NewCastle punches above its weight class at Castle Mountain

Six months ago, NewCastle Gold (TSX: NCA) enticed Gerald Panneton to join the company as president and CEO to help put its past-producing Castle Mountain project in California back into production.

The geologist is perhaps best known for founding Detour Gold (TSX: DGC) and growing its Detour Lake gold deposit in northern Ontario from 1.5 million oz. to over 15 million oz. in reserves, and bringing it into production less than six years after the acquisition.

“After doing the Detour story from scratch to the end of 2013, I spent the next couple of years looking at which stories interested me enough to bring me back to the mining industry into exploration and development,” Panneton says in an interview. “There was little to look at in 2014 and 2015 — they were difficult years in the mining industry — until the NewCastle opportunity came in July 2016.”

Panneton isn’t ruling out duplicating the success he had nurturing Detour Lake in Ontario.

“The main reason I decided to come out of retirement was because this is a wonderful story with excellent potential to grow,” he continues. “When I got to Detour in 2006, there was 1 million oz. gold … and I knew I could grow it from 1 million to 5 or 10 million. The potential at Detour was obvious because there was a lack of drilling. There was a lot of information there, it just took time to do it … the same thing can happen at NewCastle. We can take a resource of 4 million oz. and with time and drilling, perhaps we can reach 10 million ounces. If you can grow it or double it, it’s always attractive to shareholders, and it’s so much fun to do. It’s pretty certain to happen at Castle Mountain, because we control more than 20 km of the trend.”

He also liked the project because it is permitted for 8.2 million tonnes per year — or roughly 150,000 oz. gold annually — until 2025, at which point it can be renewed.

“If you want to start a project in California without a permit, good luck,” he says. “The 2025 permit can be extended at any time, which we will do this year when we start pre-stripping. This is only a local formality, and can be extended at our leisure.”

The mining permit is in good standing, and Panneton adds that “we could start the mine as soon as tomorrow if we wanted to, but in reality it doesn’t work like that. So that’s our goal: to go back into production within the next couple of years, with the 9-million-ton [8.2-million-tonne] annual mining permit that we have.”

Once NewCastle finishes an engineering study and an operational plan, it can apply for ancillary permits, such as for construction and explosives.

The Castle Mountain heap-leach gold mine — 120 km south of Las Vegas, and previously owned and operated by Viceroy Gold — produced 1.24 million oz. gold at a head grade of 1.37 grams gold per tonne and a recovered grade of 1.18 grams gold per tonne between 1992 and 2001, when it was shut down due to low gold prices.

“It has a history of being a very good operation for Viceroy back in the 1990s,” Panneton says. “It has yielded good recoveries. It’s oxidized and there are no sulphides, so it’s a clean project.”

Panneton notes that the geology at Castle Mountain is quite different than the Archean geology in central and eastern Canada. “The rocks in Ontario and Quebec are 2.6 to 2.8 billion years old, and the rocks at Castle Mountain are only 12 million years old, so it’s more recent geology,” he says. “It’s not deformed — it’s pristine. You can see a lot of the original textures and the system is powerful. It’s 2 km wide by 20 km long, and it’s open in all directions — to the north and south and at depth — and there are more discoveries to be made.”

NewCastle plans to update the project’s resource in September 2017, followed by a prefeasibility study by year-end. It also plans to pre-strip the first pit in late 2017 or early 2018 at a rate of 4,000 to 5,000 tonnes per day, which means it could produce gold by next year, according to Panneton.

If NewCastle puts Castle Mountain back into production, it will be Panneton’s fourth mine. In addition to Detour Lake, for which he raised $2.6 billion, he put Barrick Gold’s (TSX: ABX; NYSE: ABX) Tulawaka and Buzwagi mines into production in Tanzania. The difference between the previous three mines he has built and Castle Mountain, he adds, is that the latter is far less capital intensive because it’s a low-grade, heap-leach operation, so NewCastle doesn’t have to build a large processing plant.

Panneton reckons Castle Mountain would cost between US$100 million and US$200 million to build, including the mining fleet, which would be 50% of the total capex. This is another plus, he says, because NewCastle can look for fleet financing. “Fleet financing is the easiest financing you can get,” he says. “It [deals] with suppliers directly, so you don’t need banks and so forth.”

In November, NewCastle kicked off a 40,000-metre drill program after raising $18.5 million, and a few weeks later brought Sergio Cattalani onboard as vice-president of exploration.

The geologist had held a similar title at Osisko Mining, leading development of the company’s new project portfolio in the U.S., until Osisko was acquired by Yamana Gold (TSX: YRI; NYSE: AUY) and Agnico Eagle Mines (TSX: AEM; NYSE: AEM) in 2014.

NewCastle also recently staked 4,300 acres of mining claims in Nevada, 7 km northeast and along trend from Castle Mountain.

The junior has already finished one-third — or 15,000 metres — of its 40,000-metre drill program with six rigs (30,000 metres of reverse-circulation [RC] and 10,000 metres of core drilling), and expects to finish the program in April, followed by an updated resource estimate sometime before October.

Completed in December 2015, the resource stands at 219.9 million tonnes grading 0.59 gram gold per tonne for 4.2 million contained oz. gold in the measured and indicated category, with inferred resources of 40.8 million tonnes grading 0.58 gram gold for 0.76 million contained oz. gold. The resource’s cut-off grade is 0.20 gram gold per tonne.

In the latest results from four RC holes drilled into the South Domes project area, grades were higher than the resource estimate.

Drill hole 132 returned 1.07 grams gold per tonne over 67.1 metres, including 2.91 grams gold over 12.2 metres, and 128 cut 1.25 grams gold over 94.5 metres, including 3.37 grams gold over 15.2 metres.

The holes followed up on drilling in the South Domes target during the company’s phase one drill program, which ended in October. In that program, highlights at South Domes included 1.09 grams gold per tonne over 214 metres in core hole 79 and 1.73 grams gold per tonne over 136 metres in core hole 111. The South Domes target remains open along strike to the north and south and at depth.

When news broke of the intercepts, Kerry Smith of Haywood Securities said in a research note that “the grade in these few holes is at least double the current resource grade of 0.59 gram per tonne, and this program is partly designed to show the potential for a larger and better-grade resource at South Domes, which would improve economics both by reducing the strip ratio and improving overall grade.

“While we do not expect the average grade at South Domes to double, this early drilling shows the potential for a decent improvement in the overall resource grade at South Domes, likely in the 25% range.”

Andrew Kaip of BMO Capital Markets added that the drill results “provide improved resource confidence and the potential to upgrade additional inferred resources to the indicated category.”

Kaip has an “outperform” rating on the stock and a $1-per-share price target. At press time NewCastle Gold’s shares traded at 78¢ within a 52-week range of 22¢ (March 2016) to $1.30 (September 2016).

Board members include Richard Warke, Tookie Angus and Frank Giustra.

Warke, NewCastle’s executive chairman, is also founder and executive chairman of Arizona Mining (TSX: AZ). He founded Ventana Gold and Augusta Resource in 2006, then sold Ventana for $1.5 billion in 2011 and Augusta for $650 million in 2014.

Angus is chairman and director of Nevsun Resources (TSX: NSU; NYSE-MKT: NSU), and the former head of Fasken Martineau’s global mining group.

Giustra is president and CEO of Fiore Financial Corporation. He founded Lions Gate Entertainment Corporation.