Gilded Promises? The Real Worth of Novo Resources

Executive Summary

Crux Investor wrote its first company report in April 2020, on Novo Resources Corporation (“Novo Resources”) (TSX:NVO). Since April the share price has doubled, the Company has raised C$56 million from investors, and the market capitalisation is currently C$628 million.

In that first report Crux Investor highlighted many structural problems with Novo Resources such as ongoing mission creep and absence of milestone delivery, the lack of resources at Comet Well / Purdy’s Reward caused by an insurmountable nugget effect problem, the lack of technical reports at Beatons Creek, the terrace nature of gold at Egina, and Dr Hennigh’s personal enrichment activities at the probable expense of shareholders. In April Crux Investor felt that the Company was over-valued, notwithstanding the overall bull market in precious metals.

Clearly management of Novo Resources (and its supporters) will feel vindicated, given that the share price has doubled in five months, and the Company continues to receive support from investors.

In a moment of humility, Crux Investor wanted to check to see if that first analysis was unfair, or inaccurate. Accordingly, we have completed a fresh, bottom-up review of Novo Resources, with a detailed financial and technical review, prepared by a new analyst. For the sake of fresh readers, a complete background is provided, and so here it is - the new Novo Resources, Crux Investor Update (with occasional reference to the April 2020 Crux Investor Report).

Novo Resources is a Canadian company which took licences in north-western Australia in 2012 exploring paleo-placer gold deposits in the Pilbara region. The area was known as a place where prospectors could pick up gold nuggets using metal detectors and Australian companies had explored it systematically in the 1970s. Although no large scale, commercial gold mining operation had been established in the region, Dr. Quinton Hennigh, having worked in the area as a Senior Geologist for Newmont Corporation, believed that a commercial discovery could be made. In 2010, Hennigh helped start Novo Resources and began assembling its Australian exploration portfolio. Hennigh is currently Chairman and President of Novo Resources.

The first project was Beatons Creek, comprising a set of mining licences and a surround package of exploration licences. The mining licences themselves were bought from a company called Millenium Minerals Ltd (“Millenium”), and the exploration licences around it, owned by Mr Creasy, a well-known Australian prospector, and companies controlled by Mr Creasy (“the Creasy Group” of “CGE”) were together structured into a 70% joint venture with Novo Resources. Crux Investor notes that the consideration paid to the Creasy Group far exceeded what was paid to Millenium, whereas all substantive historical work seems to have been on the mining licences.

The Beatons Creek project was quickly advanced with a NI.43-101 compliant resource estimate declared on 1 May 2013 containing 0.42 million ounces (“Moz”) gold at an average grade of 1.47 g/t Au. In addition, promising results were announced at another prospect. Novo Resources declared the financial year ending 31 January 2014 a “banner year”. It was so much encouraged by the initial results that Novo Resources became a serial deal-maker, picking up large tracts of mineral rights in the Hammersley Basin of the Pilbara region where similar geological deposits to the Beacons Creek area were found.

In the Management Discussion and Analysis (“MDA”) for the year ending 31 January 2015 management undertook to “fast-track Beatons Creek toward production” contemplating a mining rate of 1,000 – 1,500 tonnes per day (tpd”)”. Despite multiple promises of feasibility studies and fast-track production, there must have been complications as the Beatons Creek project has yet to be given the go-ahead. Reality failed to match rhetoric.

The technical information on Beatons Creek shows that extracting the gold-bearing conglomerates need careful delineation, which includes drilling/pitting/trenching to determine top and bottom of the strata to mine. Mining of the relatively narrow horizons that have an undulating bottom will result in considerable dilution. The resources are present in numerous reefs, but mainly in two reefs considered more continuous, but also generally deeper under overburden.

Despite years of on-and-off further exploration Novo Resources has struggled to substantially add to the 2013 resources declaring in 2019 open pit resources of 0.75 Moz. The grade has however improved to 2.3 g/t Au, but with a grade of 2.1 g/t Au in Indicated Resources and 2.7 g/t Au in Inferred Resources. The technical report gives no geological explanation for the lower confidence resources to have a higher grade. More worrisome, bulk sample results which can be considered much more representative than smaller trench sample results on which the resource grade is based, proved to be much lower than modelled for the bulk sample sites. Furthermore, when commercially mining the narrow gold-bearing conglomerates alternating with barren sections that are visually indistinguishable, much dilution can be expected compared to the carefully controlled bulk sampling exercise.

Novo Resources is currently in the process of acquiring Millenium shares to take control of its existing process plant at 10 km from Beatons Creek. Whether this 1.5 million tonne per annum (“Mtpa”) plant is optimally set up to treat the Beatons Creek mineralisation is not yet clear from the documentation.

This study has valued the Beatons Creek project for two scenarios: mining at resource grade and mining assuming 30% dilution, which is more than the 20% dilution experienced bulk sampling to account for less grade control when commercially mining. At the gold price of US$1930 on 8 September 2020 and with Beatons Creek having to cover the cash corporate overhead expenses of C$6.1 million per annum, the NPV7.5 of the project is US$253 million. It generates an excellent cash margin of almost 53% of gross revenue, but has a limited life of mine (“LOM”) of 6.7 years to 8.7 years, depending on whether dilution is included or not. On paper this project would be profitable, but it requires significant further work to de-risk the opportunity. In April 2020 Crux Investor noted that Beatons Creek had gone backwards from promises of fast-track production in 2015, to promises of a Pre-Feasibility Study, to promises of an Option Study. There has been no technical study at Beatons Creek for years and Crux Investors’ new evaluation of the project also arrives at the conclusion that the Beatons Creek resource is unlikely to ever come out of the ground.

It should be stated that there have been a number of resource updates at Beatons Creek, in 2013, 2015, 2018 and most recently in 2019. The first three of these reports were written by independent consultants. Remarkably the 2019 resource update was written by Novo Resources itself. Crux Investor believes that no matter how much internal expertise a junior mining company has, signing off on resources internally should not be done until there is an established track record of conversion to production. This is a Red Flag.

The Novo Resources share price came alight in July 2017 when it announced the discovery of large (up to 4 cm) gold nuggets at Purdy’s Reward. The licences are from one of the Company’s many acquisitions, but not a Creasy Group asset. The share price rocketed tenfold making the company for a short period a US$1 billion enterprise. When interest started waning at Purdy’s Reward, announcements of nuggets at an adjacent property, Comet Well, temporarily reinflated the balloon. Over time things have gone quiet with regard to these prospects, which is completely understandable when the technical information is thoroughly reviewed. This fresh Crux Investor report sifted through the data and saw that the weighted average grade of 0.91 g/t Au of selectively reported bulk samples renders Purdy’s Reward and Comet Well, well, worthless. So much for the US$1 billion hype, and remember that companies that selectively report samples will always report the best selection, not the worst or the average.

With Novo Resources management realising there is little (no) joy to be had from either Beatons Creek, or Comet Well / Purdy’s Reward, attention moved on to the Egina project where prospectors at an area referred to as Farno had found gold nuggets. This time round management held out the prospect of much larger target areas with the gold in a different type, more ubiquitous occurring conglomerate. Once again, however, a review of the news releases and documents published by Novo Resources shows that the asset falls short. The surface area explored to date is not more than 800 m x 200 m and bulk sampling has yielded an average grade of 0.35 g/t Au and a gravity recovered yield of 0.28 g/t Au. And once again, the fresh Crux Investor report reached a confident but critical conclusion on the value of Egina. Worthless.

Curiously, even while it has been strategically shifting away from the Pilbara the Company has also taken full control of the Greasy Group tenements areas. Perhaps it is looking to sell the entire portfolio as a job lot, despite the fact that in ten years the Company has not had any obvious exploration success on any of the licences?

Finally, it is worth remarking that management has recently been vocal about the testing of ore sorters to reject waste. Crux Investor reminds readers that pre-concentration does not add gold to the production schedule, rather it is a volume-reduction step that may or may not create value for shareholders. Any savings created by lowering processing costs have to be off-set against revenue losses due to less gold being recovered in the full beneficiation circuit. There will be cost savings from having reduced amounts of material needing to undergo a more expensive concentration process. Equally, such a benefit comes at the loss of gold in the pre-concentration stage as not all the gold will be recovered. Therefore, the loss of revenue may well be greater than the operating cost saving. Pre-concentration in itself is not a game-changer.

At its most basic, the Company is built on sand with most of the Pilbara portfolio acreage being worthless. Yes, we concede that Beatons Creek does have a theoretical value and a positive NPV but we feel the resource can be grouped among those that are never coming out of the ground. Ironically, even though Novo Resources continues to promote the Pilbara portfolio, we believe that senior management within the Company has reached the same conclusion as Crux Investor. Events of the past two years show that Directors of Novo Resources have lost faith in the projects as the Company and its Chairman have steadily been diversifying away from the Pilbara gold conglomerates.

In 2019 and 2020 the company has changed its stated objective of developing gold in the Pilbara, adding the phrase that it “seeks to leverage its internal geological expertise to deliver value-accretive opportunities for its shareholders.” This is code for, “the Pilbara assets are worthless, we need to diversify.”

Novo Resource invested A$4 million in an 8.2% stake in Kalamazoo Resources Limited in January 2020, with gold projects in the Fosterville region of Victoria, South Australia. In the same month Novo took a 15.97% stake in a private exploration company in a share swap. The private company is New Found Gold Corp and has exploration ground in Newfoundland and Labrador, Canada, and it ended up with a 3.73% stake in Novo. In March 2020, Novo Resources subscribed for 9 million shares in ASX listed company GBM Resources Limited with an earn-in right for up to 60% of the Malmesbury Gold Project in Bendigo, Victoria, South Australia.

Hennigh, Chairman of Novo Resource has always had too many other corporate positions for comfort but in recent months he has taken on more and more positions, reducing the time he spends on Novo Resources, and reducing his reliance on the Novo shilling/pfennig/dime. He has at least sixteen paid positions as Director or Advisor to companies other than Novo Resources and incredibly, he has taken on nine new roles in 2020 alone.

When the Board of Directors agrees that Novo Resources money should be invested into companies OTHER than Novo Resources, and when the Chairman and President takes any position

offered to him OTHER than Novo Resources, the message to shareholders should be received loud and clear, “abandon ship, abandon ship”. It is every man for himself at this point.

All in all, Crux Investor arrives at a set of Green Lights and Red Flags that are very similar to the report from April of this year. Not wanting to mince our words, Crux Investor views almost everything to do with the Company as being a furiously waving Red Flag.

Introduction

Novo Resources Corporation (“Novo Resources”) (TSX-V:NVO) (OTCQX:NSRPF) is a Canadian company which arrived at its current name in June 2011. The driving force behind the Company has been Dr Quinton Hennigh, who helped start Novo Resources and began assembling its Australian exploration portfolio in 2010. Hennigh had previously worked in the Pilbara basin, Western Australia, as Senior Geologist for Newmont Corporation and the Company has spent much of its efforts targeting gold in the Pilbara conglomerates. The thesis is that the Pilbara is a geological terrain similar to the Witwatersrand Basin in South Africa, with its famously gold-rich conglomerate deposits.

Many of the portfolio deals are complex with convoluted terms and clauses. Table 1_1 summarises the Novo Resources acquisitions in Western Australia (other areas ignored) in chronological sequence and Figure 1_1 is a map with the concession blocks still held by Novo Resources at the distribution date of this report.

The Tenement Areas highlighted grey are those that were subsequently written off as of no interest.

In particular the transactions that are highlighted in the table above are particularly opaque in terms of rights and commitments. In effect Novo Resources is earning into the Pilbara Paleo project which is owned by Mark Gareth Creasy, who is also part of the Creasy Group (“CGE”). The 70% earn-in was through a company holding the rights to earn-in 70%, but this company was owned 36.7% by Mr Creasy. This means Novo Resources would earn 44.3% by meeting the commitments. Mr Creasy’s interest was reduced to 19% in CGE through expenditure of A$3.5 million.

As an aside, Crux Investor believes that it is impossible to gain a full understanding of the Creasy Group transaction from the documentation presented by Novo Gold. For example: CGE is entitled to spend (via Nullagine Gold and Beatons Creek Gold) up to a further AUD$3.5 million in aggregate on the Paleo-Placer Property and the Beatons Creek tenements to increase its shareholding in CGE to 81% (and reducing Creasy’s interest to 19%). CGE spending (among others on a prospect previously purchased from another entity Millenium) to increase its shareholding in itself? The complexity of these deals, and the lack of Novo Resource supporting documentation is, in itself, a Red Flag. There are plenty of other risks involved in mining projects, and it is always best to have simple deal terms clearly explained. No-one wants to be involved in a labyrinthine set of contracts. A repeat of the Gemfields 2017 fiasco anyone? No thanks.

What is evident from the table is the increasing generosity of the terms over time. The improving terms are probably a reflection of the perceived attractiveness of the rights with Novo Resources claimed successes on earlier acquired rights and the ease with which Novo Resources could access capital from the market.

Figure 1_1 shows the status of the tenements controlled extracted from a corporate presentation dated July 2020.

The blocks coloured dark blue are the tenements held 100% by Novo Resources. The light blue colour indicates the rights held in joint

venture with the Creasy Group for which Novo Resources paid so generously. The next highest paid rights are Comet Well in bright green.

The Millenium Minerals ground where it all began is in orange on the right of the map. There, after a 16,107 m reverse circulation (“RC”) and 478 m diamond drilling programme, Novo Resources declared on 1 May 2013 for the Beatons Creek prospect a NI.43-101 compliant resource of 8.9 million tonnes (“Mt”) at a grade of 1.47 g/t Au for 0.42 million ounces (“Moz”) gold. At the Marble Bar prospect, which was part of the acquired tenements (although shown as an isolated white dot) the company identified during 2013 “laterally continuous gold-bearing reef” sampling over a strike length of 0.8 km grades between 0.16 g/t Au and 15.96 g/t Au and over 2 km grades between 0.03 g/t Au and 9.26 g/t Au. Management declared 2013 a “banner year”. This banner year explains the acceleration in growth of the portfolio after 2013.

In the MDA for the 2015 financial year Novo Resources management undertook to “fast-track Beatons Creek toward production” contemplating a mining rate of 1,000 – 1,500 tonnes per day (tpd”), recovering gold entirely or predominantly via gravity processing. It did not stop the company from further drilling in that year, completing 9,000 m in 327 RC holes. In addition, pit samples of 45-60 kg were taken over widths of 1 metre.

In 2015 and 2016 Novo Resources was active in the Pilbara at the Talga project and Blue Spec project (a shear zone hosted gold target) without much obvious success.

Figure 1_1 shows the share price performance of Novo Resources over the last 5 years.

Not much happened in terms of share price until July 2017 except for a short blip in mid 2016 which coincided with announcements relating to exploration plans for Blue Spec, a shear zone gold prospect, not conglomerate gold.

The 2017 trench and pit sample results at Beatons Creek could not excite the market with the share price languishing between C$0.70 and C$0.90. This all changed in July 2017 when Novo Resources announced the discovery of large sized (up to 4 cm) gold nuggets at Purdy’s Reward. Subsequent news releases about other nugget finds and bulk sample results propelled the share price ever higher ending in October 2017 more than ten times higher than at the start of the rally. However when Novo Resources established the difficulties of obtaining reliable grade results from samples weighing 300 kg the market started taking profit.

After Purdy’s Reward it was Comet Well’s turn to set the market alight where “numerous gold nuggets” were retrieved from bulk samples, resulting in the share price peaking at the end of May 2018 at almost C$6. Despite continued positive news releases the market started tiring and the share again dropped. This drop became precipitous in September 2018 when Novo Resources started to cast its eye to other tenement areas in the Egina region, raising the question what was wrong with Purdy’s Reward and Comet Well for the company to again divert its attention. The revised resource estimation for Beatons Creek effective 1 January 2018, only announced in October 2018, with little more gold than the 2013 resource estimate did not help.

The next upward blip in December 2018 coincided with announced positive mechanical sorting results for terrace bulk samples from Egina. The relationship with Sumitomo was strengthened in January 2019 allowing the company to earn-in on projects based on rights of first refusal.

On 1 April there was another update of the Beatons Creek resources with effective date 29 March 2019, this time authored by Novo Resources itself, showing a 33% increase in the Indicated category (N.B. the previous resources included the Measured and Indicated categories) to 0.46 Moz. The market did not take kindly to it and the share price slid until the beginning of June when Sumitomo decided to enter into a earn-in agreement for 40% of the “Egina project” comprising the tenements acquired from Farno McMahon, Pioneer Resources and De Grey Mining at an investment of up to US$30 million over three years. At Farno the vendor had discovered gold nuggets in trenches. Positive bulk sample reports for Egina in August, October and December 2019 together with positive mechanical sorter results kept a burner under the share price until the end of 2019.

News in January 2020 that Novo Resources had acquired a stake in another company, Kalamazoo Resources Ltd, exploring a totally different deposit type, was not received well. The COVID-19 pandemic crisis hit the share price hard, as for the whole industry. It did not help for Novo Resources to announce it had taken a 16% stake in an explorer, New Found Gold Corporation, active in Newfoundland and Labrador, Canada. On 30 March 2020 another share acquisition was announced, this time GBM Resources Limited exploring the Malmsbury gold project in the Bendigo region of the Victoria state in Australia. By now there is a distinct impression Novo Gold wishes to diversify away from the gold conglomerate prospects in Western Australia.

Yet another discovery in April 2020 at Egina, this time in gravel “swales” (= shallow channels) at an area called Paradise started the turnaround in the share price.

In June an acquisition was made of gold rights in an area located in the Southern Pilbara region, where according to Novo Resources uplifting of strata had caused the gold-bearing conglomerates of the Fortescue Group to outcrop. Gold nuggets finds had been reported there over the years.

Also in June 2020 Novo Resources signed yet another agreement with the Creasy Group, this time to consolidated their rights over 510 km2 (yellow outlines in Figure 1_3) by purchasing the 30% stake held by the Creasy Group, purchase 1,865 km2 of new ground (red outlines) presumably staked by the Creasy Group, and enter into a 70/30 joint venture over 525 km2 of new ground (green outline).

The total consideration was 2.59 million Novo Resources shares, which have a value of pprox.. C$10 million based on Figure 1_1. That is a lot of money for what is essentially unexplored pasture land.

In June Novo Resources also decided to purchase a mechanical sorter to test “field exploration samples” from Purdy’s Reward, Comet Well and Egina projects. This to “better understand the grades”. Apparently the previously announced “excellent laboratory level results” needed testing in the field.

In August 2020 all shares in Millenium were acquired for C$44 million in Novo Resources shares (resulting in the vendor holding pprox.. 15% of issued shares) to secure infrastructure to “fast track Novo’s transition to becoming Australia’s next junior gold producer via production at its Beatons Creek Project”, almost 6 years after the commitment made in the MDA for the year ending 31 January 2015. The infrastructure includes a 1.5 million tonne per annum (“Mtpa”) plant, tailings storage facility, power station, offices, assay laboratory and 230 room camp situated 10 km south of Beatons Creek. To fund this transaction Novo Resources raised C$42.5 million equity funding using brokers and a C$5 million non-brokered private placement. The vendor IMC, a consortium of three companies, would also retain a 2% gross royalty up to the higher of 12,000 oz, or A$20 million.

Separately, a number of corporate transactions of the past two years indicate that the Board of Directors, and the Chairman himself have lost faith in the Pilbara portfolio, despite the fact that the Company continues to publicly promote it. The Company and its Chairman have steadily been diversifying away from the Pilbara gold conglomerates.

Notably, in 2019 the company has changed its stated objective of developing gold in the Pilbara, adding the phrase that it “seeks to leverage its internal geological expertise to deliver value-accretive opportunities for its shareholders.” The golden rule of investment is to make every dollar of investment work hard. Why put it in Area A when it can earn more if it is invested in Area B? And that is exactly what the Board of Novo Resources concluded. Area A is, of course, the Pilbara portfolio, and Area B is pretty much anything else. Why invest in the Pilbara Portfolio (apart from the investment being made by Sumitomo, and the bare minimum to keep the optics looking good), when there is a better return on investment by putting the money to work elsewhere?

And so, Novo Resources recorded a spate of transactions in early 2020 before the gold price run rendered most assets expensive.

In January 2020 Novo Resource invested A$4 million in an 8.2% stake in Kalamazoo Resources Limited, with gold projects in the Fosterville region of Victoria, South Australia. In the same month Novo took a 15.97% stake in a private exploration company in a share swap. The private company is New Found Gold Corp and has exploration ground in Newfoundland and Labrador, Canada, and it ended up with a 3.73% stake in Novo. In March 2020, Novo Resources subscribed for 9 million shares in ASX listed company GBM Resources Limited with an earn-in right for up to 60% of the Malmesbury Gold Project in Bendigo, Victoria, South Australia.

Before Crux Investor moves onto an analysis of the historical financial performance and a technical review of the projects, it is worth saying a few words about Dr Quinton Hennigh, Chairman and President. On the Novo Resources website, Hennigh’s biography reports that “joined the junior mining sector in 2007 and has been involved with a number of Canadian listed gold companies”. A quick internet search, however, shows that the biography is a massive understatement. As well as his well-paid leadership role at Novo Resources, Hennigh is also currently:

• Director of NV Gold Corp since 2009
• Independent Director of Precipitate Gold Corp. since 1 December 2011
• Director of Irving Resources Inc. since 23 September 2015 and Technical Advisor since January 2020
• Director of TriStar Gold since August 2015
• Advisor to the Board at Latin American Minerals Inc. since August 2016 (possibly lapsed)
• Director of Miramont Resources Corp. since 14 November 2017 and Executive Chairman since 10 April 2019
• Technical Advisor to Lion One since 1 March 2019
• Ethos Gold Corp (Technical Consultant) since 17 May 2019
• Member of Geological Advisory Team at Eskay Mining Corporation since September 2019
• Director at Eskay Mining Corp. since 11 August 2020
• Director at Condor Resources Inc. since June 2020
• Member of Advisory Council at NuLegacy Gold Corporation since May 2020
• Member of Corporate Advisory Board at Eloro Resources Ltd. Since June 2020
• Advisor to Hannan Metals Limited since January 2020
• Technical Advisor to White Rock Minerals since 23 June 2020
• Special Advisor to Bonanza King (Mexico Gold) since 5 February 2020
• Advisor to Crescat Capital since June 2020

The list highlights the fact that Hennigh is proving adept at mining the market, and by implication short-changing Novo Resources shareholders. At least sixteen, possibly seventeen, paid positions in addition to Novo Resources? You have to be having a laugh. Hennigh is laughing all the way to the bank. The last laugh is on Novo Resources shareholders.

Secondly, Hennigh shows that he is losing interest in Novo Resources by his accelerated collection of new positions in 2019 and 2020 despite gold-price strength. Hennigh started diversifying his time and income from Novo in 2019, and has added nine new Company roles in outfits other than Novo Resources in 2020 alone.

When one looks at the track record of diversification by Novo Resources at a corporate level from the Pilbara, and the fact that the Chairman and President appears to be taking every position offered to him that has no relation to Novo Resources, it is hard to escape the conclusion that the ship is sinking. Insert a well-known phrase or saying of your own choice involving sinking ships.

Historical Financial Performance

Table 2_1 gives the historical financial performance from 1 February 2011, the year when it acquired Beatons Creek, until 30 April 2020.

Table 2_1 shows that:

• The company had until the 2018 financial year a moderately high cash spending level of just above C$1 million per annum on operational expenses and C$2 million on investments increasing to approx. C$9 million annually in 2016 and 2017.
• With the hype around Purdy’s Reward and Comet Well this changed and operational expenditure skyrocketed and investments increased to around C$20 million per annum.
• The very low numbers for the first quarter of the 2021 year shows a remarkable slow-down in activity. The recently announced cash raising sits strangely given the fact the company has a very healthy cash balance and the Millenium share acquisition does not involve cash. Does this indicate the company wants to make sure it can use its currently highly rated paper to obtain much cash funding for another acquisition before excitement about the prospects for its gold conglomerates once again abates?

The Regional Geological Setting Of The Gold Conglomerate Prospects of Novo Resources

The large-scale geological setting for the gold conglomerate prospects of Novo Resources is the Hammersley Basin within the Pilbara Craton. A craton is a remnant of continental crust that is part of the initial geological history of the earth; in the case of the Pilbara Craton 2.8 – 3.2 billion years old. Also then the earth was exposed to continental rifting and formation of “basins” into which lava would flow forming basalts and sediments deposited from eroded rocks derived from the surrounding higher lying land. Figure 3_1 shows a somewhat blurred large-scale geological map of the Hammersley Basin.

Of importance to note on this map is the enormous scale of the terrain (the bar scale at the bottom right denotes 50 km) and the areas with pink colour which is for the Hardy Formation within which the Fortescue Group of rocks is present in which the gold bearing conglomerates are present.

A conglomerate is a coarse-grained sedimentary rock composed of rounded fragments larger than 2 mm, embedded in a matrix of cementing material such as silica. It takes a strong water current to transport and produce the rounded shape of particles this large. So, the environment of deposition might be along a swiftly flowing stream or a beach with strong waves where the clasts were tumbled for some distance to achieve the rounded shape.

In such a high energy environment gold with its very high specific gravity will be naturally concentrated, finding its way to the bottom and preferentially remaining there together with other gold grains and nuggets.

Technical Review Of The Beatons Creek Project

Introduction

Unless specifically otherwise stated all information, text and illustrations have been extracted from two NI 43-101 compliant technical reports in support of an updated resource estimations, the first by Tetra Tech, with an effective date of 10 August 2018, issued 20 November 2018, the other by Novo Resources management issued 13 May 2019, with an effective date of 28 February 2019.

The 2019 technical report, issued by Novo Resources, uses largely the same data as the 2018 technical report, written by Tetra Tech. The 2019 update includes the addition of 2018 diamond and trench data as well as a range of different interpretation methods. Crux Investor notes that Novo Resources itself is the signatory on the 2019 resources update. The two authors of the 2019 Resource Estimate, which included a 30% increase in tonnes, are Chairman and President Dr Hennigh, and Dr Simon Dominy, Principal Advisor Novo Resources (since 2017).

Crux Investor believes that no matter how much internal expertise a junior mining company has, signing off on resources internally should not be done until there is an established track record of conversion to production. This is a Red Flag.

The updated 2019 Resource Estimate included a 30% increase in tonnes driven predominantly by an improved geological framework from the recent diamond drilling program compared to the previous 2018 estimate supported by the technical report titled “NI 43-101 Technical Report Resource Update, Beatons Creek Gold Project, Pilbara Region, Australia” issued on November 20, 2018 (the “2018 Resource Estimate”)

The Beatons Creek project is located in the Pilbara region in the north-western part of Western Australia, 1,364 km north-northeast of Perth and 296 km southeast of Port Hedland (Figure 3.2_1).

The Beatons Creek area is adjacent to and west of the town of Nullagine, which is 296 km southeast of Port Hedland and 170 km north of Newman by road.

The Beatons Creek Gold Project area consists of 21 predominantly contiguous tenements totalling 167.9 km2; these tenements include Exploration Licences, Prospecting Licenses and Mining Leases. The mining licences were bought from Millenium and the other licences controlled via the Creasy Group. Comparing the tenement area outlined in the 2018 technical report with the August 2015 technical reports shows a very large reduction in ground held with only the mining licences unaffected.

Geology and Mineralisation

The host rocks to the gold deposits at the Beatons Creek Gold Project occur towards the top of a more than 800 m thick sequence of poorly-stratified, poorly-sorted conglomerate sequence with clasts from several rock types. The “Mineralized Unit” is 40 m thick within which the much narrower individual gold-bearing conglomerate beds occur. These are located in an area within a few kilometres of the village of Nullagine.

Figure 4.2_1 shows the geological map for the project area with the conglomerates shown in orange yellow with small circles. The resource outline within this formation is shown in grey.

Conglomerates occurring above and below display similar characteristics to those that are gold-bearing, but are largely devoid of appreciable gold. This will make it difficult to visually control mining the correct horizon.

Two types of conglomerates are evident and apparently interbedded with one another within the gold-bearing section of the Beatons Creek Gold Project. They are:\

• Fluvial (= river deposit) type ferruginous conglomerates, and
• Marine lag type ferruginous (= iron rich) conglomerates.

The fluvial type conglomerates are composed of various rock types with the clasts varying in size from pebbles to boulders and in contact with each other (= clast supported, not totally surrounded by a fine matrix). Individual horizons are less than 1 metre to several metres thick and continuous over tens of metres (only!) according to Tetra Tech, but ~50 m across and traceable over hundreds of metres according to Novo Resources management.

Crux Investor is much more inclined to follow the Tetra Tech guidance. Historic reports of mining activity from the late nineteenth century point out that the old-timers mined gold out of horizontal tunnels (adits) approximately 1 m high in pockets of high-grade. A further corroborating factor is that the ore blocks in the Novo model are only 1 m thick.

Marine lag-type conglomerate is typically also tightly packed with clast sizes varying from cobble to boulder, and also clast supported. Individual boulders can exceed 1 m diameter and are of varying composition, but are dominated by hard, resistant, siliceous boulders of several types including vein quartz and chert. Individual beds are between 0.3 m and 2 m thick (according to Tetra Tech, 1.5 m according to Novo Resources management) and sheet-like, being continuous over hundreds of metres according to Tetra Tech, but with the main two marine lags continuous over 2.5 km, according to Novo Resources management.

The discrepancy in the description in reports published by Tetra Tech and by Novo Resources less 6 months apart is a concern. NI 43-101 Technical Reports are supposed to represent a summary of data and they typically rely on data provided by Qualified Persons representing the Company in question. Nevertheless, it is normal for third party entities to actually complete resource estimates unless the Company is very large as an in-house resource estimate cannot be seen as independent and risks being biased.

The Resource Estimates from 2018 and 2019 were completed on different data sets, and the interpretation is markedly different on the continuity, geometry, and presentation of mineralisation. Crux Investor would have been much more comfortable if the 2019 Resource Estimate update were carried out by Tetra Tech, as an update to the 2018 Mineral Resource Estimate.

The two conglomerate types are interstratified with the fluvial type deposited in a delta and with the marine lag type deposited as sea levels rose with the wave action winnowing out the finer, lighter sediments. This process repeated several times to create the stack of interbedded conglomerates now evident. The conglomerate beds dip at approximately 20 degrees, so little is exposed at surface. Because the mineralisation dips into the ground, strip ratios and overburden increase quite quickly, generating logistical challenges that all deposits face.

Gold mineralisation within the conglomerates occurs as fine grains, larger flakes, and rounded particles rarely exceeding 2 mm occurring in the matrix together with detrital (= weathered from pre-existing rocks) pyrite, referred to as buckshot pyrite. The pyrite particles range in size from 2 mm to 65 mm in diameter. There seems to be a correlation between higher gold grade and pyrite content and the particle size of buckshot pyrite.

Mineral Resources

As noted above a number of NI 43-101 technical reports have been filed on Sedar for Beatons Creek, dating from 2013, 2015, 2018 and 2019. This Crux Investor report focuses on the most recent two resource estimates, from 2018 by Tetra Tech, and from 2019 by Novo Resources.

It is hard to make exact comparisons between the two resource estimates as the numbers are provided differently. On a qualitative basis, Novo Resources note that “There are a number of differences between the 2019 Mineral Resource estimate and the previous, with the greatest difference being a change of geological interpretation and the addition of 2018 diamond drill holes and trench samples.”

The report goes on to say that “key differences relate to:

• Addition of 2018 diamond drill hole and trench data;
• Different geological interpretation, more constrained wireframes;
• Different block model size, larger estimation blocks;
• Different variography based on the data set applied within new wireframes;
• Different SGs based on new data;
• New oxide-fresh surface;
• Coherent resource classification – no spotted dog effect;
• Higher underground cut-off based on potential mining scenario; and
• Different pit shell based on new optimisation at the current gold price.”

Tetra Tech used 27,503 samples from RC holes, 680 samples from diamond drill holes and 1,696 samples taken from trenches. The 2019 exercise used 3,767 composites sourced from 2,423 RC samples (64%), 229 diamond core samples (6%), and 1,116 trench channel samples (30%).

When comparing the map with the distribution of samples/drill holes for the 2019 resources estimation, reproduced in Figure 4.3_1, with a similar map in the 2018 technical report it is evident the later exercise includes substantially more diamond drill results (red dots) and a few more pit results. The differences are so minor, it should not explain a major difference in resource size.

Comparing the reef models of 2018 and 2019 estimation, both undertaken by Novo Resource geologists, shows the later exercise filling the gap on the left in Figure 4.3_2 extracted from the 2018 technical report of the reef shown in brown yellow.

The different interpretation fits in with the difference in statement on continuity of the marine lag conglomerate observed in the preceding report section. The 2019 interpretation provides a cross section in support of the interpretation that is far from convincing with one RC hole around 500 m north of a RAB hole and 800 m south of trench samples. One can well imagine Tetra Tech not being prepared to make this interpretative jump given the variability of the reef elsewhere. The 2019 model also includes a number of faults that terminate conglomerate horizons.

Simplistically, the wriggly outlines to the bottom right of Figure 4.3_2 are for the fluvial conglomerates and the more regular outlines to the left for the marine lag conglomerates with a transition zone in between. Figure 4.3_3 has been extracted from the 2018 technical report to show two sections illustrating attitude, depth and relative thickness of the reefs.

Noticeable is the considerable variation in grade both down hole (e.g. blue and orange bars next to each other) and between holes. The grade bars are usually for a short section within an interpreted horizon, sometimes at the top, sometimes at the bottom.

The illustration also shows the transition from oxidised mineralisation to sulphide mineralisation, ignoring a transition zone.

The illustration does not reflect the complexity of mineralisation with the 2019 resource estimation having seven marine lags included. In total 44 mineralised domains have been identified for grade estimation based on lag number (9x), lag type code for marine/channel and fault block (9x). As it was found the grade does not change from oxidised to fresh mineralisation, this was ignored for grade estimation.

Sample assays were composited to a length of 1 m with the statistics hardly changing and the coefficient of variation (“CV” = standard deviation / mean) generally below 2.0, which is excellent for gold grade population giving confidence in the block grade estimation. This was further improved by reducing the CV below 1.5 by applying top cuts to the grade.

For the more widely spaced drilling of 100 m x 100 m up to 200 m x 200 m a block size of 40 m x 40 m x 1 m was used. For more closely drilled areas a block size of 20 m x 20 m x 1 m was used. The established grade for such a block were assigned to sub blocks down to 2.5 m x 2.5 m x 0.25 m to capture the volume of the resource outline.

For reporting purposes a cut-off grade of 0.5 g/t Au was used, which is too low given the assumptions of a gold price of US$1,311/oz metallurgical recoveries of 95% (sulphide) and 90 % (fresh) mining cost of US$2.4/t for oxide material and US$3.68/t fresh, processing of US$17/t-US$19/t, and G&A expenses of US$3/t. However, given the current gold price, the cut-off grade is low.

For underground resources a cut-off grade of 3.5 g/t Au was used.

Table 4.3_1 gives the resource statements for Beatons Creek, effective 10 August 2018 (Tetra Tech) and 28 February 2019 (Novo Resources).

The table shows that gold contained in open pit resources has increased by more than 20% and underground resources by more than 250%. The few additional sample points cannot explain the increase, in particular as the area drilled by diamond core holes were not included in the resources statement. The difference must be predominantly attributed by a different approach to modelling. It is somewhat concerning that the grade of Inferred resources in the latest resource statement is much higher than Indicated resources. The geological rationale for higher grades in inferred resources is not discussed, and this is a point of concern. Crux Investor notes that inferred resources at a higher grade than measured and indicated resources, without good geological supporting data is a Red Flag, and is improbable.

Figure 4.3_4 shows a map with the resource classification for the various areas highlighting the higher confidence resources to be where fluvial conglomerates predominate and lower confidence for the more continuous marine lags, which are generally deeper and could not be tested to the same extent by trenches and pits.

Please note the resource outline differs from that indicated in Figure 4.2_1.

It is unfortunate the resource statement does not give an indication of the relative contribution of fluvial and marine lag deposits, but visually it seems the fluvial deposits are the most important in the Indicated Resources.

Comparison of Bulk Sample Results and Modelled Resources Grade

During 2018 a bulk sample programme was carried out where 2 tonne samples were collected over 1 m thickness. The scope of sampling included 45 primary samples and 13 duplicate samples of oxidised mineralisation. The grade was determined by fire assaying of a gravity concentrate from each sample and separately assaying the tailings by three different methods.

The reported results for all samples, including 6 samples with grades below 0.5 g/t Au, which is the cut-off grade, is 2.16 g/t Au. Novo Resources also reports the weighted average grade of 2.42 g/t excluding these 6 samples. Why this is applicable is not clear as in practice it will not be possible to exclude such material when mining.

The weighted average grade above 0.5 g/t Au was determined at 2.39 g/t Au for the primary samples and 2.42 g/t including field duplicates. The average grade of the duplicates was 1.87 g/t compared to 2.07 g/t for the original samples. The CV for the pairwise samples is 22%.

The average grades established by various methods are shown in Table 4.4_1.

The bulk sample grades were found to be consistently lower than the block model grades for those sites, which in turn were found to be consistently lower than the uncut trench sample results. Whereas the technical report puts a brave face on these results, even postulating these could indicate a potential upside above the global oxide block model grade of 1.88 g/t Au, the 25% lower average bulk sample grade compared to forecast grade as per block model could spell problems, especially considering how carefully the samples were collected.

In practice when commercially mining the narrow conglomerates with gold-bearing and barren sections visually indistinguishable, much dilution can be expected.

Mining

In 2016 the company carried out test mining excavating 29,560 tonnes of mineralised material. The waste and ore bearing reef were all free dig. Each 12-hour period 4,000 cubic metre material was removed using one 80 tonne excavator, a loader and 3 articulated dump trucks (“ADTs”) with 40 tonne haulage capacity. In addition, a D9 bulldozer was used to ensure the floors were flat.

According to the discussion in the technical report, the hanging wall of the conglomerate was easily identifiable as transition of soft sandstone to quartzite boulders of conglomerate. The footwall was also visually identified, but without details how this was accomplished. It should be noted, the above is at variance with the geological description of gold bearing and barren conglomerates interstratified. It raises the question to what extent the bulk mining site was representative from the overall resource area.

It should also be noted mining was under strict geological control with test pits being dug in order to provide grade control for the sub-horizontal reef. As the reef was found to vary in thickness from 0.5 m to 2 m and has an undulating footwall such test pits will be required in practice at great density to be optimally effective. The undulations represent the sea floor in this depositional environment, which implies test mining was on the more continuous marine lags only.

Even with such strict geological control mining dilution was estimated at 20% (in the illustration in the technical report about the sampling process this is given as 20%-30%) and “ore” losses at 5%, mostly due to being removed with the overburden during stripping. Under commercial mining conditions these numbers can be expected to be higher.

In total 29,560 tonnes of mineralised reef were mined and 86,876 tonnes of waste for a strip ratio of 2.94. Of the mineralised reef 2,760 tonnes were classified as low-grade and stockpiled. No information was provided about the criterion used for this classification. The estimated average grade from test pit samples was 2.42 g/t Au, which is much higher than the block model grade of 1.65 g/t Au. However, the calculated head grade after treatment of bulk sample material including 20% (?) dilution was 1.86 g/t Au, therefore reconciling well with the trench sample result. The technical report, however, ignores that the calculations were carried out excluding the low-grade material.

Metallurgy and Processing

The discussion on metallurgical testwork that has been carried out is extremely brief in the 2018 and 2019 technical reports. This is not because of lack of testwork as according to the 2018 this was undertaken to examine gravity concentration, flotation and cyanide leaching in addition to comminution testwork.

For oxide material the mineralogical characterisation shows the gold to be present from very coarse (good for gravity concentration) to very fine at 1 μm (requiring leaching). As the majority of gold is liberated (free milling) a good recovery can be expected.

Comminution tests show the rock hosting mineralisation to be moderately hard with an average ball Bond Index of 14.2 kWh/t and average abrasion index of 0.26, which is also moderate.

Typical overall recovery from a process of gravity concentration and leaching of the gravity tailings is forecast at almost 95% with more than 58% percentage points recovered in gravity concentrate. The 2018 report however includes a graph for gravity recovery as a function of feed grade with sharply dropping numbers at lower grade (see Figure 4.6_1).

For fresh material mineralisation gold was shown to be strongly associated with a nickel arsenic sulphide (gersdorffite), as well as with chalcopyrite and carbon grains. The latter could cause high cyanide consumption and reduction of gold recovery. A further potential complication is the higher than average presence of Hg, As and Sb, but no further detail is provided.

Comminution tests show the rock hosting mineralisation to be hard with an average ball Bond Index of 18.8 kWh/t and average abrasion index of 0.26, the same as for oxide material.

The tests were on composites with grades of 5.46 g/t and 4.35 g/t, which are far higher than resource grades and therefore cannot be considered representative.

Test results indicate gravity recovery of 50% to 80% from “a well-designed and operated process plant”. Leach results show extraction rates of above 93%. An overall recovery rate of 92%-93% was suggested.

Tests of tailings samples indicate poor settling characteristics which would result in higher water retention (therefore increasing water consumption with less water recovered back to the plant) and reduction of the minimum strength below what is required for slope stability factors of safety.

A trial mining test in 2016 excavated 29,560 tonnes, but treated only 9,680 tonne due to a host of problems such as crusher breakdowns and “inefficiencies”. Whereas problems were experienced, it is not clear why not all material was treated, when this could have been done over a longer than planned period. The 2019 technical report glosses over this work, but the 2018 report includes a detailed description, which still leaves gaps in the numbers and reconciliations.

The calculated head grade of treated material (which excludes low-grade, stockpiled material), is determined as 1.86 g/t Au. Assayed grade of all material (including low-grade?) is 1.61 g/t. The recovered grade of 0.67 g/t Au implies a recovery of only 36%. The technical reports gloss over the poor recovery stating “the crushing and processing plant was never considered as a pilot plant so little emphasis is placed on plant recoveries”.

For the sake of the NPV calculation, Crux Investor has used the PEA recovery rate, but it is noted that a significant amount of further de-risking work is required.

Economic Evaluation

Assumptions

An extremely simplistic cash flow model was generated assuming a long-term gold price equal to the spot price on 8 September 2020 of US$1,930/oz Au.

At the rated capacity of 1.5 Mtpa of the infrastructure acquired from Millenium the undiluted resources can sustain a life of mine (“LOM”) 6 year and 8 months, with an assumed start at full production on 1 January 2022. This valuation has also tested the impact of a dilution rate of 30%. The overall strip ratio has been guesstimated at 5.0 given the bulk sample of oxide material alone had a strip ratio of almost 3. Any dilution would reduce the amount of waste classified as stripping waste by the same amount.

With substantial sulphide material the overall metallurgical recovery was assumed 90% under commercial production conditions.

The operating cost has been assumed at US$4/t mined given the high degree of grade control required, selective mining and assuming a mining contractor responsible for the mining activities, excluding planning and supervision. The processing cost rates were taken as per inputs for the conceptual resources, but the site G&A at US$6 million per annum. The haulage cost to the plant has been estimated at an industry-standard-rate of US$0.125/t/km one way. As at this stage the Beatons Creek would be the only operating assets it will have to carry the corporate overheads on its own. The cash proportion of these overheads amounted in the last two financial years on average to US$6.1 million per annum.

With a mining contractor responsible for purchasing the equipment, the processing plant available and probably only needing refurbishment, capital expenditure is very limited and provisions of US$15 million have been included for remaining studies and refurbishment of infrastructure. The closure and rehabilitation expenses have been guesstimated at US$5 million.

The model includes the 2.0% royalty to IMC up to the higher of 12,000 oz or A$20 million. The Western Australian government is entitled to another 2.5% royalty.

The corporate income tax rate in Australia is 30%. Taxable income is based on EBITDA minus amortisation/depreciation of capital expenditure over the remaining life of mine with an inclusion rate of 30% on sustaining mine capex and 100% for mill capex. Of the mine capex 70% was included as part of cost of sales for tax purposes.

Tax losses may be utilised and carried forward indefinitely to offset against future assessable income provided a “continuity of ownership” (more than 50% of voting, dividend and capital rights) or a “same business” test is satisfied.

Investments in working capital have been ignored.

Results

Figure 47.2_1 shows the forecast financial performance over the LOM for two scenarios: one without dilution and another with.

The table above indicates that the operation will have a very high cash margin of almost 53%, even at a dilution rate of 30%.

With very low capital expenditure requirements the amount of EBITDA available for distribution to shareholders is more than 61%, despite an effective income tax rate of almost 30% of EBITDA.

The NPV7.5 of US$253 million is many times the assumed remaining initial capital expenditure requirement, which is high compared to peer projects.

Table 4.7.2_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters for the scenario where there is 30% dilution of gold grade.

The table illustrates that a one percentage point change in the gold price (i.e. US$19.3/oz) increases the NPV7.5 by only 2.2%, again highlighting the very high margin earned at Base Case metal prices. The sensitivity to one percentage point changes in working cost (i.e. US$0.43/t treated) results in changes in NPV7.5 of 1.0%.

There are, however, reasons to believe that the resource at Beatons Creek is never coming out of the ground. Quoting the Crux Investor report from earlier this year, “in September 2015 when Novo announced a Resource of some 292,000 oz in near-surface oxides at its Beatons Creek project, it also stated that there was a plan to release a PEA within the next 2-months. This was a great start and an admirable goal. However, Exploration continued, expanding the envelope of known mineralisation, but the proposed PEA for Beatons Creek was not completed.

Over 18-months later, in May 2017, the company announced that it would drill another 10,000 m and dig another 800 trenches to expand and upgrade near-surface mineral Resources at Beatons Creek. It also stated that it was “targeting completion of a Prefeasibility Study (PFS) for the Beatons Creek Gold project by fourth quarter of 2017.”

Note that in 2017 it is the more advanced report that is promised - a Pre-Feasibility Study (PFS), which is considerably more detailed than the PEA, that was promised in 2015. What happened next is that Exploration continued, expanding the envelope of known mineralisation, but the proposed PFS was never published. At this point, technical credibility starts to be questioned.

Perhaps learning from this habit of over-promising, by the time the November 2018 Resource Update for Beatons Creek was published, the accompanying technical language had been toned down. No studies were promised, instead, an opinion was aired that management thought it was one of the best deposits in that part of the Pilbara.

Fast forward to April 2019 when another Resource Update was announced for Beatons Creek, this time taking Indicated Resources to 457,000 oz and Inferred Resources to 446,000 oz. The accompanying language was circumspect, saying that the Resource “demonstrates the potential for conglomerate Gold deposits in the Pilbara”. In the same month it was announced that an Options Study would be completed on Beatons Creek and Karratha combined, for delivery in Q3 2019.

Note that Option or Trade-Off Studies are usually carried out internally and are typically a precursor to a PEA, which in turn is quite a step back from the promise of a PFS 2-years earlier. What this means is that the project actually appears to be going backwards, not forwards.

All in all, although the NPV creates a positive number, the resource does not look as if it will ever come out of the ground.

Review Of The Purdy’s Reward / Comet Well Project

Unless specifically otherwise stated, the information, illustrations and text in the section have been extracted from a NI.43-101 compliant technical report by Optiro Pty Ltd (“Optiro”), dated 30 April 2019. Whereas the technical report refers to the project as the Karratha project, this study prefers to reference these as Purdy’s Reward and Comet Well, because first exploration results here caused the price to tenfold and the market capitalisation to reach around US$1,000 million before the company moved to Comet Well and got the market again excited for a second, albeit lower price spike.

Figure 5_1 serves as the location map of the project area and mineral tenement plan.

The Purdy’s Reward – Comet Well project is located 37 km south-southeast of the Karratha town centre, or 55 km by road: sealed road for 47 km and thence 8 km by graded dirt road.

The plan above includes 47 tenements, comprising 2 granted Mining Leases, 32 granted Exploration Licences (with another 8 under application), 3 Prospecting Licences and 1 granted Miscellaneous Lease (with another 1 under application). These can be subdivided into a number of groups, namely:

• Controlled 100% by Novo Resources
• The Artemis Joint Venture area of 213.1 km2 in red covering Purdy’s Reward– originally 50%, fully acquired in March 2020 for A$1 million and 2 million Novo Resource shares and a 1% point retained net smelter return royalty. This is a pitiful price for a half beneficial interest in a prospect that was valued at US$1.0 billion at some stage.
• The Gardner/Smith Joint Venture Area of 50.8 km2 in orange covering Comet Well – 80%

Figure 5_2 is a geological map for the area, extracted from an old press release in preference of a similar map in the technical report to better illustrate the relative location of the Purdy’s Reward and Comet Well prospects.

The map shows the Mount Roe package, which is a basal sequence of the Fortescue Group in which the gold bearing conglomerates occur, in olive green.

The Fortescue Group volcano-sedimentary sequence at Comet Well and Purdy’s Reward dips shallowly (~10 degrees) to the southeast, and has a stratigraphic sequence that is characterised by from bottom to top:

• A variety of gold-bearing conglomerates (the Lower Conglomerate) punctuated by a thin (<20 m) sequence of angular volcaniclastic rocks and a 5 cm to 20 cm thick tuff marker unit, described as a massive mafic rock with minor fine quartz eyes.
• Above the volcaniclastic rock and “tuff” is the “Upper Conglomerate” and related sand and silt beds, minor felsic tuff and chert. Blanketing the upper sedimentary sequence is the Mt Roe Basalt.
• Overlying the Mt. Roe Basalt is a thick sequence of sandstones and quartzites with lesser amounts of conglomerate and siltstone, belonging to the Hardey Formation. The conglomerate tends to characterise the base of the Hardey Formation in the project area.

Figure 5_3 is a longitudinal section along the strike of the geological strata to illustrate the variability of the vertical distance between the Upper Conglomerate (in red) and Lower Conglomerate (in blue) between Comet Well on the left and Purdy’s Reward on the right. The vertical dimension is exaggerated 3 x.

At Purdy’s Reward gold nuggets are found in a thin-skin of conglomerate, sands and muds that directly overly the basement. This gold-bearing horizon has an irregular local geometry, dipping 5-10 degrees to the southeast.

At Comet Well, the lower gold horizon occurs immediately on top of the basement rocks as well and the upper gold horizon is present within a variety of coarse sandy conglomerates that occur immediately above a distinct volcaniclastic package. Both gold horizons outcrop in the Comet Well area and dip shallowly (5-10 degrees) to the southeast.

The main method of exploration up to the date of the technical report has been the excavation of trenches and pits with sample sizes that were progressively increased from 50 kg to 300 kg to, most recently, 5 tonne bulk samples. This was an attempt to get to representative grades given the coarse nature of the gold nuggets.

The area has also been subjected to diamond drilling with 208 holes for 11,998 m (therefore an average depth of almost 58 m), but only 37% assayed. Given the observation of requiring large sample sizes, diamond drilling serves little purpose apart from establishing the lithological profiles.

For this reason, this study has ignored the diamond drill assay results and only reviewed the results of 49 bulk sample with a mass of approximately 5.6 tonne, depending on the thickness of the conglomerate at that sample site. It should be noted that sampling was much more complex than the Beatons Creek exercise as it involved jack hammer work and pre-cutting boundaries with a diamond blade.

A total of 155 samples were taken from 57 bulk sample sites. The results are summarised on Table 5_1. The gaps in the numbering have purposefully been included to highlight that these results are selectively reported. It therefore excludes samples with nil gold.

It is very concerning that, of the selected results, less than 30% have a grade of 1.0 g/t Au or higher. The average grade is well below 1.0 g/t Au.

Given the irregular nature of the deposit, the spotty presence of gold and prospective very difficult mining conditions the indicated average grade is far too low to be of economic interest.

The announced acquisition on 18 June 2020 of a mechanical sorter does not change this conclusion. Pre-concentration does not add gold to the production, but can only reduce the amount of material having to undergo a more expensive concentration process. Such a benefit comes at a loss of gold, with the loss of revenue possibly less than the operating cost saving.

Crux Investor notes that the earlier Crux Investor report, commented at length on representative sample size, bulk tonnage requirements of up to 100,000 tonne samples, and small mine-permitting issues. This report acknowledges all of those points, but has not investigated them deeply since the grade information from the samples gathered to date indicates that the project is uneconomic.

Review Of The Egina Project

Unless specifically otherwise stated, the information, illustrations and text in the section have been extracted from a NI.43-101 compliant technical report by Novo Resources, dated 30 April 2020.

Figure 6_1 serves as a location map of the project area and mineral tenement plan.

The project area is indicated by the tenements in yellow (Pioneer Resources JV), light green (De Grey Mining JV), purple (New Frontier JV) and the light blue blocks immediately to the west (100% Novo Resources). The project area is accessed 80 km from Port Hedland or 140 km from Karratha via the sealed Northwest Coastal Highway, and via a reportedly well-maintained, graded south-bound gravel road for a further 40 km.

The greater Egina Project comprises 16 tenements, including two granted Mining Leases (“ML”, 100% Novo Resources), 13 granted Exploration Licences (“EL”) and one granted Miscellaneous Licence (“L”). Of the EL’s 418 km2 is held 100% by Novo Resources and 557 km2 in joint venture with a beneficial interest between 60% and 75%. One of the mining leases is subject to a royalty of 5% in addition to the Western Australia state royalty of 2.5%.

Whereas Novo Resources has recognised three styles of gold mineralisation at Egina, lode mineralisation, gold-bearing conglomerate in the Fortescue Group similar to its other two project areas, the one on which it focuses here are gold-bearing gravels that blanket an erosional surface “covering most of the Egina area”. The gold in these conglomerates is interpreted to have been derived from the erosion of basement rocks and the gold-bearing conglomerates of the Fortescue Group. It is therefore a very different type of target from Novo Resources’ earlier exploration projects.

Figure 6_2 shows a map in the Farno mineral right area drawn from ground penetrating radar (“GPR”) surveys with the base of the transported erosional material palaeo-drainage pattern, and the scope of trenches and diggings executed by Novo Resources. Subsequent auger drilling confirmed the accuracy of the GPR data.

The statement about the conglomerates “covering most of the area” may be correct, but the above map clearly shows sampling activities to be confined to the deepest section of the palaeo-drainage pattern extending 800 m parallel to the drainage and 200 m perpendicular to the drainage. Novo Resources refers to the deeper sections as “swales”.

In addition to trenches dug by the vendor of the mineral rights, six trenches were excavated for a total of 2,213 linear metres. Using metal detectors nuggets were extracted weighing in total 1.13 kg, but these were heavily concentrated in an area of 100 m x 50 m around a bulk sample given the identity number 19EGTR006A.

A significant component of the higher-grade gold mineralisation is characterised by very fine to extremely coarse nuggets ranging in size from less than 10 μm to more than 10 mm (nugget mass of 4.6 gram). Given the coarse nature of the gold, very large samples are required to obtain a representative grade. For this reason, a bulk sample programme was carried out, mostly in 2019, the sample locations of which are identified by the grey squares in Figure 6_2. To guide the selection of the bulk sample locations 489 test pits were excavated and 294 “Mobile Alluvial Knudsen (“MAK”) mini samples” of 1 tonne collected. It is noticeable the technical report gives no results for the MAK mine samples. These may not be representative of the local grade, but would have been indicative of the potential of the area.

The most reliable grade results are obtained from bulk samples and Table 6_1 reproduces these.

The table shows the weighted average grade to be very disappointingly low at 0.35 g/t Au, which is to some extent positively biased by siting the extra-large bulk samples in most favourable spots (see Figure 6_3).

The average recovery achieved by the gravity recovery plant is 70.4%, the efficiency of which is highly determined by the feed grade (see Figure 6_4).

Valuation Of Novo Resources

The Enterprise Value of Novo Resources at 8 September 2020

At the share price of C$3.32 on 8 September 2020 the market capitalisation of Novo Resources is C$685.4 million, or US$517.3 million based on the information on the company website at 8 September of 206.44 million shares. This seems to include the 17.7 million shares paid for the IMC shares, based on deducting the stated number of shares with the number of shares outstanding 1 month ago. It does not seem to include the 19.19 million shares issued with respect to the capital raising announced in August 2020. Without clarity, this valuation has given (possibly optimistically) not added the 19.9 million shares.

Also according to the stock information on the company website the company has 8.85 million warrants outstanding, but these are far out of the money at an exercise price of C$4.40. The issued shares and warrants are after the August capital raising of C$56 million through the issue of 17.19 million shares with 8.60 million warrants exercisable at C$4.40.

In addition, there are 15.13 million share options outstanding of which 5.48 million are in the money at an average exercise price of C$1.19.

The net current assets at 30 April 2020 were C$20.3 million.

Based on the above the diluted Enterprise Value for Novo Resources is C$621 million, equivalent to US$469 million as derived in Table 7_1.

In contrast to the Enterprise Value of Novo Resources at US$469 million, the underlying assets do not get nearly close to that valuation. As discussed in the technical sections above, Crux Investor believes that Egina and Comet Well / Purdy’s Reward are both worthless. In addition, a purely hypothetical value of Beatons Creek reaches an NPV (7.5%) of US$253 million. In reality we feel that the resource is unlikely to ever be mined, and therefore in real terms it too is worthless, but for the time being, it could be argued that it has a nominal value of US$253 million. Clearly the project is only at the conceptual stage as it has just been through an Option Study, and has yet to advance to an updated PEA, PFS or Feasibility Study.

The stake in Kalamazoo Resources Ltd is worth approximately US$3.9 million, and the stake in GBM Resources is worth approximately US$1.3 million, so US$5.2 million in total. Adding together the listed portfolio (US$5.2 million) with the Beatons Creek net present value of US$253 million, the Net Asset Value of Novo Resources is US$258 million.

The EV of the Company is US$469 million and the crucial fact is that the EV of the Company is 1.9 times larger than the Net Asset Value of the Company. The most likely outcome is that the share price of the company will fall. An extremely unlikely outcome is that Novo Resources will do something spectacular to ‘backfill’ the missing value of US$211 million (or thereabouts) in the current EV.

Shareholder Composition

Figure 7.2_1 has been extracted from a corporate presentation dated 3 July 2020 and shows the shareholder composition.

The pie chart shows that important interests are held by Kirkland Lake Gold, Eric Sprott and the Creasy Group. Management has very little skin in the game. Retail shareholders own more than half the company. The fact that Newmont has quietly reduced its beneficial holding from being the largest shareholder in 2014 to 3.15% now, and the low representation of financial institutions should be a warning signal.

Red Flags

From the review of the technical data, Crux Investor reaches a conclusion that the Pilbara portfolio acreage is largely worthless. Yes, we concede that Beatons Creek does have a theoretical value and a positive NPV but we feel the resource can be grouped among those that are never coming out of the ground. Ironically, even though Novo Resources continues to promote the Pilbara portfolio, we believe that senior management within the Company has reached the same conclusion as Crux Investor. Events of the past two years show that Directors of Novo Resources have lost faith in the projects as the Company and its Chairman have steadily been diversifying away from the Pilbara gold conglomerates.

In 2019 and 2020 the company has changed its stated objective of developing gold in the Pilbara, adding the phrase that it “seeks to leverage its internal geological expertise to deliver value-accretive opportunities for its shareholders.” This is code for, “the Pilbara assets are worthless, we need to diversify.”

When the Board of Directors agrees that Novo Resources money should be invested into companies OTHER than Novo Resources, and when the Chairman and President takes any position offered to him OTHER than Novo Resources, the message to shareholders should be received loud and clear, “abandon ship, abandon ship”. Actions speak louder than words, so get out while you still can.

All in all, Crux Investor arrives at a set of Green Lights and Red Flags that are very similar to the report from April of this year. Not wanting to mince our words, Crux Investor views almost everything to do with the Company as being a furiously waving Red Flag.

• Opaque property transactions in the Pilbara
• An absence of updated technical studies on Beatons Creek
• Novo Resources publishing the latest resource estimate at Beatons Creek, not an update from Tetra Tech
• Low grade, high nugget effect at Comet Well / Purdy’s Rewards rendering the project worthless
• Low grade, high stripping at Egina rendering the project worthless
• Board of Directors abandoning the Pilbara investment thesis as demonstrated by ‘strategic’ investments in early 2020
• Chairman and President of Novo Resources abandoning the Novo Resources cause by taking nine new senior positions with other companies during 2020
• Enterprise Value 1.9 times greater than Net Asset Value indicating that the next most likely significant share price move will be lower (barring a huge rise in the gold price)

Green Lights

• Novo Resources is still able to raise capital in the equity markets
• Beatons Creek has a theoretically positive NPV of US$253 million at current gold prices

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These CRUX Reports are written for expert investors AND for people new to natural resource investing. But whether you are an expert or a newbie, we all have the same driver. We invest to make money. Sometimes investors get emotional about the investment. They actually think they own a mine. They don’t. They own shares in a company. So focus on your investment strategy, work out the best plan for your needs, stick to the fundamentals and remember that the only way you make money is if your shares go up in value… assuming you don’t forget to cash them in!