Leveraging the historical mining successes in the region and on the site itself, ARX Gold Corporation (OTCBB: DUCP) appears poised to take advantage of one of the most attractive mining opportunities in the industry.
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Headquartered in Brisbane, Australia, ARX Gold Corporation is a gold exploration, mining, and production company with projects in Australia. In the fourth quarter of 2012, the Company changed its name from Daulton Capital Corp to ARX Gold Corporation and installed a new management team focused on the exploration, acquisition and development of gold resource projects, and continues to invest in the expansion of exploration activities. The Company also continues to seek out opportunistic special situations that can add to its portfolio of assets within the resource sector. In exchange for the license for the project described below, along with the recapitalization and restructuring of the firm, ARX will pay prior parties a fixed royalty of $7.5 million and, to reduce operating costs, pay a partner a production and processing royalty based upon the value of the extracted resource.
As part of its unique approach to the mining industry, ARX has exclusively licensed a proprietary extraction method that will not only improve efficiency but allow for more gold to be extracted. The Company uses the more traditional gravity separation method in its pre-processing phase. However, in the main processing stage, ARX plans to implement its exclusively licensed technology to allow for separation of micro-fine gold particles that cannot be extracted using traditional technology, thus yielding a recovery rate of more gold per ton than traditional methods alone. We should note that not only are these methods cost effective, but they do not require the typical heavy infrastructure investment associated with the mining space. As a result, with this method and the relationship with processing partners, ARX can generate profitability at the earliest of production stages.
The ARX Springs Gold site is located at Coonambula near Eidsvold in Queensland Australia, a proven producer of gold from a historical perspective. The Queensland area was the site of the Australian gold rush of 1867 and home to some of the major mining sites from the large firms like BHP Billiton Limited (NASDAQ - BHP) and Rio Tinto (NASDAQ - RIO).
The deposit is described as alluvial grade sand and gravel resource with a varying depth of resource within a continuous surface area of 1600 ha. The earliest geological reports identified a tertiary glacial till that is prominent in both the ARX site and area where the majority of the alluvial deposits occur and surveys have indicated the presence of gold. The recoverable grade is contained within paleo channels of alluvial sand, gravel and conglomerate associated with gravel beds of old alluvium and minor alluvial deposits. Alluvial deposits, or placer deposits, are a loose accumulation of stream-deposited sediments, including sands, silts, clays or gravels. These deposits typically contain gold, platinum and other gemstones.
The average depth of resources estimated from extensive drilling is at between 15 m to 20 m. The targeted recovery from the resource is dependent upon operational factors once the project is in production and the consistent average recovery of the targeted yield.
The shallow depth, combined with the Company’s extraction methods, ARX should be able to begin stockpiling material for processing and later production in very short order, relative to typical projects. This is a major advantage for the Company.
The ARX site was previously owned by a variety of companies via fragmented licenses and the site and area has a history of intermittent working by small-scale mining and various private operators. Today, the site is now owned exclusively by ARX with a secured and renewable license. The area has a strong history of reserves and existing reserves are backed by extensive assays. Based on company test results management has adopted a potential recovery per tonne of between 0.9 gpt to 1.8 gpt depending on production and operational factors.
The size of the ARX opportunity is simply huge. If the 350,000,000 tons of material available for mining for an estimated 20 year production life is processed and fully exploited, it could mean billions in cash flow.
Initial development has commenced on the ARX Springs project site and limited resource mined for processing treatment has already been stockpiled. Future material will be stockpiled while construction works are under way and there will be sufficient material mined before the production plant is commissioned, in order to provide an adequate supply of resource for processing.
Following a sustained, multi-year rise, the price of gold has endured an abrupt decline recently and is in bear market territory as inflation fears and other factors have spawned a virtual selling panic. Still, long-term themes remain favorable and clearly the price of the yellow metal is likely closer to the bottom rather than the top, which bodes very well for investors initiating positions in this investment class via equities. Importantly, Australia remains one of the most important players and sources of gold in the space.
At the end of the day, worldwide demand due to political unrest, high sovereign debt levels, low interest rates, monetary easing, and decreasing currency values will drive price increases which in turn should drive gold prices higher. In the U.S., the Federal Reserve’s continued commitment to quantitative easing and increasing money supply reaffirms one of these driving factors. Thus, ARX is poised to capitalize on the continued gold boom, in our view.
THE ARX GOLD EXECUTIVE TEAM
Brian Smith, Chief Executive Officer
Tom Verdon, Director
In 2010, Mr. Verdon joined Deutsche Bank, as a Director of the Bank's African private wealth management business. During this time, he had responsibility for developing the Bank's private wealth management business in: Kenya, Uganda, Tanzania, Nigeria and Ghana. He provided advisory insight on private equity deals to the Uganda Safari Company and TPS Serena Group amongst others and in addition was the lead advisor to the Central Bank of Lesotho in relation to the fixed income portion of their reserves portfolio.
Mr. Verdon is 48 years old and holds a law degree from the University of Wales. He is a member of the Society of United Kingdom Investment Professionals and holds the Advanced Diploma in Financial Planning for Australia.
As is the case with most early stage mining and exploration companies, DUCP’s biggest overall risk factor is not achieving success in “striking gold” in its primary project. In our view, the primary risk factor is related to any missteps or delays the commencement of meaningful resource surface extraction. Considering the enormous length of the region’s and site’s production history and data, we deem it unlikely that gold mineralization will not occur. A near term risk is access to capital. In order to fund continued exploration and then production, DUCP management must maintain access to capital. Still, given that the needs for capital are a fraction of the usual requirements due to the unique resource depth and extraction methods, we believe that this access to capital on fair terms should be favorable to the company and investors. With a solid management team, we are confident that DUCP will be in good financial shape throughout this process and achieve profitability early on in the production stage. Separately, while the number of shares outstanding is large, the public float represents less than 10% of this figure, which should provide ample liquidity going forward.
With a long history of mining success in the region, a unique extraction strategy and partnership, and a need for only limited infrastructure capital to mine the unusually shallow depth of the resources on the site we believe that DUCP offers great potential and a quick road to profitability. Based on company test results management has adopted a potential recovery per tonne of between 0.9 gpt to 1.8 gpt depending on production and operational factors. The size of the ARX opportunity is simply huge. If the 350,000,000 tons of material available for mining for an estimated 20 year production life is processed and fully exploited, it could mean billions in cash flow.
The start of meaningful material stockpiling and surface resource extraction should occur within 90 days following a modest infrastructure capital funding and we believe that production should commence within 12 months thereafter. As these and other milestones occur, DUCP should trade substantially higher. We rate DUCP Speculative Buy with a $0.30 price target.
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Analyst: Robert Goldman
Rob Goldman has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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