VANCOUVER — The proposed merger of juniors NewCastle Gold (TSXV: NCA; US-OTC: CTMQF) and Catalyst Copper (TSXV: CCY; US-OTC: CATXF) is small in terms of cash and asset valuation, but the dealmakers see NewCastle’s past-producing Castle Mountain gold property in California as a potential flagship project.
On March 22, the companies agreed to a combination that would give NewCastle and Catalyst investors 60% and 40% equity stakes in the merged company. Catalyst is a copper vehicle spearheaded by mine financiers Richard Warke and Frank Giustra, who will join a new board of directors.
“A few years ago, Frank, Ian Telfer and I looked at copper assets. We wanted to build something up in that space along the same lines as the Wheaton River and Goldcorp story,” Warke said during a phone interview.
“Quite frankly, we didn’t come across any assets we liked. Keep in mind there has been little exploration in the copper business over the past 10 years, so a lot of these projects get recycled … we’re still looking around, but when assets don’t stack up to conservative commodity pricing … it’s just something we didn’t want to get involved in right now.”
Back in July 2014, Warke had just wrapped up a contentious sale of Augusta Resource and its Rosemont copper-molybdenum project in Arizona to Hudbay Minerals (TSX: HBM; NYSE: HBM) for $555 million. Over the intervening two years, however, the red metal has dropped nearly 40% and wavered near US$2 per lb.
With Catalyst and its La Verde copper-porphyry project in Mexico failing to gain traction, Giustra and Warke turned their attention to gold.
“Earlier this year Ian moved on to other things, and we looked at the gold space. Again, our criteria involved something with a promising resource, where we could add value with our skill sets and advance fairly quickly,” Warke said.
“We came across NewCastle and really liked the project, and we’re not scared of working in the U.S. It can take a little longer to permit, but there isn’t too much political risk in terms of mineral titles and … permitting is achievable, and there’s exciting exploration potential at the project.”
Castle Mountain occupies 30 sq. km of mineral claims in San Bernardino County, California. The property is road accessible year-round and sits 90 km south of Las Vegas along highway US-95 South. The site hosted a heap-leach operation between 1991 and 2001 that cranked out 1.24 million oz. gold at a head grade of 1.47 grams gold per tonne.
Since acquiring a 100% interest in Castle Mountain four years ago, NewCastle has drilled 21,500 metres, with much of the activity at the historic open pits. The company released an updated resource in late December that includes 220 million measured and indicated tonnes of 0.59 gram gold per tonne for 4.1 million contained oz.
In 2013, NewCastle secured an extension on its conditional-use permit and reclamation plan, which extend through 2025. The documents allow for open-pit mining up to 8 million tonnes of mineralized material per year, with no pit back-fill requirements. The company also has the rights to 10 water wells, with two operating.
“The moment you say ‘California,’ everyone has tends to take a second look at the regulatory environment … But in this instance the mine is a historic producer, and the majority of the permits are in place,” Warke said. “The requirements to get back into production are achievable under a comfortable time schedule. Given the resource and exploration upside, we definitely see value here.”
According to technical documents NewCastle filed in January, most “operational” permits arrive three to six months after the application is submitted. Regulatory requirements at Castle Mountain include — but are not limited to — air emission and construction permits.
Warke is equally excited about the property’s exploration upside.
Gold mineralization at Castle Mountain is related to rhyolite volcanism and the collapse of an evacuated magma chamber. Faults created during this collapse formed dense fault patterns and large cataclasite zones that accommodate displacement and created permeable conduits for gold-rich fluids to ascend and concentrate.
Geophysical surveys have hinted that these geological conditions extend past the resource, while rock geochemistry to the north and northwest of the current open-pit areas has returned “highly anomalous” gold and “typical pathfinder elements.”
Warke said that some companies “rush to a production decision before they figure out the size and value of the asset. We’re going to take a bit of a step back to the exploration stage, and have a closer look at the resource … there are a couple areas on the structure that haven’t been tested … we can increase the ounces in the ground quite substantially, and we’ll have enough cash to run a pretty nice drill program after the deal closes in May. Our access to the markets should allow us to really test for upside.”
Catalyst would bring in $4 million in cash to get Castle Mountain moving. NewCastle had $800,000 in cash and equivalents at the end of September, and its share price tumbled from just over $1 per share in March 2014 to 25¢ at the time of the deal. David Adamson will reportedly continue to serve as the post-merger CEO, while Ian Cunningham-Dunlop will remain vice-president of exploration.
BMO Capital Markets analyst Andrew Kaip has an “outperform” rating on NewCastle, along with a 60¢-per-share price target. BMO Research models Castle Mountain as a heap-leach operation with the “capacity to produce 165,000 oz. per year at cash costs of US$719 per oz.” Kaip added that the deal “strengthens” the company by adding “seasoned mine-finance veterans.”
NewCastle shares have traded in a 52-week range of 18¢ to 47¢ per share, and rose 54% on the merger news to a 40¢-per-share close at press time. The company has 89 million shares outstanding for a $33-million market capitalization.
“I’m still not seeing money coming into the sector in a huge way,” Warke said. “There is a bit of generalist capital taking another look, but until the big financial markets sort out where they’re going and we get a better idea on China and Europe, it’ll remain pretty tough. To do deals in this environment, you need a track record, or loyal followers who have been involved in your previous success stories.”