GOLD - The Recent Pullback In Hercules Silver Could Be A Late Holiday Gift

2024-01-05 19:14:03 ET

Summary

• Hercules Silver shares lost over 40% of their value on January 2, 2024, due to disappointing exploration results.
• Despite the lower grades, the recent batch of results still show significant potential for a sizable mineralizing system.
• Barrick Gold's investment in Hercules and the upcoming follow-up drilling in 2024 provide opportunities for investors.
• The pullback could be just the opportunity patient investors have been waiting for.

Hercules Silver ( BADEF ) shares lost over 40% of their value on January 2, 2024 on the back of the most exploration results. While these results did not match the high grades we saw in earlier results, there are some positives to glean from the most recent batch. While much work remains to be done for Hercules, the recent sell-off is likely to provide astute investors with an attractive entry into a well-capitalized company.

Why Hercules Rallied Over 500% in 2023

The Hercules Silver Project in Western Idaho is the primary focus for exploration and development. It's home to a silver-lead-zinc system that has undergone over 28,000 meters of historical drilling along a 3.5-kilometer stretch. In October, a copper porphyry system was found beneath the silver deposits, hinting at substantial potential across several kilometers.

In the Phase II exploration program at Hercules Silver, a significant blind chargeability anomaly, spanning more than 1.8 kilometers, was investigated. This led to a spectacular intersection of 185 meters showing 0.84% copper, 111 parts per million of molybdenum, and 2.6 grams per ton of silver. Notably, within this, there was a 45-meter section displaying 1.94% copper. This newly found porphyry system is positioned below the silver mineralization hosted in rhyolite, as identified by more than 300 historical drill holes. As a result, the system is entirely concealed and remains open in all directions from the HER-23-05 point of discovery.

Finding copper deposits with this grade and thickness is a rarity in North America. Many mines currently in production in North America are mining copper grades below 0.4%. This blind discovery which was signified by copper grades in excess of 0.5% attracted enormous attention from both investors and corporates alike. Hercules saw its shares rally by more than 500% on this blind discovery.

Barrick Swoops in With Bags of Cash

In less than a month, Barrick Gold ( GOLD ) swooped in on Hercules and purchased over 12% of the company at a share price of C$1.10. Hercules issued 21,265,370 shares plus warrants which resulted in Hercules obtaining over C$23M of cash to help further their exploration efforts.

Here is another point worth mentioning - since the deal was announced, Barrick has excercised their warrants bringing their ownership to over 15%. Investors had cheered this development and bid the shares of Hercules up further. The shares of Hercules rallied north of C$1.50 the back of this development and in anticipation of bigger news ahead.

The company now has a cash position in excess of C$20M which should provide them with enough liquidity for the next year, and perhaps a little more. The company does not have any debt, however, once the cash starts to dwindle, I would not be surprised if Hercules raises more equity to fund their exploration.

The Most Recent Batch of Results Lack the Grade But Show Herculean Scale

Hercules announced assay findings from three additional drill holes, marking an expansion of the drill-confirmed area to approximately 500 by 450 meters. These results follow the initial discovery hole, which showed 185.3 meters at 0.84% copper, including 45.3 meters at 1.94% copper. While the latest results aren't exceptional, they're still significant, with intersections like 437.5 meters at 0.32% copper, 183 meters at 0.3% copper, and 161 meters at 0.45% copper within a phyllic alteration halo. These findings begin to outline a sizable mineralizing system, yet the higher-grade core hasn't been located.

The latest release of results from Hercules includes findings from three drill holes, with partial assays for one hole, HER-23-21, currently available. These recent drillings primarily focus on the east and southeast areas relative to the initial discovery hole. The outcomes reveal broad stretches of lower-grade copper mineralization, typically within the range of 0.3% to 0.6% Cu, situated within a phyllic alteration zone. Notably, the more lucrative higher-grade potassic core is yet to be pinpointed.

The established dimensions of the drill-confirmed area now span roughly 500 by 450 meters, remaining open in all directions. Anticipated higher-grade mineralization is expected towards the west, north, and at greater depths, supported by soil analysis and geophysical data indicating a potentially larger system. Encouragingly, all drill holes concluded within mineralized zones, showcasing potential for further depth extensions.

Of significance, Hole 8 didn't replicate the notable higher-grade subinterval found in HER-23-05, but it did demonstrate 88.5 meters at 0.5% Cu. This hole, located to the east of Hole 5, is anticipated to exhibit weaker mineralization due to propylitic alteration in that region.

What could go wrong?

Hercules is in the exploration business. Should the next round of results fail to impress the market, we could see the stock decline from here. As mentioned above, the company's liquidity position is suffice for a year but given that this business does not generate any cash, there will be further dilution ahead. Companies that have been successful explorers have seen their market caps and share prices reach levels that are multiples higher than where Hercules currently trades at.

More Catalysts Ahead

Encouragingly, the recent news release contained details of the new IP survey completed in 2023. This survey uncovered a more extensive chargeability anomaly at depth compared to the initial survey. Further processing of this data is ongoing, although no visual representations have been presented yet. This survey will help unlock a series of new targets to continue growing the system further and perhaps also help the company zero in on the heat engine that drives the porphyry.

I am awaiting assay results for five deeper holes, including the remaining data for hole 21, drilled to a depth of 1007 meters, which could potentially exhibit mineralization through to the end of the hole. Notably, Hole 26 is anticipated to yield one of the most substantial intercepts based on the hypothesis that the alteration transitions from propylitic to potassic from the east-southeast to the west-northwest direction.

The Sell-Off is Overdone

The recent dip in results could offer an opportunity to either increase an existing position or initiate a new one, especially for those who missed the initial 500% surge. I was encouraged by the simple fact that none of these holes "missed". The Jan 2, 2024 results demonstrated that the blind discovery was not a one-off. While the grades are not of the splashy 0.8%+ copper nature, these are still mineable grades over mineable widths. The recent news demonstrates a geologic success despite the share price reaction.

Future plans include an initial 10,000 meters of follow-up drilling in 2024. The current market cap for Hercules Silver stands at approximately C$200M, with a cash reserve exceeding C$20M. The company is well capitalized. The weight of expectations is off the stock as many early investors chose to cash in their gains. Looking ahead, we have a cashed up company that has discovered a large system that could be worth multiples more than today's market cap. The recent sell-off could prove to be a late holiday gift.

For further details see: