“Tiny co. strikes gold in abandoned mine” Chuck de Castro

By Travis Johnson, Stock Gumshoe, January 30, 2009

Is it even possible to slip back in time a year or two, to our delightful bull market past, and remember how differently we looked at things?

At this time of year in 2007 we would have been sifting through teasers about how the latest LCD maker or electronics store was going to benefit from sales of big screen TVs for the Super Bowl … or about how much money Chinese travel companies would make during the Lunar New Year celebrations.

Today, alas, we’re looking at gold. That pretty much says everything you need to know about investor sentiment.

Chuck de Castro edits the Penny Mining Speculator newsletter, which, as you can guess from the name, looks for microcap mining stocks that might have the potential for massive returns. It should probably go without saying, that almost has to mean that the record of his newsletter is going to be based on a lot of duds that didn’t pan out, and a few hugely successful breakout companies. He claims credit for a few big winners, notably Nido Petroleum, which he says got his subscribers 2,844% gains.

I can’t verify that, of course, but I’d urge you to note that in his advertising he doesn’t brag about his overall returns, or his average returns — though the dozen or so closed trades that he claims credit for in the ad do sound impressive (most with 100%+ short term gains, a few with losses of 20% or so, and his “open” portfolio apparently has some good recent performers, perhaps thanks in large part to the big run in gold and silver prices recently).

That’s neither here nor there, of course — the question is, for the gamblers out there, what is the tiny company that he thinks is the most exciting glold play right now, and is it really all that he says it is?

For that, you can turn to your friendly neighborhood Stock Gumshoe — assuming, of course, that you’re not interested in ponying up $3,250 for a subscription … and I think we’ve got some interesting info about this one, but let me preface all of this by saying that I’m no expert in gold miners, nor am I a geologist. I plain don’t understand much of the stuff about “assays” and “veins” and such … but certainly folks love gold these days, so let’s see what we can uncover for you.

Here’s the marketing language from de Castro:

“This gold mine was once one of the richest gold mines in the world, and it looks like it’s going to have a second day in the sun.

“It set many world records, several of which still stand after a hundred years — including the most gold ever extracted from a ton of ore, and the largest single nugget of gold ever found (containing 3,100 ounces of gold).

But as the old miners followed the rich veins of gold deeper into the earth, they ran into a water table. They were sure there was a lot more gold deeper down, but every time they tried to get at it, the mine flooded.

“Since they didn’t have sophisticated pumping systems or diesel generators back then, they had to shut the mine down. And the mine lay dormant for more than 80 years.”

There are a couple clues in there, but we get some more further down in the letter:

“small company bought out all the old mining claims around the old mine and secured 591 square miles of highly promising gold properties…”

“Near-term, I expect them to produce 50,000 ounces of gold a year. In two years, I expect that to grow to 100,000 ounces a year….”

“you’re looking at a company which almost certainly has at least $2 billion of gold in the ground — and probably a lot more.

“The managing director told me he thinks there’s $5 billion in gold, and has gone on the record saying so.”

We learn that the company was originally working with one old mining site, but that they’ve bought up some neighboring companies and mines and continued drilling, including one drill sample that “showed an amazing 355 grams per ton.” (He noted earlier that many mines are very profitable at 5 grams/ton, and this companies drilling had shown an average of 31 grams/ton).

These shares are currently trading for 11 cents, we’re told … and of course, we’re told that the potential is stupendous …

“I see the shares doubling or tripling over the next 12 months. Longer-term, if you’re prepared to sit on your stock while they explore their property and bring one vein after another into production, I think these shares will go to $2 or even $3. If you get in now, this is a company that could multiply your money about 18 times.”

These are always fun little companies to trade or invest in, for those with stomachs of steel or a love of gambling … so what is it?

Thinkolator sez …

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Hill End Gold (HEGLF on the pink sheets, HEG in Australia)

For US investors who don’t trade in Australia, note that this one, according to Yahoo Finance, trades only an average of 50,000 shares — that’s only a bit over $5,000, so almost any investor could make those prices sway dramatically. Volume is not particularly large in Australia, either, just FYI. That means, just to spell this out, that it’s quite possible that even the Stock Gumshoe readership could easily move this stock dramatically if just a few folks get excited about the stock, so buyer beware and watch your limit price if you’re thinking of buying this one.

Hill End is an old gold mine, it is indeed the mine where the largest nugget ever mined was found, Holtermann’s Nugget, a whopping 3,100 ounces of gold. And it was an active mine for many years that then lay dormant, like many of the gold mines in nearby areas — the mine(s) are in New South Wales, not all that far from Sydney in southwestern Australia. The water table can be fairly high in this area, and that was indeed one of the impediments to deeper mining.

Another impediment and challenge, apparently, has been the nature of these gold veins — as befits an area where such a large nugget was found, the gold in this mine is very “nuggetized”, which sounds good but actually makes it very tough to do modern resource estimation and, to some degree, hard to mine with industrial processes. That’s because resource estimates look for tiny bits of gold in small drill samples, and extrapolate those samples. When the gold isn’t distributed fairly evenly in a vein and is in much larger nuggets, it is quite easy for a sample to include either no gold or a huge amount of gold, making estimates very difficult.

That’s about the extent of my understanding of this company — there was a nice long article on them in Gold Mining Journal last Fall [PDF file] that explains a lot of this, and provides much more detail … worth a read even if you don’t like buying these kinds of stocks. Since this is an Australian company there won’t be a huge amount of info on many finance websites, but the company itself makes some press coverage and, more importantly, it’s annual reports and filings available on their website here if you’d like to start digging.

The clues are a match beyond that one big Holtermann’s Nugget — de Castro claims that they have 591 square miles of territory to explore, and the company actually claims 1,531 square kilometers, which is an exact match if you do the math. The managing director, Philip Bruce, has said that 50,000 ounces of gold is a good estimate of their initial production capacity, and he has also stated the he thinks they will be able to produce 4-5 million ounces, which, depending on the price of gold, could be $5 billion worth of gold. And in the most recent quarterly report they reported this:

“Total gold produced was 1202 ounces from 1772 tonnes at 24g/t gold with 675 tonnes at a feed grade of 31g/t gold processed in December.”

So they’re actually producing gold now, and the 31 grams/ton claimed as an average by de Castro has at least some merit for current production. The company also announced that they’ll be selling their own gold bars, so maybe shareholders will get a chance to buy those, too (that’s just a guess).

Hill End also has a project in Laos, which some of the notes I’ve seen indicates might potentially be big someday, but they’re currently only in the permit application process, and of course political risks may well be significant there.

So … does that mean this is a great stock for you to buy? I can’t tell you that, and I know very little about any companies of similar size, or the comparative potential of various microcap gold companies, but I can tell you that this appears almost certainly to be de Castro’s pick. And I did listen to several interviews with Philip Bruce, and read several articles about the company and their projets, and I came out of it intrigued. Of course, the company has been working this area for about a decade and has a lot of losses built up, so one hopes they do end up with a big pile of gold.


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