Novo Stumbles, Market Panics
I have covered the Novo saga for almost a decade now and have even written a book covering the story right up to the first gold pour eight weeks ago. I was part of the story going all the way back to 1977 when I took a Rockwell 685 from Florida to Australia for Lang Hancock, the 2nd richest man in the country. I had with me the son-in-law of Hancock who managed to bore me for 75 hours of flight talking about how the Pilbara had 29% of the world’s iron reserves. The deposits were the richest in the world. The banded iron formations precipitated iron out of salt water about 2.8 billion years ago when single cell creatures began to produce oxygen. Gold does the same thing.
Novo has three primary agendas in the Pilbara basin. The mine and mill at Nullagine using ore from Beatons Creek is the least meaningful. Novo controls 12,000 square km of ground around Karratha they believe prospective for conglomerate gold. It will be fifty to one hundred years before we get a real feel for how much gold there is there. But Novo has bought a mechanical sorter and wants to begin tests with it this quarter.
My favorite of the three projects is Egina and the surrounds. As far as I am concerned, it is the jewelry box. Cheap to process and a lot of near surface gold. I visited the project with Dr. Keith Barron four years ago. Not a lot of people know it but Keith is one of the largest placer operators in the US. He mines sapphires in Montana and his operation is the largest sapphire placer mine in the world. He doesn’t know placer operations from a theoretical basis, he owns a mining operation and knows the costs to a penny. Based on current costs of people and fuel in Australia, Keith told me that Novo can mine gold at Egina for a cash cost of $10 a cubic meter or about $300 per ounce of gold. Novo has done studies showing grades at Egina of over one gram per cubic meter.
For two years there has been a surfeit of news about progress at Egina because of a lack of a heritage agreement from the two native groups that control the area. For the first year it was because those agreements take a lot of time to mull over and for the last year it has been because Covid stopped the two groups from interacting at all. There is absolutely nothing Novo could do to speed things up that they haven’t tried. So the project that will be the highest profit percentage terms in return is stuck at the testing stage until the native groups wake up.
On April 14th Quinton Hennigh announced plans to raise $22 million in a private placement at $2.55 a unit. Novo haters slithered out of their holes in glee and Novo lovers shit their pants at the surprise announcement. Everyone, including Quinton Hennigh, me, and all the shareholders were hoping there would be no particular need to a further dilution to the share structure after the mill went into production two months ago.
From reading the chat boards, clearly few actually understand how difficult a startup operation can be. Posters were literally demanding production figures from the first day. I’ve put half a dozen placer projects into production and until you have done it a few times you cannot imagine the hurdles you have to leap over in a single jump. There were some nice surprises such as 50% of the free gold being captured in the gravity circuit. That means the cyanide vats have more potential for production that means more gold produced. That’s a good thing. But there were glitches that literally no one thought of.
There were local children that like to fish off a bridge that the ore trucks have to drive over coming and going to the mine site. If you want to piss off the entire community, try running over one of their kids by mistake. If you want to piss off the kids, try convincing them they can’t fish off the bridge they have fished off their entire life.
Then they needed to replace part of the ball mill liner. Since that had just been done in advance of startup, it shouldn’t have been required. But it was. That caused a delay in replacing the liner. In hindsight they realized they were being too cautious and the mill needed more material in it to soften the impact of the steel balls. If you run a ball mill with no rock in it, the balls will destroy the liner overnight. By being conservative, they were destroying the equipment.
Then they had to feed lower grade material through the mill because it blocked access to the higher-grade material at the mine site that they really wanted to use in production. These are all things that were driving Quinton and the Novo team nuts.
It didn’t bother me in the slightest. Things are supposed to be screwed up as you go into production on what are essentially a new mill and a new operating crew. If they thought everything was just wonderful, then I would be nervous.
I’m going to share with my readers a piece of sterling advice I have learned over the years.
If you aren’t making mistakes, you aren’t making enough decisions. When humans make decisions, often they err. The key is to not keep making the same mistake again and again. Mistakes are ok. What is not ok is to do the same stupid thing again and again.
Quinton made a decision. I don’t give a rat’s ass if it was the right decision or not, it simply doesn’t make any difference. I hate dilution and he determined he needed to cash the company up for the same reason a dog goes in the road to lick his dick.
Because he can.
Companies don’t go teats up because they run out of ore; they collapse because they lose control of their finances. When Novo was doing normal exploration on the three major projects, they were burning through about $1.5 million a month. Putting the mill into production and paying for the mining has jacked up the burn rate to $12 million a month just for mining and milling.
The QP who did the PFS recommended Novo do 20X20 infill drilling for grade control. As they got into production they realized they were diluting the grade because of a lack of precise grade control. When they talked to the QP he said to tighten the drill spacing a lot. It would be very foolish to ignore his advice.
The primary purpose of the PP is keeping a decent cash balance. The secondary purpose is to comply with wise advice from the QP on the drilling. There is also another issue that should be discussed. Working in WA during their summer/our winter is tough. When WA goes through the cyclone season as it just finished, literally you can’t work at all. Nullagine was flooded well into actual production in February.
If Quinton halts all work at Karratha until Beatons Creek will support their exploration, he could easily lose the entire winter working season. And there is no telling when the natives will come to the table at Egina. I hope that he is thinking of keeping some cash reserve for those all-important projects. Novo has paid for a Steinhart sorter, it would be pretty silly to run out of the cash to test it on the Comet Well ore.
There is another factor in the drop in Novo shares over the past ten days or so. It is typical in the finance business that the minute you go to brokers and start talking about doing a placement, they promptly short the shares. For one thing, it lowers the price of the PP and they can replace the shorted shares in the PP and get zero risk warrants as part of the deal.
The price of Novo didn’t go down $.42 on April 14th because of any malfeasance or stupidity on the part of Novo. Quinton made a reasonable financial decision that is good for Novo shareholders. If anyone sold their shares in a panic I think they will soon see a change in attitude on their part. I wish there was no dilution of shares but I also don’t care. The substance of what I have been saying for almost a decade is still there.
Novo is an advertiser and I am biased. Do your own due diligence.
Novo Resources Corp