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March 06, 2005

The Cortez Story: Right Trend, Right State, Right Country, Right Time?
by Bill Fox

Precious Metals Special Report

Outline:
... Part One : Overview
... Part Two: The Fundamentals
... Part Three: Overview of Players, Two Majors
... Part Four: Profiles of Sample Junior Players
... Part Five: Cortez Trend Maps, Pictorial Overview

Part One: Overview

The Cortez Trend comprises the southern "hot play" portion of what has been long known as the Battle Mountain-Eureka Trend in north central Nevada. Some new interpretations of the Cortez Trend's Carlin-style geology over the last few years have caused many experts to believe that Cortez Trend may eventually rival or even surpass the famous Carlin Trend, one of the top three gold fields in the entire world. "Will it or won't it? is the basic question addressed in this five part article.

In this article I reference independent analysts such as John Kaiser (author of Kaiser Bottom-Fish), Paul Van Eeden (Kitco.com columnist), Frank Veneroso (Veneroso Gold Associates), John Doody (Gold Stock Analyst), Brien Lundin (Gold Newsletter), and Bob Moriarty of 321Gold.com who have recommended or invested in Cortez Trend junior mining companies. Major mining companies such as Newmont, Placer Dome, Kennecott (Rio Tinto), Teck Cominco, Goldfields, and Goldcorp have invested significant funds or made major new obligations in the area.

I am grateful that Intierra Resource Intelligence has given me permission to use one of its Hot Play maps (see Part Five). I am also thankful that CEO's and head geologists of major junior mining companies active in the Cortez Trend have generously given their time both over the phone and in person at the Jan 2005 Vancouver Resource Investment Conference to help me improve the accuracy of this research project.

In many places in this series I have tried to create a forum format, in which different viewpoints help us to see the proverbial elephant from different perspectives. In some cases different sources disagree somewhat on their resource estimates. I quote them "as is" in an effort to let them speak for themselves. Geology is not a precise science.

...your own investments at issue.

Sometimes you do not have to scale the Andes or tromp through dark jungles of Africa to find a really good investment idea. You might have passed within miles of this opportunity crossing the USA on Interstate 80 on a vacation trip last summer. In addition, sometimes it is a better idea to approach junior mining companies from the perspective of who is involved in a particular hot trend play, to the extent that a rising tide can lift all boats. (Similar in concept to the saying, "If you want to get rich in real estate, buy property in the way of the growing big city").

Later in this article I will discuss "the many ways to play" the trend and valuation methodologies. But first a quick synopsis:: Right Trend? Since 1991 just one segment of the Cortez Trend, the Cortez Joint Venture area, has manifested 31.5 million contained ounces (produced ounces plus resource ounces still in the ground). The Cortez Trend runs parallel and has strong geological similarities to the world class Carlin Trend, which has already either produced or proved up over 180 million ounces. Right state? Many parts of the U.S.are regulatory and environmental nightmares for miners, but Nevada remains the most unencumbered state of all. Right country? Gold is more likely to experience real appreciation relative to the dollar than any other currency, yet America still has less geopolitical risk relative to most other countries. Lastly, Right time? I will update my article "Back of the Envelope Analysis for $1,000 Gold in Five Years" published last March. The fundamentals for gold grow stronger by the month.

Right Trend?

A proverbial saying in the gold mining business is that if you want to find elephants, go to elephant country where big elephants have already been found. According to the Nov 2002 Gold Newsletter, "The rich Carlin Trend is second [in the world] only to the legendary Witwatersrand Basin of South Africa in terms of gold reserves..."

For geologists, the main focus of "The Cortez Trend" has been that part of the Battle-Mountain Eureka Trend south of the city of Battle Mountain and Interstate 80 which has sedimentary rocks capable of hosting Carlin-style gold deposits created roughly 38 million years ago. This is in contrast to areas north of Battle Mountain where gold tends to be hosted in volcanic rocks. However, the definition of the Cortez Trend can get more geologically complicated because it, like the Carlin Trend, also involves numerous interactive cross rifts to the main fault system that involve other types of gold deposits created in other geological periods.

Data from the Nevada Bureau of Mines and Geology, Nevada Division of Minerals, U.S Bureau of Mines, and U.S. Geological Survey

About 60 million ounces total have been produced from the Carlin Trend to date, with over 120 million still in the ground as reserves out of a total of perhaps 200 million in all the trends of Nevada. According to Miranda Gold, "...Total production from 1859 through 2001 totals 137 million ounces." In other words, since its inception in the early 1960's, Carlin has accounted for nearly half of Nevada's historic gold production and it currently accounts for the majority of its reserves.

Overview of the Carlin and Cortez (Battle Mountain-Eureka) Trends.

Gold Deposits on the Carlin Trend in Northeast Nevada. Source: U.S. Geological Survey

According to Klondex Mining: "[It was] Dr. Ralph Roberts who pioneered the idea of sub-microscopic gold deposits. His famous paper published in 1960 entitled, `Alignment of Mining Districts in North-Central Nevada' was the catalyst for all subsequent development in the parallel Carlin and Battle Mountain trends and the evolution of the heap-leach [cyanide] method of extraction. He stated as recently as 1988 that "probably only 15% to 25% of those belts have been adequately explored."

Dr. Roberts is often lionized as the father of the Carlin Trend and the companies it helped create such as Newmont Mining and Barrick Gold. His book "A Passion for Gold: An Autobiography" has become a gold mining industry classic.

Newmont Mining, which is now the largest gold mining company in the world, observed that, "Carlin is Newmont's foundation. In 1961, Company geologists began probing the high desert area around the Tuscarora Mountains in search of finely disseminated gold - gold that could be seen only in a microscope and, thus, had eluded earlier prospectors. By the summer of 1963, drilling had identified a three-million ounce deposit, sufficient to justify a mine even at the then-prevailing gold price of $35 an ounce. Newmont's first open pit mine and oxide mill began production in 1965."

According to one source, the gold is so fine that one actually needs an electron microscope to see it, and it is so small relative to water molecules that early prospectors were unable to pan it out.

Typical assays in early years were found in 80 foot trenches at 6.2g/t (0.2 ounces/tonne). The largest specks were .0002 inches and had to be magnified 1,800 times before they could be photographed.

Today the core of the Carlin Trend is about two miles wide and 18 miles long. In some areas huge open pit mines run into each other and seem to form a long string. The "elephants" along the Carlin Trend include Barrick's 32 million ounce open-pit Post-Betze mine and its 10 million ounce underground Meikle Mine. It also includes Newmont's prolific Carlin mine. Further to the south outside the core area (see chart in Part Five), the Carlin Trend also includes the 35 million resource ounce open-pit Gold Quarry Mine. According to Miranda Gold, "Intense exploration over the last 20 years in the Carlin Trend has resulted in the discovery of over 40 deposits that contain(ed) a total of 180 million ounces of gold."

It is a lot harder than it looks

For readers unfamiliar with the gold mining business, please be aware that less than one in a thousand good project ideas wind up as an economic mine. A highly competent geologist is doing extremely well relative to his peers to uncover two or three economic deposits in a 30 year career that might have 250,000 ounces in reserves apiece. The Carlin numbers are so huge by industry standards, that it may be more appropriate to refer the Carlin Trend as "Super-Elephant" country.

Please also be aware that the Carlin story is also a technology story. It is about how new geological theory got married with highly capital-intensive, high tech production and processing techniques. Newmont Mining points out that: "Nevada Operations boast the widest variety of processing methods of any gold mining complex in the world. Fourteen active processing facilities, ranging from autoclaves and a roaster to flotation cells and heap leaching, allow Newmont to maximize the economic recovery of gold from a wide variety of ore types and grades. A linear program helps direct the movement of ore to the processing plant that offers the highest economic return. This flexibility is vital to unlocking value in Nevada as the proportion of harder-to-process refractory ore increases and easily recoverable oxide leach ounces declines."

Meanwhile back at Cortez...

The Battle Mountain-Eureka Trend saw its own action during the Carlin development period. Over the last two decades, there have in fact been about twenty producing mines, some with substantial production, scattered about the Battle Mountain-Eureka area. As examples, in the NW extremity, they include the Marigold Mine operated by Glamis Gold and the Lone Tree Mine operated by Newmont. In the center is Placer Dome's prolific Pipeline Complex. In the mid SE area there is the Gold Bar Mine (former annual open pit production 527,000 ounces) controlled by American Bonanza. In the SE extremity by the town of Eureka is a cluster of dormant mines. Barrick is planning to put its Archimedes mine in this area back into production in 2005.

Up until fairly recently, exploration in the Battle Mountain-Eureka Trend area focused on shallow deposits exploitable by open pit mines. Economic deposits were typically uncovered by shotgun prospecting methods without the aid of the more recent prospecting theory that is exciting geologists today.

Major Nevada Trends. The Cortez Trend runs parallel to and is bracketed by the Carlin and Lovelock-Austin Trends. Cortez Hills is just north of Fye Canyon on this chart. Source: White Knight Resources.

Let the show begin...

The first major phase in the current Cortez drama started in 1991 when Placer Dome decided to drill below an inactive leach pad to see how far down one had to go to reach the water table. Local lore has it that the next thing they did was post security guards around the site pending legal perfection of their claim, owing to a peculiarity of Nevada law that gives ownership to finders and not necessarily to claim owners. Placer Dome obviously was not guarding water rights. In fact, this became the site of the prolific Pipeline and South Pipeline Mines still in operation today. Placer Dome has been steadily drilling around the area and adding mining infrastructure ever since.

The Bravo Venture Group notes that the Battle Mountain-Eureka trend has already produced 23 million ounces over the last 30 years, making it the second most productive belt in Nevada after the Carlin Trend. Between 1991 and June 2004 Placer Dome mined 8.3 million ounces out of the Cortez Joint Venture area, and noted in Jan 2005 a total of 36.9 million contained (produced and still in the ground) resource ounces.

An Aug 3, 2004 Raymond James research report noted that 31.5 million ounces have been proven up to date in the broader Battle Mountain-Eureka Trend compared to 107 million ounces for the Carlin trend. The report reasons that since 23.5 million ounces have been discovered in the last 13 years (since 1991), the trend very likely "is still in `exploration infancy' compared to the Carlin trend, which has been explored since the 1960's."

Obvious question: Why do we now have a "world class" deposit right in the middle of this trend?

Then came the Cortez Hills discovery within Placer Dome's Cortez Joint Venture property area. According to the Canadian research firm Loewen, Ondaatje, McCutcheon in its June 15, 2004 report, "Placer Dome reported the discovery of Cortez Hills in April 2003, with an initial resource of 2.1 million ounces in measured and indicated resource plus an additional 932,000 ounces in inferred resource. In less than two months, measured and indicated resources more than doubled to 4.5 million ounces. By the end of 2003, the Cortez Hills deposit was estimated to contain 5.25 million ounces of proven and probable reserves, 0.5 million ounces of measured and indicated resources plus an inferred resource of 1.0 million ounces gold. The rapid expansion of mineralization validates the geological model."

It gets even better. Placer Dome notes on page 17.46 of its September 2004 Technical Report that the Cortez Joint Venture (CJV) contained 15.04 million proven and probable reserves (1.94 g/ton gold oz @$350/oz) as of 30 June 2004. The area also has 8.15 million measured and indicated reserves (.94 g/ton for pits optimized at $450/oz.).

The total of the two categories now amounts to a whopping 23.2 million ounces.

The report notes on page 8-1 that "Carlin-type deposits in the CJV area are situated along the Cortez Rift." It also observes on page 9-1 that, "The Pipeline, South Pipeline, and Crossroads deposits are disseminated, Carlin-type, sedimentary rock-hosted gold occurrences."

Incidentally, this does not include another site called "ET Blue" in the Cortez JV area SW of Cortez Hills, also recently drilled by Placer Dome. Various newsletters are guessing between one million to over five million ounces. Placer Dome has not released results yet.

The Loewen report notes (in exhibit 2) that the Cortez Pipeline and Cortez Hills sites share in common with Newmont and Barrick's Carlin properties such geological characteristics as intrusive proximity, deep rooted fault, sediment host rocks, Carlin-type geochemistry, low silver to gold ratio, and micron-sized gold in Arsenian Pyrite.

Placer Dome has drilled down 2,500 feet in the Cortez Hills and still has not hit bottom with impressive gold assays. This suggests that Placer Dome could run an open pit mine down to 1,200 feet and then continue on with an underground mine, which would be a similar evolution compared to many Carlin Trend mines.

...and now we continue with "Bonanza"...

In "Stocks Explode on Cortez Hills Speculation," Mineweb's Tim Wood reported Placer Dome's announcement on 4 June 2004 before the Nevada Geological Society that it had drilled a hole in another area between the Cortez Hills and Pediment deposits and found bonanza grade ore over a long distance. A Placer Dome spokesman told me that they found 500 feet at .7 ounce or 410 feet at 1.035 ounces. Elsewhere I have seen an analyst claim that they found 1.5 ounces at 500 feet. According to Wood:

Rumours say there are more drill holes returning better than an ounce over intercepts of up to 500 feet. It is said to remain open at substantial depth. What is still unclear is whether Placer has succeeded in linking the Pediment deposit with Cortez Hills. However, there are persistent rumours of successful drilling south of the Cortez Hills "envelope."

That has given rise to speculation that the Cortez Joint Venture may be sitting on more than 20 million ounces, a good portion of which is shallow enough to be quite quickly mined...

The rapid accumulation of resources at Cortez Hills has been likened to the early days at Barrick's Betze Post [on the Carlin Trend]. There is some conviction that another Goldstrike complex is in the making.

According to Tim Wood, as this news filtered out to the public, "White Knight Resources [stock, symbol TX.V WKR, was] up 69.5% today; Victoria Resources [VIT.V] up 55.6%; Miranda Gold [MAD.V] up 24%; Placer Dome [PDG] up 5.8%; CMQ Resources up 5.6%. Those gains were made against the backdrop of an otherwise ordinary day for resource stocks as gold gave up nearly $5 per ounce."

For readers new to mining, please be aware that .3 ounces per tonne is considered "high grade," and one troy ounce per tonne or above is "bonanza." Most good assays are just a few feet long and do not necessarily prove a continuous ore body long enough or wide enough to make an economic deposit.

But 410 feet at over an ounce? A 3 Aug 2004 Raymond James research report comments, "If confirmed, this intersection represents the highest value intersection ever attained within the entire northern Nevada region. Secondly, the majority of the deposit is oxidized, indicating low processing costs may be possible. Thirdly, the project appears to be, at least in part, open-pitable [much cheaper than underground mining]."

It will be interesting to see how the 23.2 million ounce total will increase once Placer Dome officially factors in both its ET Blue discovery and the aforementioned bonanza discovery. A company spokesperson told me that Placer Dome is doubling its exploration spending in the Cortez area to $12 million for 2005 compared to 2004. One constraint regarding more spending is that rig availability has already become very tight in Nevada.

A junior mining executive who negotiated a joint venture with Placer Dome in the Cortez Trend told me that he thinks we may be entering a saturation drilling phase that has the potential to offer similar results to the historical phase where the Carlin Trend made huge leaps in discoveries.

Right State?

The state of Nevada maintains a reputation as a geologists' and miners' paradise for a number of reasons. For starters, geologists only care about things that are tens of millions of years old, back when jungles and oceans existed on this planet in places where deserts and mountains stand today. The state is so barren that major parts of it are essentially America's answer to the moon, meaning relatively little pesky shrubbery to obstruct observing and accessing geological formations. In fact, with the exception of a few small rivers that feed into the Colorado River on the southernmost border, or into Idaho's Snake River from the NE corner of the state, no rivers lead out of Nevada into the ocean. Geologically most of Nevada is part of a sunken desert known as The Great Basin where all streams eventually meander to a place where the water simply evaporates or sinks into the ground.

Secondly (actually firstly), Nevada "has got the beef." The modern economic history of the state starts with the Comstock Lode ("The mine that helped save the Union"). Even today, Nevada is the world's third largest gold producer after South Africa and Australia.

According to Nevada Pacific Corp, "During the period from 1985-1991, eight of the world's largest gold deposits, totaling approximately 87 million ounces were discovered in Nevada. In 1999, the state of Nevada produced just over 8.26 million ounces representing approximately 76% of the gold produced in the United States and 11.2% of world production..In a 1998/1999 Survey of Mining Companies carried out by The Fraser Institute, Canada's economic think tank, Nevada ranked highest in North America for overall mining investment attractiveness. This top ranking is the result of Nevada's high mineral potential and excellent public policies such as taxation, regulatory consistency, and land use policies."

Despite Nevada's importance on the world gold stage, I was surprised to learn that the mining industry produced only 2% of Nevada's Gross State Product in 2000 (Nevada Economic Overview, Exhibit 1A-38). Gaming, tourism, financial services, and hotels are the overwhelming mainstay of the Nevada economy. These types of service industries are located in border regions away from mining activities in remote Great Basin desert areas. People in the former industries tend to leave the miners alone.

As I explain in the next section, I agree with James Puplava and other very pro-gold financial commentators that America is very likely headed for a full blown hyperinflationary depression that could send gold to the moon and simultaneously knock the tar out of the Nevada services sector, in which case I could see mining go from 2% to over 20% of the state economy, making Nevadans more than just a little bit glad they left the miners alone.

Right Country?

This is really a fundamental question regarding how the value of gold will likely rise relative to the U.S. dollar compared to most other currencies.

In my March 2004 article "Back of the Envelope Analysis for $1,000 Gold in Five Years" I explain how gold has been more suppressed relative to the dollar than to any other currency on the planet. This has been caused by two primary factors. The first involves direct central bank intervention reminiscent of the London Gold Pool episode of the 1960's. The second factor involves economic distortion related to the dollar's post-World War II status as a global currency, which has made foreign banks unusually willing to swallow tidal waves of dollars pumped out by the Fed.

Under ordinary circumstances involving ordinary countries, a 6% balance of trade deficit triggers a serious currency crisis. But as the world's so-called "last remaining super-power" in which 80% of global trade has been conducted with dollars, the United States has been neither an ordinary country, nor has it operated under ordinary circumstances. However, no country can finesse a fundamentally unsound position forever, and we are already seeing increasing signs that the dam is breaking and that foreigners are getting ready to wash tidal waves of dollars back at America. PIMCO analyst Chris Dialynas now sees the deficit growing worse to 8%, pushing the global tolerance of America's profligacy to the absolute breaking point.

Brett Arends of the Boston Herald reported on 23 Nov 2004 that Stephen Roach, chief economist at Morgan Stanley, told a private meeting of fund managers in Boston that, "America has no better than a 10 percent chance of avoiding economic `armageddon.'"

I will highlight just a few of the key trends I discussed in my March article that have become progressively worse. Short position overhangs in the futures markets and draw-downs on central bank gold and silver reserves have increased, but obviously can not go on forever. Runaway consumer, corporate, and government debt are now running away even faster. America's intervention in Iraq is not bringing down oil prices, which constitute a tax on the economy and one more motivation for central bank inflationary bailout. The slide in the dollar has not solved the balance of trade deficits, which have doubled in the last three years. The deficits reflect deeply structural problems such as a longstanding productivity decline and loss of half of America's manufacturing jobs in the last three decades. Runaway government spending, which contributes to the skyrocketing debt described in the Grandfather Report, and which will ultimately have to be bailed out by inflationary central bank policies, has only grown worse as a result of escalating social and military spending. Robert Chapman's Jan 2005 International Forecaster (issue 4) observes, "When you pencil all the debt commitments, you will find the US on the hook for $82 trillion. That is over 800% of GDP. There is no question of the eventuality of bankruptcy." Foreigners are switching out of dollars into Euros and other currencies, and showing increasing reluctance to absorb excess dollar deposits from their continuing trade surpluses.

During Al Korelin's Nov 28-29th San Francisco Gold Show round table, Paul van Eeden commented: "I think the gold bull market widely perceived to be in place is not a bull market at all. We are really just experiencing a dollar bear market. And so you want to leverage yourself against that dollar decline. It does not make any sense to go out and buy gold mining companies all over the world when the increase in the gold price is perceived mainly in terms of the US dollar. So you want to focus on gold mining companies with operations in the United States, that basically narrows it down to Nevada and Alaska, with some lessor projects in other states."

The Right Time?

This question is oriented more towards stock price "technicals" of gold mining companies involved with the Cortez Trend.

After the run-up in junior gold mining stocks between late summer and winter 2003, the stocks underwent a pull back beginning in the spring 2004. Part of the reason is that the price of gold got swatted down back below $400 an ounce. Also, there was apparently an overhang of paper from new stock issues, in which the industry raised $5 billion in new capital. Rick Rule observed in a panel discussion at the 2004 San Francisco Gold conference that the market cap of the junior mining sector has nearly tripled.

In his SmartStox interview at the 3-4 Oct Toronto Resource Conference, John Kaiser commented that investors have been holding back on running up junior mining stocks because, "There has been no multibillion dollar discovery for six or seven years. The investor is waiting for a fifty cent (stock) to find 500 feet [core drill result] of 1.5 oz gold [per ton], as happened with Placer Dome [at the Cortez Trend] in Nevada. Any junior such as White Knight or Miranda could do the same thing."

Incidentally, Dr. Keith Barron, VP Aurelian Resources, made essentially the same point in his Dec 4, 2004 interview at the San Francisco Gold Show with James Puplava, namely that if the Cortez Hills discovery had happened to a junior mining company as opposed to Placer Dome, it might have ignited the whole junior mining sector.

The recent relative lack of an "elephant" discovery among junior mining companies can be blamed in part on the extremely depressed gold prices in the late 1990's, which threatened to put half of all mining companies out of business. The Bre-X scandal, in which a junior exploration company operating in Indonesia got caught salting its core samples, did not encourage exploratory investment either.

According to Bill Murphy, head of the Gold Anti-Trust Action Committee, (GATA), the Deputy Chairman of the Central Bank of Russia gave a talk in London in July 2004 that validated its claims regarding a gold suppression campaign led by America's Federal Reserve. The Russians claim that if gold had simply kept pace with global inflation, it would have risen to $740-$760 an ounce rather than dropping below $300 an ounce in the late 1990's. This analysis has also been seconded in a report by the eminent Canadian investment firm Sprott Asset Management.

This suggests two other key factors that could run up junior gold stocks apart from a major new discovery. One might involve a situation where central banks completely run out of any gold or any other last forms of influence to keep gold artificially suppressed. Another scenario might involve a country or group of private individuals who decide to make a determined effort to aggressively buy gold and start a "run on the bank."

The odds are unknowable regarding when any of the aforementioned scenarios might take place...unknowable except perhaps to a very small number of people at the pinnacles of power. However, so long as America continues to experience aggressive debt creation, steady increases in government spending, growth in balance of trade deficits, and aggressive money supply creation, the arrival of a day of reckoning is a virtual certainty. In fact, the longer it is delayed through continued use of "the best defense is a good offense" tactics, the more dramatic the outcome will be later on.

End of Part One: Overview

... Part Two: The Fundamentals
... Part Three: Overview of Players, Two Majors
... Part Four: Profiles of Sample Junior Players
... Part Five: Cortez Trend Maps, Pictorial Overview

Bill Fox
America First Trust

Disclaimer: The views expressed are those of William Fox, and may not be those of Sammons Securities Company, LLC. This report is for research/informational purposes only, and should not be construed as a recommendation of any security. Information contained herein has been compiled from sources believed to be reliable. There is however, no guarantee of its accuracy or completeness.

Bill Fox is VP/Investment Strategist and private client money manager, America First Trust. Bill welcomes phone calls and responses to this article. His web site: www.amfir.com. Address: VP, America First Trust, Reg. Rep., Sammons Securities Co., LLC P.O. Box 820669, Vancouver, WA 98682, telephone: 360-882-5369, toll free: 866-945-5369 (866-WILL FOX), email: wfox@sammonsrep.com. Securities offered through Sammons Securities Co LLC, member NASD and SIPC.

Securities offered through Sammons Securities Co. LLC, Member NASD and SIPC. Investment advisory services offered through Sigma Planning Corporation, a registered investment advisor. Views and opinions expressed are not necessarily those of Sammons Securities or Sigma Planning Corporation. Sometimes William Fox offers viewpoints that are not necessarily his own to provide additional perspectives. Please see additional disclaimer on Broker-Dealer/Sammons page.

Copyright © 2004-2005 William Fox

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