Nevada still offers excellent potential for discovering and developing gold assets

Investment bankers Dahlman Rose say prospective Nevada exploration and mining projects--not belonging to Newmont or Barrick--also offer junior company investors high-return opportunities in a rising gold price environment.

Author: Dorothy Kosich
Posted: Monday , 11 Jan 2010

RENO, NV -

Adam Graf, director of equity research for Dahlman Rose, suggests, that despite the dominance of Barrick Gold and Newmont Mining operations, "Nevada is still highly prospective for new mining investments."

Although declining ore grades and depleting assets continue to result in lower production and high costs at a number of major mines, Graft advised that Barrick and Newmont still "must fill their processing facilities to maintain costs and efficiencies of scale."

In the meantime, Graf suggested, "junior miners stand to gain from existing processing facilities and well developed infrastructure, as well as the desire of major gold producers to replace existing assets."

‘New discoveries and extensions to existing operations demonstrate the continued prospectively of Nevada," Graf said. "We believe the state's unique geology and ore deposits offer the opportunity to discover significant new deposits."

Dahlman Rose, which is sponsoring an Emerging Miners CEO Conference this week in New York City, is initiating coverage on five exploration and development companies, all of which Graf said have significant assets in Nevada.

"We believe that early-stage assets represent potentially high-return opportunities to investors in a rising gold price environment with access to capital markets," he added.

"We have chosen what we believe are among the best vehicles in this space, and view these equities as providing both value and attractive leverage to future gold (and silver) price changes," Graf said. As a result, Dahlman Rose is initiating coverage on U.S. Gold, Fronteer Development Group, Victoria Gold Corp. and Great Basin Gold, all with a BUY rating.

U.S. GOLD (AMEX, TSX: UXG)

U.S. Gold holds one of the largest land positions on Nevada's gold trends, consolidating most of the southern portion of the Battle Mountain-Eureka trend, just south of the Cortez district and Barrick's Cortez Hills deposit.

‘We believe the company's land position encompasses several prospective areas with the potential to discover new Carlin-type ounces," Graf said. U.S. Gold also discovered and is expanding the El Gallo silver project in the Magistral gold-silver district in Sinaloa, Mexico.

"While a new and expanded resource estimate has yet to be released, we believe that this deposit represents a large, high-grade, low-cost silver district," he said. "In addition the company has existing resource at the historic gold and silver mines in the district as well as additional early stage gold exploration properties."

Graf also noted U.S. Gold is headed by "renowned company builder" Rob McEwen, who "effectively built Goldcorp from a $50 million, single asset company in 1992, to an $8.5 billion global gold major in 2005."

"Mr. McEwen has made no secret of his goal to build another U.S. domiciled gold major and S&P 500 listed gold miner," Graf said. "With a large personal stake in the company, McEwen has a vested interest in line with shareholders."

Major shareholders include McEwen with 15.3% of U.S. Gold shares, and Barclays Global Investors with 6.23%

FRONTEER DEVELOPMENT GROUP (AMEX, TSX: FRG)

Fronteer's pipeline of three advanced stage gold projects-Sandman, Long Canyon, and Northumberland-have the potential to build a new Nevadan mid-tier gold producer with an annual production of 300,000 ounces and current resources of over 4.2 million ounces and growing, Graft noted.

Graf asserted, "The company has unmatched balance sheet strength among its peer group. With nearly $200 million in cash and note debt (thanks in part to a pending asset sale), we think the company is well positioned to bring its pipeline to production."

In his analysis, Graf said Fronteer is second only to Newmont in terms of Nevada mineral rights landholdings a total of 620,000 acres. "We believe the company's land position encompasses several prospective areas with the potential to discover new gold ounces."

Graf also noted Fronteer also holds the Michelin uranium deposit in Labrador, Canada, and projects Michelin could produce 6.5 million pounds of uranium annually or 5.4% of global mine production. "This is a substantial asset that, while only providing modest double digit returns in the current environment, provides substantial leverage to high uranium prices going forward," he said.

Dahlman Rose also suggested the company has strong partners with Newmont in the Sandman project and Teck in the Halilaga project in Turkey.

Major shareholders in Fronteer include Royce and Associates with 8.77% of Fronteer shares, and Anchorage Advisors with 6.50%. Other shareholders include Morgan Stanley, RBC Asset Management, Vanguard, and Oppenheimer Funds.

VICTORIA GOLD (TSX: VIT)

Victoria Gold has twelve exploration projects and former mines on or adjacent to Nevada's gold trends, including the McCoy/Cove and Big Springs mines. "The company employs top geologists with unique expertise in Carlin systems," Graf said. "While Newmont retains back-in rights to some of these projects, the high cost of regaining control puts Victoria in the driver's seat in our view."

It also has an advanced stage gold project in the Yukon Territory and an early-stage project in Guyana, recently completing two major transactions that increased their resources by 4.4 million ounces of gold.

Senior gold producer Kinross maintains the largest stake in Victoria with 19.01%, while Eastwest Gold holds 12.62%.

Graf suggested Victoria Gold's assets in both Canada and the U.S. "could provide an opportunity for Kinross to utilize its significant NOL's [Net Operating Loss] in both jurisdictions."

GREAT BASIN GOLD (AMEX, TSX, JSE: GBG)

While Graf calls Great Basin Gold's Hollister mine "a Bonanza deposit on the Northern Nevada Rift, the company's greatest Hollister property is also located on the north side and western boundary of the Carlin Trend."

"In our view, not only does Hollister have the potential for additional high-grade gold-silver Bonanza mineralization, but also for a Carlin-type discovery," he added.

In his analysis, Graf also highlighted the Great Basin's major South African gold project, the Burnstone mine, which will be "the first new mine to open in the Witwatersrand region for more than 30 years." Planned average annual production at Burnstone is 254,000 ounces at a cash cost of US$319/oz.

"Shares of Great Basin Gold provide investor with exposure to: 1)cash flows from a US-based precious metal operation at Hollister, 2) expected cash flows from a new gold mine in South Africa, and 3) potential upside from exploration in known gold districts," he said.

With both mines in operation, Dahlman anticipates an annual production of 350,000 ounces of gold. "We believe that the company has both the financial and technical capacity to develop these assets, thus constructing a new mid-tier gold producer with a focus on underground mining. We expect these mines to be long-lived assets providing stable cash flows with some years to come."

MIDWAY GOLD (AMEX, TSX: MDW)

Dahlman Rose also initiated coverage of Midway God with a HOLD rating.

In his analysis, Graf noted Midway Gold provides investors access to three advanced-stage gold projects in Nevada and "a significant gold project [the Golden Eagle] in Washington State. The projects are all in known historic gold districts or trends, or have the potential to generate high returns in the current gold price environment."

"Should the company gain the financing necessary, Midway has the potential to evolve into a significant mid-tier gold producer as the Nevada assets could come online rapidly for a relatively low capital cost," he said. "The combination of financing issues and interest, but smaller, projects could make Midway an interesting target for a producer looking to establish a production base in Nevada."

Dahlman suggested that, with its attractive exploration portfolio in known Nevada gold districts, "we view Midway as a potential acquisition target for an existing miner looking for a pipeline to build. While we can make no predictions as to an actual event, we expect acquisition activity in the gold space to pick up in a rising gold price environment and for more attractive juniors to garner higher multiples on take-out speculation."

‘As shares of larger miners appreciate with higher gold prices, we should expect them to become more acquisitive, thus bidding up the value of junior project developers and exploration stories," he advised.