
It's important to also point out that although Bullfrog Gold Corp is focused on exploring and developing the three main assets described above, it also is selectively pursuing acquisitions and business opportunities that could further add value to the Company.
All-in Valuation Supports Stock Price North of $1 per Share
To recap, the Newsboy project alone could be worth near $2 per outstanding share. Although less advanced than Newsboy, Beling's Bullfrog project shows ample evidence of good quality gold that with sustained drilling could add up to commercial quantities. Klondike, while the most risky, could have the biggest upside. Taken together, Bullfrog has a portfolio of projects with a prudent range of risk, diversified across three distinct, highly prospective areas.
But how much might that basket of projects be worth? Simply ascribing an arbitrary but not crazy valuation of $40 million for the combined Bullfrog and Klondike projects and $80 million (midpoint of mine and RMB's NPVs) for Newsboy, that equates to $3 per outstanding share. It's difficult to say what the appropriate discount to my $3 figure should be. At $0.40 per share, a discount of 87%, there's tremendous room for upside and a share price north of $1 by year end seems reasonable.
Newsboy Site Visit
On January 17th, I spent the day near Phoenix with CEO David Beling and Chief Consulting Geologist, Clive R.G. Bailey, on a site tour of Bullfrog's Newsboy project. That night, Beling was the featured speaker at a presentation to the Society of Mining Engineers in Phoenix. My visit was both fascinating and informative. In addition to expanding the main deposit and drilling the nearby Queen of Sheba target, wide-spread, "chip-rock" sampling of the property has shown promising results.
Access to the Newsboy site is excellent, a regular paved highway, then hard compacted, county-maintained road for just a few more miles. A power line runs within three miles of site. The towns of Wickenburg and Morristown are within 10 miles. Newsboy could employ up to one hundred people. A hundred relatively high-paying direct jobs, plus ancillary jobs, would be a big deal in the area.
Newsboy has an historic resource of 235k ounces of gold. Importantly, this figure is only for a proposed pit that a prior owner planned on developing in the early 1990s. A Feasibility Study was completed for a 600k ton per year open pit mine and carbon-in-leach milling operation. Since the early 1990s, more than $10 million (in today's dollars) has been spent on the Newsboy project. It's difficult to over-estimate the importance of the historical data that Bullfrog has been able to obtain.
At Beling's speech that evening, over 70 people, including a handful of investors, watched his presentation on Bullfrog Gold. Beling did an excellent job of articulating the significant progress and the highly prospective nature of the company's three projects. Given the largely technical / professional audience, he did not hard sell the story, but Beling's 49 years of operational, financial, managerial, marketing and capital raising experience came across loud and clear.
My thesis on Bullfrog Gold Corp is that the company is not as risky as many peer junior gold companies, yet offers substantial upside. However, Bullfrog is of course a high risk investment and it is not suitable for all investors. Owning a diversified basket of junior gold companies is probably a good idea. It is probably a bad idea to bet the farm on Bullfrog Gold Corp or any other high risk investment.
Please see Bullfrog's January, 2013 S-1 filing for a much more detailed list of Risk Factors, [SEE PAGES 3-10]. An investment in Bullfrog Gold should not be made before carefully reviewing the company's S-1 filing.
Other Key Company Documents:
Management Presentation January 16, 2013
December 17, 2012 Press Release Lease of 2 Vital Patented Claims
December 12, 2012 Press Release $4.2 Million Debt Facility
August 28, 2012 Press Release Excellent Phase 2 Drill Results
July 10, 2012 Press Release Locks Up Very Promising Klondike Play
May 1, 2012 Press Release Discovers High Grade Gold in Phase 1 Drilling
Detailed Map of Bullfrog Project Showing BF Project and Barrick Mines
Newsboy, AZ Historical Ounces 235k Historical Ounces Gold
Summary List of Risk Factors (from Company's S-1 filing)
"We are a new company with a short history and have only lost money
Since we have a limited operating history, it is difficult for potential investors to evaluate our business
Exploring for gold is an inherently speculative business
We will need to obtain continued financing to fund exploration
We do not know if our properties contain any gold or other minerals that can be mined at a profit
We are a junior exploration company with no mining operations and we may never have any mining operations in the future
Our business is subject to extensive environmental regulations which may make exploring for or mining prohibitively expensive
We may be denied the government licenses and permits which we need to explore on our properties
In the event that we discover commercial deposits, we may be denied the additional licenses and permits which we will need to mine our properties
Our property titles may be challenged. We are not insured against any challenges, impairments or defects to our mineral claims or property titles
We do not carry any property or casualty insurance and do not intend to carry such insurance in the future
Exercise of options and warrants and/or conversion of preferred stock will dilute your percentage of ownership
If we lose key personnel or are unable to attract additional qualified personnel we may not be able to successfully manage our business
Our common stock is subject to the "Penny Stock" rules of the SEC, which can make transactions in our stock cumbersome and may reduce the value of an investment in our stock."
Disclosure: I am long OTCQB:BFGC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.