VANCOUVER — The proposed merger of juniors NewCastle Gold (TSX: NCA; US-OTC: CTMQF) andCatalyst Copper (TSXV: CCY; US-OTC: CATXF) is small in terms of cash or asset valuation, but the deal makers behind the scenes view the past-producing Castle Mountain gold property as a potential flagship project.

On March 22, the companies unveiled a combination agreement that would result in NewCastle and Catalyst investors holding 60% and 40% equity stakes, respectively. Catalyst has been a copper vehicle spearheaded by mine financiers Richard Warke and Frank Giustra, who will be joining a new-look board of directors.

The landscape at the Castle Mountain property, 90 km due south of Las Vegas, Nevada. Credit: NewCastle Gold

“A few years ago Frank, Ian Telfer, and I decided to look at copper assets. We wanted to try to build something up in that space along the same lines as the Wheaton River and Goldcorp story,” Warke recounted during a phone interview.

“Quite frankly, we didn’t come across any assets we liked. Keep in mind there has been very little exploration in the copper business over the past ten years so a lot of these projects get recycled over and over again. We’re still looking around, but when assets don’t stack up to conservative commodity pricing … well it’s just something we didn’t want to get involved in right now,” he added.

Rewind to late July 2014 and Warke had just wrapped up the 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 assumed an uncomfortable position near the US$2 per lb. level.

With Catalyst and its La Verde copper-porphyry project in Mexico failing to gain traction, Giustra and Warke decided to turn their attention to gold.

“Earlier this year Ian moved on to other things, and [we] began looking at the gold space. Again, our criteria involved something with a promising resource, where we can add value with our skill sets and advance it fairly quickly,” Warke elaborated.

“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 things like that. Plus we believe the permitting is achievable, and there’s some exciting exploration potential at the project,” he continued.

Castle Mountain occupies 30 sq. km of mineral claims in San Bernardino County, California. The property is road accessible year round and sits around 90 km due 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.

Annual gold production at the Castle Mountain mine in California from 1991-2001. Credit: NewCastle Gold.

Since acquiring a 100% interest in Castle Mountain four years ago NewCastle has drilled 21,500 metres, with much of that activity focused around 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.

Back in 2013, NewCastle secured an extension on its conditional use permit and reclamation plan, which now extend through 2025. The documents allow for open-pit mining up to eight million tonnes of mineralized material per year with no pit back-fill requirements. The company also maintains the rights to 10 water wells, with two classified as “currently operational.”

Water extraction at Castle Mountain. Credit: NewCastle Gold.

“The moment you say ‘California’ everyone has a tendency to take a second look at the regulatory environment for sure. But in this instance the mine is a historic producer, and the majority of the permits are in place,” Warke explained. “I think the requirements to get back into production are achievable under a comfortable time schedule. Given the resource and exploration upside we definitely see very good value here.”

According to technical documents NewCastle filed in mid-January, most “operational” permits take three to six months to obtain after the application is submitted. Notable regulatory requirements at Castle Mountain include — but are not limited to — air emission and construction permits.

And though the project hosts a notable gold resource, and could be within striking distance of being fully permitted, it’s the exploration upside that has Warke more excited.

Gold mineralization at Castle Mountain is related to rhyolite volcanism and the collapse of an evacuated magma chamber. Faults created during that collapse formed dense fault patterns and large cataclasite zones that accommodate significant displacement and created permeable conduits for gold-rich fluids to ascend and concentrate.

Geophysical surveys have hinted that those geological conditions extend beyond the current resource area, while rock geochemistry to the north and northwest of the current open-pit areas has returned “highly anomalous” gold and “typical pathfinder elements.”

Drilling at the Castle Mountain site. Credit: NewCastle Gold.

“I think a lot of companies have a tendency to rush to a production decision before they fully 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,” Warke said. “We also think there are a couple areas on the structure that haven’t been tested. We’re thinking we can increase the ounces in the ground quite substantially, and we’ll have enough cash to run a pretty nice drill program right after the deal closes in May. Our access to the markets should allow us to really test for upside.”

Catalyst will bring in around $4 million in cash to get Castle Mountain moving. NewCastle had roughly $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 around 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 as vice-president of exploration.

BMO Capital Markets analyst Andrew Kaip maintains 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] through the addition of seasoned mine finance veterans.”

NewCastle shares have traded in a 52-week range of 18¢ and 47¢ per share, and jumped 54% following the merger news to a 40¢ per share close at the time of writing. The company hasd 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 concluded. “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. In order to do deals in this environment I think you need a track record or some loyal followers who have been involved in your previous success stories.”