Novo Discovery May be the Spark which Ignites the Entire Mining Sector
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Back in April of this year, I wrote an article entitled “Novo Resources Presents a Golden Opportunity” , which was about the massive potential of a micro-cap Canadian junior exploring for elephant sized gold deposits in Western Australia. As you are probably aware by now, the stock has become the most talked about junior in the sector since Novo made a major discovery in mid-July. In six weeks since this discovery, the stock has zoomed over 700% while weakness in the share price below C$5.00 is being bought this week.
The news of this discovery has brought credibility to the President of the firm Quinton Hennigh’s theory of the Pilbara region of Western Australia having similar mineralization potential as the famous Witwatersrand Basin in South Africa. Since 1886, the “Wits” has produced over 1.5 billion ounces of gold, which represents about 50% of all the gold ever mined on Earth.
The mining space has been waiting over 20 years for a major discovery which can be significant enough to bring in much more retail investment into this tiny sector. The last time we had such a finding was in the fall of 1994, when micro-cap junior Diamond Fields stock began a run from C$0.40c to an eventual buy-out by Inco at the pre-split price of C$174 ($4.3 billion) per share just 2 years later, on the back of the now famous Voisey’s Bay discovery. Even though this was a nickel deposit, the publicity brought in a massive amount of investment capital into the entire mining space, making millionaires out of investors who made large bets into 1994 on a select few micro-cap junior resource stocks.
Moreover, just six months after the Voisey’s Bay find, the Bre-X “discovery” was responsible for bringing even more investment capital into the mining sector. However, a few years after bilking fortunes from countless investors, what was to eventually become the $6 billion Bre-X fraud was also responsible for bringing shame to the industry and utter contempt for mining stocks into the end of 2000. Most of the huge moves by many resource firms’ respective stocks after the Voisey’s Bay discovery came to an end when the infamous Bre-X deception was announced in March, 1997.
Fast forward to mid-July of this year when Novo made the significant discovery at its recently 50/50 joint ventured property named Purdy’s Reward. The 25km Purdy’s Reward area is less than 1% of Novo’s land package of over 7,600sq km in the Karratha region of Western Australia. The 2x2x.5 meter pit for the bulk sample was 2 ounces of gold per ton at surface, but they still will not know the significance until the area has been drill tested. They do not know the dimensions of the deposit, how thick it is, if it’s all mineralized, or even if or how far it extends under the basalt. It is way too soon to be sure this discovery has Wits sized potential until some of these questions are answered.
Nevertheless, the market is pricing Novo as if these questions have already been answered and the stock is trading at a “must have in my portfolio at any price” valuation now. In other words, the market is telling us the risk is not being into possibly the greatest gold discovery of the past 130 years, as opposed to worrying about paying too much for it. I believe the market may also begin to tell us that a discovery with this much potential could very well ignite the entire mining sector in the not too distant future.
In a recent interview with sector analyst and newsletter writer Jay Taylor, Quinton Hennigh mentioned the company will be announcing a trenching and drilling program on the Purdy’s Reward property in early September. As of today, 26.5 million shares of Novo, or 22.7% of issued shares (16.5% of fully diluted shares), have been sold short. There will be around 23 million shares from the most recent financing becoming free trading just after Labor Day, which will also be the week most of the big money traders and fund managers will be back from their summer vacations. If you already own the stock, prepare yourself for some volatility. I, for one, will not be selling a single share until this fascinating story has played out.
Full Disclosure: I participated in the most recent Novo Resources Private Placement and have also recommended the shares to my subscribers since April of this year. Please do your own due diligence before purchasing shares in any of the companies mentioned in this article.