GOEX - A Deja Vu For Liberty Gold Investors

Summary

• Liberty Gold has released a resource update for the Black Pine project.
• Turning this project into a mine looks like an uphill battle.
• Already existing market concerns will most likely linger.

Expectations had been high in the lead-up to the release of Liberty Gold's ( LGDTF ) maiden resource estimate for the Black Pine project back in mid-2021, and the share price proceeded to severely under-performed peers ( GOEX ) when these expectations were not met (the release date of the maiden resource is the bifurcation point in the chart below). And not only were high expectations not met by this maiden 2021 resource estimate; the associated technical report also revealed certain issues that cast question marks over the economics of potential mining scenarios for this project. Without ever saying so in public Liberty Gold seemed to harbor similar doubts, as the preliminary economic assessment (or PEA) based on this maiden resource estimate and due for release in late 2021 was unceremoniously dropped from the language in news releases and filings, and never saw the light of day.

Fast forward to February 7, 2023, and consider Liberty Gold's resource update for the Black Pine project. Again, expectations had been building in the lead-up to this resource update; and indeed, tonnage and metal content have increased significantly when compared to the 2021 estimate thanks to an enormous amount of drilling over the past couple of years. The company was quick to frame this increase as a major milestone. To quote the CEO, Mr. Jason Attew from the news release:

This updated Mineral Resource Estimate for our flagship Black Pine project represents a major milestone for Liberty Gold and a major accomplishment for our exploration team, who spent the last year and a half with a singular focus on expanding and upgrading the resource endowment at Black Pine. The team has delivered impressive results. Compared to the July 2021 resource estimate, tonnes are up significantly while grade has improved using conservative input assumptions, positioning Black Pine in the rarified territory of an oxide resource with more than 2.6 million indicated ounces and a further half a million ounces inferred. Moreover, we are encouraged that Black Pine continues to expand in all directions with future resource growth expected as drill results continue to impress.

Yet, despite the fanfare, excitement seems to be fading. Investors appear to be selling the news after buying the rumor in late 2022. Is this a deja vu of sorts? We will try and provide an answer to this question in the following.

Background

Liberty Gold is advancing two oxide gold projects in the Great Basin of the Western United States, namely the flagship Black Pine project in Idaho and the PEA-level Goldstrike project in Utah which has been relegated to second fiddle. Additionally, the company controls the legacy TV Tower project in Turkey.

The Black Pine project is a re-development of a past-producing heap leach operation that ceased production in 1997. The historic leach pads were subsequently reclaimed (but remain an environmental liability managed by the Idaho Department of Environmental Quality), and a couple of historic pits can still be seen from the nearby I-84 highway if you know where to look. Liberty Gold has used historic information and applied a new geological interpretation to come up with its development thesis. The exploration results so far seem to confirm this fresh approach as Liberty Gold is consistently hitting gold mineralization in the places predicted by its geological model.

N.B. To be fair, we have spoken to a geologist who used to be part of the team working on the historical heap leach operation and he told us that he and his team had tested a very similar thesis already in the old days. The mine was closed, nevertheless, for reasons that might also preclude future mining, as we will discuss in the following.

The Resource Update

Let's cut to the chase. The table below summarizes the latest resource update for the Black Pine project. It documents a total of 2.6M ounces of gold in the indicated category, and just under 0.5M ounces of gold in the inferred category. The so-called Discovery Zone and the Rangefront Zone account for almost 85% of the tonnage for this project.

Grade - The Elephant In The Room

At just 0.52g/t this is arguably a low-grade deposit and several aspects need to fall into place for economics to work.

Metallurgy for once seems favorable for a run-of-mine heap leach operation, pointing to gold recoveries of close 81% on average which is at the upper end of the range for comparable operations.

Liberty Gold also points to a high-grade sub-set of the resource, with grades almost double the average resource grade quoted in the table above:

And in many cases, such a high-grade portion of the mineral resource is great news -- if it can be mined in the early years of operations, bringing forward cash flow, and reducing pay-back times. Unfortunately, this advantage doesn't seem to apply to the Black Pine project.

Consider the cross-section through the Rangefront Zone below, and note how the higher grades (purple color) are located at the very bottom of the resource pit shell.

And now consider the cross-section through the Discovery Zone, and note how the same characteristics apply for the high-grade ore.

Quite clearly, and highly unfortunately, these high-grade blocks will be mined towards the end of the mine plan; and in order to access these high-grade portions an operator will have to dig through the lower-grade ore closer to the surface first. It is therefore important to focus on these lower-grade portions and ascertain whether mining this ore will generate the cash flow required to pay back the capital required to build this mine in the first place. And this is where we see severe challenges.

After netting out the high-grade portion of the Black Pine deposit the remaining portion of the resource -- and to stress the point, this portion sits on top of the high-grade portion -- runs at 0.3g/t gold. And to put it succinctly - this is a grade where waste meets ore, even with a run-of-mine heap leach operation. Mining 0.3g/t grades in the early years of a mining operation when development capital needs to be repaid is a very tall order.

And to make things worse, this is not a simple blast and shuffle affair. The terrain is steep and rugged in places; and while the strip ratio came to 1.0 for the historic operation, it will most likely be higher for the current resource. These factors don't preclude a mining operation, but they will surely add to the costs. And these costs may well prove prohibitive since we are dealing with 0.3g/t material for the initial years of mining.

Liberty Gold seems to be well aware of the low-grade argument, and points to other profitable low-grade heap leach operations in its presentation. However, these mines have all paid off the initial capital investments and whatever margins they generate turn into free cash flow for the respective operators; and to the best of our knowledge, all of these mines originally enjoyed the benefits of a high-grade starter pit to take care of repayments in the initial years of operation. And most of these examples are simple mines, with low strip ratios.

Summary & Investment Thesis

Liberty Gold's mineral resource has grown to a sizeable 2.6M indicated ounces of oxide gold at the Black Pine project. On surface, this looks like a large resource; however the nature of this resource continues to pose significant challenges for anyone contemplating a mine development. We suspect that these challenges were the underlying reasons for Liberty Gold to drop plans for a PEA following the maiden resource in 2021, and we don't really see a remedy for these challenges with the recent resource update.

One could argue that the mentioned challenges can still be addressed by exploration success in the coming months and years; and that's certainly true -- a high-grade zone close to the surface would certainly change the picture. However, we see challenges here as well. Firstly, the company is limited by the boundaries of the current Plan of Operations, and especially at the Rangefront Zone there is little room left for a resource expansion away from the steep hillside (the adjacent land is protected by the Bankhead-Jones Farm Tenant Act of 1937). And secondly, we note that the discovery cost was a reasonable $11.70 per indicated ounce for the maiden resource. This discovery cost has increased significantly to $25.50 for each incremental ounce in the latest resource update. In other words, the cost of resource expansion has more than doubled, indicating that low-hanging fruits have been picked and we suspect this trend of increasing discovery costs will continue as Liberty Gold continues to look for the elusive high-grade ore close to the surface.

The market has been aware of the challenges since the release of the maiden resource in 2021, and the share price performance reflects just that. These challenges remain after the latest update and we see little reason for the market to change its view. With rising exploration costs, and the number of candidates for potential starter pits shrinking with every drilling season we see little reason to speculate on a share price rally following the resource update. Absent a story-changing discovery we see plenty of reasons for the share price to continue its underperformance compared to peers going forward.

We submit that it is time to move on when a story-changing discovery becomes part of the thesis for a development company. And hence we call SELL on Liberty Gold following the resource update.

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