DR. O’DEA has built and financed international mining companies from Canada to Africa, taking them from exploration and discovery to development and operations. Dr. O’Dea has co-founded and acted as a chairman/CEO for various corporations including True Gold Mining Inc., True North Nickel, Aurora Energy, and Fronteer Gold, growing the latter from startup to its 2011 sale to Newmont Mining Corp., a deal that included the spin-out of Liberty Gold.
He is also the founder of of Oxygen Capital Corp., and serves as Chairman/Director of the/many companies within the Oxygen Capital family, including Pure Gold Mining, Discovery Metals, and Sun Metals.
Dr. O’Dea, great to have you back with The Assay again. Can you give us a quick intro into how Pure Gold Mining got started?
Back in 2014, Darin Labrenz (Pure Gold Mining’s company president and CEO) and I identified an incredible opportunity to acquire a high-quality gold asset from Claude Resources. It was a high-grade, past-producing mine in Red Lake Ontario that Claude was being forced to sell due to balance sheet stress. This project ticked all the boxes for us – it had grade, size, growth potential, and importantly, it was located in an area that we both knew really well. We had each cut our teeth in Red Lake as younger geologists; we knew the rocks and we understood how these deposits formed and how to explore for them. We also knew that these legendary gold deposits have very deep roots, and that the real prize was still yet to be found. We got to work fast, raising money from cornerstone investors, who are still with us today, pulling together a management team and board with uniquely strong Red Lake experience, and finally creating PureGold Mining.
Thomas Edison once said that “opportunity is missed by most people because it is dressed in overalls and looks like work”. If we look back at 2014, most of us can recall that it was a time of incredibly tough markets and hard work. Sentiment for gold stocks was apathetic at best, valuations were falling, and financing was very difficult to come by. But these dynamics created an amazing opportunity for PureGold. We were able to purchase this Tier 1 project for just CAD 10 million. Now known as the PureGold Red Lake Mine, it has it all. With our Phase 1 reserves at 9g/t, and resources well over two million ounces, it will be the fifth highest-grade gold mine in Canada and ranked 17th worldwide.
Yet we still feel we have barely scratched the surface of this gold deposit. Its growth potential is extraordinary, and we see it as a driving force in the future of the whole Red Lake mining camp. It’s scheduled to be in production by the end of this year.
Why do you think so many explorers and mining companies are setting up shop in the Red Lake District?
Red Lake has always had a gravitational pull for exploration and mining companies. It has such a rich history of high-grade gold production and is where Tier 1 mining companies are born and bred. For example, the discovery of the famous High-Grade Zone in the late 1990s transformed Goldcorp into one of the largest gold miners on the planet and became a must-own company for specialists and generalists alike. It was Placer Dome’s bread and butter and jewelry box for decades. Red Lake exists as a place because of mining so, as a location, you couldn’t ask for any better. And because of its history and genesis, it comes with a highly skilled and competent workforce, supportive community, supportive local and provincial government, and the support of local First Nations.
I would stress, however, that not all geology in Red Lake is created equal. Certain ingredients are critical for the creation of large high-grade deposits. You need to be in the right rocks, and you need to be along the right structures. There have been 30 million ounces of historical production in the camp and over 90 percent of that has come from only two areas, owned today by only two companies, Evolution Mining (ASX: EVN) and PureGold. Together, we control the most fertile corridors of gold in the district, and in my opinion, the bulk of gold production for decades to come.
Specifically looking at your PureGold Red Lake Mine, what do you think differentiates you from other emerging gold producers?
Let’s start with the people and the specific experience they bring to the table in Red Lake. There are six of us on the Board and Management Team who have deep experience in the camp. Darin Labrenz, Phil Smerchanski, Chris Lee, Rob Pease, and Maryse Belanger, and I all have extensive Red Lake experience. Without question, our group has more on-the-ground work experience in Red Lake than any other group in the world. Beyond that, our broader owners’ team has been involved in the construction of 33 mines and the operations at 68 mines, and played key roles in the exploration, discovery and/or advancement of 64 economic projects around the world.
Being in a great mining jurisdiction like Canada is a real positive relative to other junior producers who are in more challenging regions. We also have the benefit of being at all-time highs in Canadian dollar gold prices. With a weakening Canadian dollar, gold is now at ~2,400 CAN per ounce. At these levels, our mine will generate a margin of roughly CAD 1,300 per ounce. That translates into approximately CAD 1.3 billion in pre-tax free cash flow on our Phase 1 mine plan alone. The massive margin expansions that the industry is seeing from a rising gold price are not yet baked into equity valuations for junior producers like PureGold.
Lastly, one of the biggest risks in this business comes from a poor understanding of your orebody through insufficient drilling. We mitigate this risk and differentiate ourselves by having over 1.3 million metres of drilling defining our reserves and resources. That translates into a drill hole every 6.5 metres in our reserves. I have never worked on a project with that density of drilling. It really is astounding. What that means is that we have an exceptionally good understanding of the shape of our orebody and its distribution of grade.
Do you see additional resources being converted into reserves? If so, where do you see your growth coming from, and what is attracting some of your bigger investors?
We see resource growth coming from the expansion of known zones, as well as the discovery of new ones. The amount of prospective real estate along and underneath our deposit is remarkable, and that’s a big part of our growth story.
To date, we have already defined two and a half million ounces of high-grade gold from the surface down to a depth of 1.2 km. We have intersected the deposit in drilling at over 2 km of depth with the same mineralization and same grades, so we know it goes significantly deeper. Historically, the Madsen mine, which is part of our PureGold Red Lake Mine, produced 2.6 million ounces in a parallel zone over a consecutive 36 years production, and was never developed deeper than approximately 1 km. Added together with ours, that’s over five million ounces of endowment in just the first kilometre of depth, and I believe we’ll prove that there’s 10 million ounces, or more, of high-grade gold waiting to be discovered right there.
One area in particular that we are very excited about is called the 8 Zone. It’s wide open, up and down plunge, and is characterized by very high-grade gold grades with intercepts such as 466.0 g/t gold over 4.3 metres and 342.4 g/t gold over 5.5 metres. Some assays run into the kilograms of gold per tonne of ore, which is incredible. We believe this zone is very similar to the High-Grade Zone at the Red Lake Mine Complex that transformed Goldcorp into a household name in the early 2000s. Having exploration success with the expansion of our 8 Zone alone gives us the potential to create real transformative growth.
To give you more context, the discovery of the High-Grade Zone was a game-changing moment in the development of the Red Lake Mine Complex and the evolution of Goldcorp. After its discovery in the early 2000s, head grades ran up to +70g/t, making it the lowest-cost mine on the planet.
Transformative growth potential is a key aspect of our PureGold Red Lake Mine story and it’s the reason that several major investors including Anglogold Ashanti (JSE: ANG) (15 percent), Eric Sprott (12 percent), Rob McEwen, and Newmont Goldcorp (NYSE: NEM) have become major shareholders of PureGold. As you know, Eric Sprott just made another significant investment (CAD $ 15M financing) with the funds entirely earmarked for exploration and resource expansion. In a press release, he was recently quoted as saying, “The ultra-high-grade hits in the 8 Zone remind me a lot of the HG zone that built Goldcorp, as well as SMC at Macassa and the Swan Zone at Fosterville. These are the types of discoveries that have the potential to be company makers and tend to lead to a much higher production profile than originally given credit.”
PureGold is taking a phased approach to mine development. Is there visibility to higher production and longer mine life?
Absolutely. Our 47 km2 land package covers over 10 km of key Red Lake Camp geology. We have a large high-grade deposit in a strong, open 7+ km high-grade gold corridor that’s ripe for expansion in every direction. We continue to discover new high-grade gold all along this system – at the surface and up to 2 km underground. In less than five years, we’ve added over two million ounces of gold – and this is just the tip of the iceberg in the development of this deposit. Our one-million-ounce reserve at 9.0 g/t gold is only a fraction of the mineral resource. We’ve already made at-surface discoveries outside of the Phase 1 footprint, and we’re already thinking about what an expansion would look like. This is the low-hanging fruit.
As we know, these types of deposits can continue for kilometres at depth. Our neighbour, Evolution’s Red Lake Mine, has produced over 20 million ounces and is currently mining at over twice the depth of our deepest mineral reserves. We expect our deposit to continue to similar depths. And we have 1.3 million metres of drilling to support this belief, including holes intersecting the deposit with the same mineralization and same grades down to over 2 km depth. With 2.5 million ounces produced in the top kilometre, and well over two million ounces in our current resource, it’s very easy to see where our next five million ounces sits. Using our Phased Approach, we’ll continue to grow and develop this deposit and see the potential for a long life multi-generational asset, providing gold production in Red Lake for decades to come.
Are you fully funded to get to production? What are the next steps?
We are about six months away from the first gold pour. We are on budget and on schedule to be in production by Christmas, so we can see the goal line. One of the huge advantages of our location is that our construction ramp-up period is very short, and we are poised to deliver into a very buoyant gold market.
We’re also excited to recommence exploration. With approximately CAD $ 150 million available in funding and CAD $ 86 million remaining on capital expenditure to complete our mine construction, the company is in a uniquely solid financial position to be able to concurrently fund an aggressive exploration and expansion program. Commencing in early June, this program will include underground drilling focused on the expansion of mineral resources in areas targeted for early production, as well as the expansion of new high-grade discoveries at both surface and depth across our 47km2 property. This drilling will enable us to accelerate our resource growth plan, without impacting our capital budget for final mine completion and first gold pour.
“The massive margin expansions that the industry is seeing from a rising gold price are not yet baked into equity valuations for junior producers like PureGold.”
Based on that timeline, it’s looking like you might start producing with the gold price at an all-time high; where do you see the price going in H2 2020 and what do you see driving it?
I see several driving forces behind the continued rise in gold price. The broad stock market has been hit hard and the fear that we may see it hit yet again and test new lows like we saw a few months back has not completely disappeared. This is against a backdrop of debt at record highs and governments that continue to print trillions of dollars to stabilize struggling economies with interest rates that are nearly zero. So, with all of those variables, there remains a sense of risk in the air. Gold has reacted to that and become a counterpoint to the fear and risk. Gold looks to be in a very good place right now and has done what it needed to; it has adjusted upwards very nicely. It’s up 33 percent over the past year and it’s up 13 percent year to date in the face of this massive financial crisis, trading at or above USD 1700 an ounce.
We know that as governments print trillions of dollars, the purchasing power of the dollar begins to decline, and I don’t see this big government spending decreasing anytime soon. Gold, which is rare and intrinsically valuable, as opposed to a paper dollar, is a way to preserve the purchasing power of your money. I usually stay away from making predictions, but given the macroenvironment that we just discussed, I could see us reaching USD 2,000/ounce this year.
All of this has created incredible opportunities in gold equities right now. In particular, we are seeing the growth in operating margins increase dramatically with the rise in gold price. As an example, if a company was making CAD $ 300 an ounce in margin one year ago, they are now making double that, and that increase in profitability goes straight to their bottom line. So, in my opinion, that massive margin expansion is not yet priced into their equity valuation of junior or emerging producers. I believe that this is a real opportunity for investors.
“Gold, which is rare and intrinsically valuable, as opposed to a paper dollar, is a way to preserve the purchasing power of your money”
Last year you indicated that the mining industry needs to be more environmentally aware and forward-thinking. Do you think that the COVID-19 pandemic will make this even more of a focus going forward?
This pandemic has certainly created another factor that ethically minded investors are going to look at; and for mining companies, it is the right thing to do. At Oxygen, we have always made it a practice to be good, conscientious employers and neighbours, wherever we operate. News travels very quickly via social media and if a company experiences a pandemic-related issue or worse, has a COVID-19 outbreak, investors are going to want transparency around what management did proactively to protect their workforce, their families, and the communities they operate in. As mining companies continue to develop their best practices around COVID-19, they need to keep in mind that with each year, owing largely to the online world and social change, people increasingly have more awareness of what goes on in their own communities and other countries.
The impact of the pandemic in developing countries could be long-lasting and devastating, both on the social fabric of their communities and also on their fragile economies. This could be a situation that persists for years to come and, in turn, greatly increases the risk and difficulty for any mining company trying to advance a project in developing economies.
For developed countries like the US and Canada, there is recognition that big mining and development projects will become a key part of the engine for re-stimulating the economy through all the direct and indirect benefits and the increased tax base created. Both countries have established legal systems, governments, and institutions that can better manage the impacts of the pandemic which will foster stability and economic growth.