We have published a site visit report on the Nevada assets of Rye Patch Gold (RPM.V) earlier this summer and we promised to release a more substantial in-depth review of Lincoln Hill, Rye Patch’ flagship project. In this report, we will provide a general overview of the project but we will also try to calculate the impact of Rye Patch’ efficiency plans on the net present value of the project.

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Lincoln Hill’s access to existing infrastructure makes this company very interesting

The Lincoln Hill project is located in the state of Nevada, approximately 200 kilometers east of Reno. To get from Reno to the project you’d have a 2-2.5 hour drive ahead of you on highway I-80. Forget about driving tens of kilometers on dirt roads, from the I-80 there’s a paved road going straight to the bottom of the Lincoln Hill (approximately 5 kilometers where you’d have to drive a well-maintained unpaved road to the top of the hill (an additional 6 kilometers).

Lincoln Hill is located in what you could call the ‘Rochester mine district’ and is bordering the Spring Valley district (which contains the 4Moz+ Spring Valley project owned by Midway Gold and Barrick Gold (ABX) in the northern and eastern part of the district boundaries. The Rochester District has had a historical production of approximately 1.3 million ounces gold as well as roughly 150 million ounces of silver in the past 100 years, of which the majority was produced by Coeur.

The name ‘Rochester’ should ring some bells as Coeur Mining (CDE, CDM.TO) owns a silver-gold mine bordering the Lincoln Hill land claims (when you’re picnicking on top of the hill you’re actually looking out over either the Interstate or the back of the producing Rochester mine so Lincoln Hill is almost literally located in the shadow of another mine.

Rye Patch has acquired Lincoln Hill in 2007 and hasn’t wasted a lot of time as it drilled approximately 100 holes for a total of in excess of 15,000 meters which resulted in a measured and indicated resource estimate containing 360,000 ounces gold and 10.2M oz silver with an additional 255,000 ounces gold and 8.2 million ounces silver in the inferred. As you can see on the next image, the PEA pit it only a small part of the total resource at Lincoln Hill as Rye Patch has used quite rigorous parameters to ensure the viability of the project.

About the PEA

As explained above, the PEA was based on a smaller but higher grade resource estimate based on a pit shell using a gold price of just $775/oz. That’s extremely conservative and probably even the most conservative starting point we have seen gold mining companies using in the past 5 to 10 years.

Using a very low gold price also has the consequence that a lot of the resources could not be considered as part of the mine plan, and the PEA is based on 148,000 ounces gold in the measured and indicated resources (in addition to 3 million ounces silver), with an additional 19,000 ounces and 819,000 ounces silver in the inferred resource category.

The mine plan calls for an 8Mt leach pad to be constructed and this should result in a total gold production of 105,000 ounces gold and 2.2 million ounces silver. The initial capital expenditures are pretty low at less than $30M, and the pre-tax NPV5% of this scenario using a gold price of $1150/oz and a silver price of $16.5/oz is approximately US$36M. This doesn’t sound very attractive but there are two things you need to keep in mind.

First of all, this is just a PEA and should only be seen as the basis for further optimization. Should the gold price increase a bit, Rye Patch could easily extend the mine life as the current mine plan takes only 25% of the total amount of gold ounces into consideration, so it sure looks like the mine life could be doubled without any additional effort.

Secondly, it also looks like Rye Patch Gold has used conservative recovery rates, and we feel that this could be a turning point in the company’s development.

Adding a simple crushing circuit could boost the NPV by several millions

As Rye Patch Gold was focusing on the economics of the project, it decided to base the PEA on a run-of-mine production, whereby the ore would be hauled from the top of the hill to the leach pad for its cyanide treatment.

That’s pretty cheap because all you’d need to do is blast the rocks on the hilltop and throw them on the leach pad. The operating costs are low, and it also helped to reduce the capital expenditures as Rye Patch didn’t need to pay for a crushing circuit.

However, the nearby Rochester mine DOES use a crusher and its recovery rates are superior compared to Rye Patch’s recovery rates, as you can see in the next table.

As you notice, there’s a very clear improvement when using a crusher to crush the ore instead of using a run-of-mine operation. The decision on whether or not installing a crusher will be based on a trade-off between the additional NPV and the cost of a crusher. If Rye Patch would obtain the same recovery rates as Coeur, its total gold production would increase from 106,000 ounces gold to 152,000 ounces, and the silver production would increase from 2.21Moz to 2.29Moz.

We have tried to calculate the benefits of using a crusher and have used a bottom-up approach as we first tried to calculate the impact of a higher recovery rate on the pre-tax NPV5% of the property. In a first calculation we will use a recovery rate of 85% for gold and an unchanged recovery rate for silver (to indicate our calculations are more conservative than a best-case scenario). We have taken an additional cost of $300 per marginal additional ounce into account to take the operating costs of crushing the ore into consideration (which equates a cost of $1.75 per treated tonne during the entire mine life) and are using a gold price of $1100/oz.

As you can see in the table, if an average gold recovery rate of 85% could be achieved, Rye Patch could see the total gold production increase by 34,655 ounces during its mine life, so the effect of a better recovery rate will be huge.

According to our calculations, the pre-tax NPV5% of this scenario would be $25M, and even though the final decision on the specifics of the crusher will depend on the outcome of the metallurgical test-work, a used crusher could cost less than $5M. Constructing a crusher would definitely have a very positive trade-off based on our expectations regarding the additional processing cost and gold price. Keep in mind all of these calculations are our own calculations and are not the official expectations of Rye Patch Gold.

Conclusion

Even though the Lincoln Hill project might seem to be unappealing using a gold price of $1100/oz, we are convinced the key to unlock additional value is in the metallurgical test work which is currently being conducted. If Rye Patch would be able to increase the gold recovery to 85% using a crusher, the effect on the NPV will be huge considering an additional 35,000 ounces gold could be produced at just a marginal extra cost.

The first results of this updated met test work are expected to be released by year’s end and this will be a very important moment for Rye Patch Gold. The company remains well-funded with C$5.7M in working capital as of at the end of June this year, and the ongoing income from the 3.4% NSR on the Rochester mine will ensure Rye Patch will be able to keep its balance sheet solid.

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Disclosure: Rye Patch Gold is a sponsoring company, we own shares. Please see our disclaimer for current positions.


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