Complex, Costly, Cause For Concern: Analyst's Notes Reviews I-80 Gold

Executive Summary

I-80 Gold Corporation (“I-80 Gold”)(TSX:IAU)(OTCQX:IAUCF) is a Canadian company focused on developing mineral projects in Nevada, USA. It was created in 2020 through a plan of arrangement between Premier Gold Mines Limited (“Premier”) and Equinox Gold (“Equinox”) in terms of which Equinox gained control over all non-USA assets of Premier and the USA-assets spun out in a vehicle that became I-80 Gold. I-80 Gold soon thereafter entered into several additional acquisitions and assets swaps, leaving it in control of four assets: the historical Cove, Lone Tree, Granite Creek, and Ruby Hill mines. At Lone Tree and Ruby Hills, substantial infrastructure, including processing plants, remains. At Lone Tree, there is even an autoclave that was used to process refractory gold mineralisation. 

From early press releases after the company’s creation, it is evident that I-80 Gold management had ambitious plans and was full of confidence in achieving speedy production growth at the various mining units. The Lone Tree facility was destined to service the other company operations on a “hub and spoke“ arrangement, treating their refractory ore. The agreements valued the fixed assets generously and came with substantial deferred considerations. On 31 March 2024, the balance sheet values Property, Plant, and Equipment at US$648 million. This is considerable for assets that still have not generated positive cash flow. 

The company produces a small amount of gold from residual heap leaching at Ruby Hill and Lone Tree and underground mining at Granite Creek. Worryingly, this has dropped off steeply, with residual leaching at Ruby Hill ending and Granite Creek underground mine production mostly stockpiled for later treatment in a pressure oxidation (“POX”) facility. The autoclave at Lone Tree has never commenced, and only a technical study has been commissioned for its restart. Currently, the stockpiled material is meant to be sent for toll treatment by a third party.

The company is therefore faced with diminishing production and projects still years from production. The company needs frequent and substantial funding due to a cash drain of approximately US$100 million annually in 2022 and 2023. Small wonder that the I-80 Gold share price has declined steadily since the end of 2022. 

Crux Investor has found valuing I-80 Gold very problematic. The technical reports are outdated, all published in 2021, and of poor quality. The four technical reports reviewed are all by different consultancies, none except for one very well known. Press releases since 2021 on developments have been very promotional, sometimes announcing spectacular results but without giving the reader a good understanding of the consistency and size of the targets being drilled. This valuation has confined itself to modelling cash flow for Cove and Granite Creek, with Lone Tree and Ruby Hills deemed too uncertain. Given the status of studies and permitting, for this valuation, production has been assumed as from 2027. 

After reviewing all the infill drill results for Cove, Crux Investor concludes that this has at best improved the confidence level of the mineral resources there, and has used the preliminary economic assessment (“PEA”) schedule to model cash flow. Crux Investor records that the infill drilling has been like shooting fish in a barrel. It targets sections of the mineralisation that have historically been proven to contain attractive grades. The infill drilling results, however, show that these are associated with lenses of very limited size and that historical interpolations may have been optimistic. The valuation of Crux Investor is probably the best-case scenario, as it relies on PEA resources. The spot gold price of US$2,375/oz on 8 July 2024 is used as a long-term price.

As for Cove, Crux Investor has modelled the Granite Creek cash flow using the PEA production schedule. Of the total 1.28 million ounces (“Moz”) gold contained in plant feed, roughly one-third is from underground, and the balance is from open pit mining. No additional drilling of the open pit deposits has been carried out since acquisition to affect the mineral resource estimation (“MRE”). All the attention has been on finding additional underground resources. The company has now drilled for almost three years there and has little to show for it in terms of additional resources. It managed to find sufficient resources at the Otto Adams/Peak Zone and Ogee Zone to keep producing, but the attention is currently on the South Pacific Zone (“SPZ”). From the provided cross-section, it is evident that the SPZ is a horizon approximately 5 m thick. Management expects this deposit to be present over 600 m strike length and 250 m down dip. If so, it would add 2.0 million tonnes (“Mt”) to the inventory, not material enough to affect the company's value.  

Although there are concerns about the representativeness of the metallurgical test work, Crux Investor has used the PEA production schedule and cost inputs with certain amendments. The most important of these is the full inclusion of the forecast capital expenditure (US$469 million) and not the US$148.5 million in the PEA cash flow model. Amendments to the operating cost are compensated for by the removal of a large contingency provision in the PEA model. 

The value of Lone Tree is in potentially servicing the other operations, and as such, no cash flow model for this was generated. It should be noted that a technical study for the restart of the autoclave was commissioned in January 2022, but no results were ever announced. 

The Ruby Hill project is still being drilled, and no updated MRE has been issued despite the intention to advance to production before May 2023. Crux Investor concludes from its review of drill results that the, at times, spectacular results are not associated with well-defined and consistent deposits. Mining will involve considerable dilution, resulting in an average grade of questionable economic value. Until the company issues an updated MRE, it is too early to put a value on Ruby Hill. 

When valuing the cash flow of Cove and Granite Hill at the corporate level, also accounting for corporate expenses and the cash drain of US$100 million per annum on current activities included for the next two years, but not for debt and metal stream financing, a value of US$400 million is derived. The annual drain is almost certain, whereas positive future cash flow is very uncertain, particularly given all the concerns raised here about the validity of the mineral resources and metallurgy for Cove and Granite Creek.

The calculated NPV8 of US$400 million compares low to the diluted Enterprise Value of US$510 million on 8 July 2024. 

In conclusion, progress to converting I-80 Gold into a sizeable gold producer has until now been a failure and will remain so for at least another two years. A review of the projects that receive the most attention in terms of exploration and studies raises serious questions about whether they will ever make the grade. Given all the concerns about the mineral resources, metallurgy, and cost inputs set out in the main body of this text, as well as the delays experienced at the various projects, Crux Investor rates I-80 Gold as not an attractive proposition. Nevada as jurisdiction is one of the global best, but the deposits I-80 Gold advances are very complex. Moreover, these are leftovers of mines where the best and most accessible resources have already been mined. This is probably the reason why progress has been so slow and costly.

Introduction

I-80 Gold Corporation (“I-80 Gold”)(TSX:IAU)(OTCQX:IAUCF) is a Canadian company that has a relatively short history. It was created in 2020 through a plan of arrangement between Premier and Equinox where Equinox gained control over all Premier’s non-USA assets, and the USA-assets were spun out in a vehicle that became I-80 Gold. The USA assets included a 40% stake in the South Arturo project, the McCoy-Cove (in technical reports referred to as Cove) and Tabor properties, and an option to acquire 100% of the Rodeo Creek property. 

Soon after the plan of arrangement, in August 2020, I-80 Gold entered into the Granite Creek acquisition agreement with Waterton Global Resource Management Inc. (“Waterton”) with a deemed consideration of US$56.4 million paid in cash shares and warrants, but not accounting for US$10 million in possible deferred payments. The Granite Creek project was formerly referred to as the Getchell project. In December 2020, the company acquired land adjacent to Granite Creek for US$15 million. 

In September 2021, the Lone Tree mine was acquired through an asset swap, with I-80 Gold handing over its interests in South Arturo and Rodeo Creek.  The Lone Tree project includes the past-producing Lone Tree mine, which is host to substantial processing infrastructure (including a whole ore autoclave), and the Buffalo Mountain gold deposits. During the same month, I-80 Gold also acquired the Ruby Hill project from Waterton, paying US$75 million in cash, C$10 million in shares, and an additional US$67 million upon the occurrence of certain milestones, which could be reduced to US$47 through early payments. By 31 December 2023, I-80 Gold had exercised all early payment options and had paid US$21 million in cash, with the balance in shares. 

The plan of arrangement and subsequent acquisitions had numerous and very complex financial agreements associated with them. These included substantial financial obligations, both immediate and deferred, and metal off-take agreements. It allowed the company to recognise in its 2022 annual financial statement Property, Plant and Equipment with a value of US$565 million, but with US$110 million debt, and after raising US$172 million in 2021 and 2022. The difference is explained by, for example, I-80 Gold deeming it to have gained an after-tax profit of US$106.7 million on the Lone Tree asset swap. How the company arrived at such a gain is not however explained. 

Crux Investor ignores reporting on balance sheets for mineral companies because fixed asset value is meaningless when based on transaction costs. A hole in the ground and a plant on top are without value when they do not support an operation that generates cash. 

Whereas the company produced very minor amounts of precious metals at South Arturo (until its disposal on 14 October 2021), the focus of operations during 2021 was underground rehabilitation at Granite Creek and exploration, drilling, and studies at Granite Creek, McCoy-Cove, and Ruby Hill. 

During 2022 the company produced almost 21,100 ounces from residual heap leaching operations continuing at Lone Tree and Ruby Hill. Whereas operating cash flow was negative in the fourth quarter, the fact that most expenditure is associated with underground development and sunk means that treatment does make sense as at least some recoupment is made. 

During 2022, activities at Granite Creek were predominantly resource drilling, underground development to access new areas, and extraction of 17,455 tonnes at an average grade of 7.6 g/t Au, with the refractory material shipped for toll treatment and the oxide material for heap leaching on site. At Ruby Hill, the main activity was exploration and resource drilling and advancing permitting for the construction of a decline. At Cove, a portal for a decline was started in February 2022, and studies for permitting were undertaken. 

During 2023 at Granite Creek, a total of 9,444 ounces was produced from heap leaching and contained in sulphide material sold to a third party. Underground development and drilling continued throughout the year. At Cove, work continued on studies for permitting parallel to exploration and infill drilling. At Ruby Hill, 6,643 ounces were produced in parallel to drilling the “high-grade polymetallic base metal” and advancing permitting for underground development. At Lone Tree, another 6,225 ounces were produced from residual heap leaching. 

I-80 Gold management seemed to have liked the results at Ruby Hill because, in February 2023, the company purchased the FAD deposit immediately to the South, paid for in shares, valuing the vendor’s shares at a 36% premium. This resulted in them owning 10% of I-80 Gold post-acquisition. After taking control, I-80 Gold started drilling at the FAD property.

Figure 1_1 shows the share price performance on the Toronto Stock Exchange since listing. It illustrates that shareholders have been increasingly disappointed since the end of 2022, possibly due to impatience with progress, causing a steady downward slide.

The following sections will investigate whether or not the impatience is warranted.

Historical Production and Financial Performance

Table 2_1 shows the operational and financial performance from 1 January 2020 until 31 March 2024. 

I-80 Gold is very vague in its reporting of operational production and sales, and the numbers in Table 2_1 should be approached with caution, as they have been generated from bits and pieces of information in which production is specifically mentioned. The company also sells “sulfide mineralized material”, which in 2023 generated US$26.3 million revenue. 

Table 2_1 shows that gold produced drastically declined in the March quarter of 2024 due to the heap leach operation at Ruby Hill coming to an end, and the Granite Creek operation not producing any gold, adding only 28,500 tonnes of mineralised material to the stockpile. After reaching a peak of US$55 million in 2023, revenue has dropped off sharply in 2024 on an annualised basis.

Table 2_1 shows for the financial performance:

• Cash from operations was in aggregate almost US$132 million negative, reflecting that all exploration, study, and pre-development activities are expensed. In 2023 alone the outlays on such activities were almost US$39 million; 
• Cumulative investments amount to US$242 million; 
• The shortfall from cash from operations and investments has been covered by US$361 million financing, the bulk of which (US$220 million) was equity financing. This was not sufficient to prevent a drop in the cash balance of US$13 million; and 
• The cash balance of US$13 million on 31 March 2024 would not last long given the cash burn rate of the last few years. This was soon confirmed by the substantial equity placement of C$115 million on 1 May 2024. 

Total debt in the balance sheet amounted to US$188.3 million on 31 March 2024, including a short term portion of US$99.1 million, of which almost US$40 million relates to metal stream obligations. It should be noted that finance charges in the quarter alone amounted to US$33 million, of which US$18.8 million relates to convertible loans and debentures. These charges do not appear in the cash flow statement as these have been capitalised. Moreover, the cash cost of the metal stream arrangements amounted to US$22.2 million in 2023. The company amended the metal streams, raising US$18.9 million, but extending its obligations. 

All in all the I-80 Gold’s financial condition looks problematic and shareholders can expect to be called on to support further equity placements over and above the C$115 million raised on 1 May 2024. 

The following sections will look at what the expenditure has achieved for shareholders.

Review of the I-80 Gold projects

Introduction

The technical reports on the projects are not elaborate and the financial assessments in the two PEAs are cursory. The reports all date back to 2021 and no updates have since been released.

Crux Investor has confined the introductory remarks of the I-80 Gold projects to very brief sections for the sake of brevity and due to the limited information available.

Figure 3.1_1 shows the location of the projects within the State of Nevada, USA, annotated by Crux Investor by putting blue boxes around the project’s names. 

Being close to current and historical operations, the projects are at a good address regarding protectiveness, albeit not at the best local address (i.e. the Carline trend).

Review of the Cove Project

Introduction

The information has been extracted from a National Instrument 43-101 (“NI 43-101”) compliant technical report by Practical Mining LLC (“PML”) with the findings of a PEA, dated 25 January 2021. Unless specifically otherwise stated, all information, text, and illustrations in the following sections were extracted from this document.

The 1,671 unpatented and nine patented claims over the project area (covering 30,937 acres) are still covered by an agreement with Victoria Gold Corporation (“Victoria), which entitles Victoria to receive up to C$20 million should there be production from the Cove portion of the project. 

Two royalties apply: 1½% net smelter return (“NSR”) royalty in favour of Newmont, and 2% in favour of Summa Corporation, but this does not cover all mineral resources. 

Geology and Mineralisation

The mineralisation at McCoy-Cove consists of four mineralisation styles, Carlin-style disseminated refractory gold, polymetallic sheeted veins, carbonate replacement and skarn. Of these, the Carlin style type is by far the most important economically. Carlin style mineralisation characteristically occurs at the intersection of faults and permeable reactive strata, typically below an impermeable caprock. The permeable rock is usually calcareous sedimentary strata. With mineralising fluids ascending along major structures and blocks under impermeable rock, these flow laterally into the permeable and reactive carbonate sequences, resulting in extensive mineralisation. 

Figure 3.2.2_1 shows a section looking northeast identifying the mineralised zones that are bounded by fault zones. The Carlin-style mineralisation is within the Helen, Gap, and Cove South Deep (“CSD”) zones. These comprise approximately 85% of the mineral resource in 2020, with high gold and silver grades occurring as both stratabound and structurally controlled mineralisation at the intersection of the Cove anticline and favourable lithologic beds, structures, intrusive dikes, and sills.

The principal host for Calin-style mineralisation is the Favret Formation. Where this unit is in contact with the overlying Home Station Member, lower grade gold mineralisation is present.  The highest grades are found where the rhythmically bedded unit of the Favret limestone is cut by mafic dikes and sills along the axis of the Cove anticline, and especially where this area is cut by apparent small-scale, unmapped faults. Within this formation are also “type 2 sills”, which are volcanic intrusions that are also generally mineralised. 

The polymetallic 2201 zone is a separate deposit from the shallower Carlin-style mineralisation, and is believed to be a structurally controlled sheeted stockwork vein system with concentrations of lead and zinc. The veins range in thickness from 0.1 cm to 6.5 cm. The veining is oriented northwest, with vein geometry being controlled by a deeper northwest striking reverse fault.

The mineral resource estimation for the PEA included 1,397 holes.  Figure 3.2.2_2 has two cross sections and has been included to show the relative thickness of the outlined mineralised horizons at Gap and Helen. The numbering of the vertical coordinate indicates these are expressed in feet, making the distance between each approximately 30 m. It means that the individual horizontal outlines have limited width. Intersections with a red colour exceed 2.7 g/t Au, just below the 3.0 g/t Au cut-off grade used to wireframe lenses.

Mineral Resource Estimation

Gold mineralisation was modelled along an azimuth of 315 degrees on vertical sections 30 m apart. Polygons were drawn around gold assay values and intercepts in adjacent holes were connected within a polygon, so that the polygons lie generally parallel with bedding and sills. Using the lithology model as a guide, polygons on adjacent sections at similar stratigraphic depths were connected to create mineral lenses.  The grade model used a 3 g/t cut-off. This was modified to locally allow lower grades in order to maintain continuity, so long as the composite grade of the interval remained above 3 g/t Au. In this manner, 76 individual lenses were defined indicating the generally small size of the resource contribution of each lens. 

The chosen parent block size of 30 m x 30 m x 30 m Is very large given the short composite length of 1.5 m and narrow nature of individual lenses. The chosen sub-block size of 1.5 m x 1.5 m x 0.75 m was very much smaller in order to capture the small volume of each lens. 

For grade estimation, both inverse distance cubed (“ID3”) and nearest neighbour was used. Only assays within the wireframe of the particular lens (applying so-called hard boundaries) were considered. The search ellipsoid was oriented parallel to the strike and used a very long search radius of 100 m for the main and intermediate search direction, and 30 m for the minor direction. No support for these long search dimensions is presented. 

Table 3.2.3_1 gives the mineral resource statement, effective 1 January 2021, expressed in metric units. 

The table shows that the gold is dominantly contained in the Helen and Gaps zones, which account for almost 80%. The average grade of almost 11 g/t Au is very surprising when referring to Figure 3.2.3_1, which contains two cross sections through the block model. Colours warmer than orange exceed a grade of 2.8 g/t with the cut-off grade for resources supposedly 3 g/t Au. The purple colour is for blocks with a grade in excess of 5.6 g/t Au. 

There are very few lenses with purple colour over extended distances. Moreover, certain extrapolations of high grade ground seem to have been made without much substantiation from adjacent intercepts. Crux Investor would advise caution concerning the suggested numbers.

No drilling was undertaken in 2021 and 2022, except for reverse circulation (“RC”) holes “to expand water monitoring capabilities and study hydraulic properties of the project to support permitting efforts”. Underground development continued in 2022 partially in support of planned underground drilling, which started in 2023. Figure 3.2.3_2 has been extracted from a press release dated 15 April 2024 showing drilling completed in 2023 and planned for 2024. 

The company has elected to test the deposits by drilling from a few drill platforms. It is not clear from the longitudinal section over what width the deposits are explored, but given the length of the bar scale indicating 150 m, each hole seems to add little knowledge. Figure 3.2.3_3 has been reproduced from a press release with results for the Gap Zone to illustrate that the infill drilling is like shooting fish in a barrel, targeting an area previously identified as having attractive grades (see the legacy holes with the prefix PG drilled under a much shallower angle). The bar scale for 50 m shows that the recent drilling does not cover more than 75 m. In this way, I-80 Gold could announce very attractive results.

Crux Investor calculates a weighted average grade of 15.0 g/t Au for all reported intercepts of the infill holes. Based on the above Crux Investor gives the mineral resource statement the benefit of the doubt and has adopted it for this economic assessment. The drilling increases the confidence level of the mineral resources, but has not added resources. 

Mining

The PEA envisages underground mining with access via a portal on the north side of the existing pit. The existing decline developed subsequent to the technical report date to support underground drilling has presumably assumed this role.

The choice of mining method will only be made after infill drilling is complete and stopes are delineated. In the PEA drift and fill mining has been assumed. The initial drift is planned at 4 m x 4 m, but down to 2.4 m high where needed to avoid dilution.  Once the initial drift is complete, the floor or back is extracted to capture the full thickness of the lens. If mining is planned adjacent to the drift it will be backfilled with cemented rock fill (“CRF”) prior to mining the subsequent drift. 

Processing

As the mineralisation is refractory the contained gold needs to be made amenable to cyanide leaching either through roasting (= burning the sulphide minerals), or POX. The PEA makes it clear that the specification of the feed is problematic, requiring blending with other feed to meet requirements. 

The test data indicates that the Helen Zone composites were “generally” more amenable to roasting than POX. Conversely, the Gap test data shows more amenability to POX. 

The forecast recoveries are poorly supported by test work, and much work requires to be done about this aspect. Gold recovery after roasting is suggested at 79% and after POX at 85%. Crux Investor has used an average recovery of 82.5%. Whereas the discussion to motivate these recoveries is almost absent, the payability terms discussion is even worse with these “generally based on feed head grades of gold and silver”. Working back from total revenue received and gold produced it is evident that the PEA assumes 100% payability. 

Economic Assessment – Cove

The production schedule in the PEA assumes first processing in 2025, which is almost impossible given the current status of the project. Crux Investor has adopted the schedule, but starting production in 2027.

Figure 3.2.6_1 shows the production profile as per the PEA in imperial units.

Comparing the production totals with the mineral resource statements indicates that approximately 55% of the resource tonnage is included in production at almost the same grade. It indicates that no dilution has been provided for in the PEA. This is probably too optimistic despite employing a selective mining method. 

The operating cost discussion in the PEA is confusing and contradictory. In Table 21-7 of the report “typical contractor cost for the anticipated conditions at Cove” are given, but ignored in the cash flow model which has much lower rates. Table 3.2.6_1 illustrates this. The only way to reconcile the mining contractor rates with the overall mining cost rate of US$100/st is by reducing the stope development cost of US$75/st (only development tons?) to US$18/st (processing feed tons).  Anyway, Crux Investor deems the overall rate unrealistically low for the chosen mining method, the small size of individual lenses, and the small annual production rate. For its assessment, it has used US$150/st. 

Crux Investor can only explain the discrepancy between contractor rates for roasting and POX, and the rates used in the economic assessment section of the PEA by I-80 Gold dividing the total life of mine (“LOM”) cost for each process by total tonnage treated. Crux Investor has used US50/t resulting in the same LOM cost as the PEA. However, Crux Investor has added processing cost of US$15/st to account for downstream processing up to pouring of gold in doré. 

The PEA assumes LOM General and Administrative (“G&A”) expenses of US$42 million, which is less than US$6 million per annum at steady state production. As G&A expenses are essentially fixed, Crux Investor has used a constant annual rate, and pitched it at US$10.0 million as being more realistic. 

The electrical power expense is almost fully related to power used for dewatering pumping. 

The PEA has pre-development and construction capital expenditure of respectively US$23.9 million and US$81.9 million for total initial capital expenditure of US$105 million. The very low outlay is explained by the use of existing infrastructure, and the shipping of material for toll treatment. Subsequent to the PEA the company has carried out many of the pre-development activities (dewatering, decline development and delineation drilling) and some construction activities. For this reason Crux Investor considers the pre-development expenses as already sunk, and construction outlays as 1/3 sunk.  

Crux Investor has adopted the sustaining capital expenditure (US$25.2 million) and closure and reclamation costs (US$15.3 million).

The validity of the Crux Investor tax model was checked by comparing the calculated Nevada Net Proceeds tax (US$17.4 million) against the total PEA amount of US$19.0 million, and the calculated Federal income tax of US$26.7 million against US$25.0 million in the PEA.  

Figure 3.6.7_1 shows the forecast financial performance over the LOM using the assumptions in the PEA, and of Crux Investor in the preceding sections, and assuming a long term gold price equal to the spot price of US$2,375/oz on 8 July 2024.

The table above indicates that the operation would have a cash margin of almost 50%, which is more than excellent for a project with small upfront capital expenditure requirements. The much higher spot gold price compared to the PEA gold price more than makes up for the 38% higher total operating cost. 

Review of the Granite Creek Project

The information has been extracted from a NI.43-101 compliant technical report by Global Resource Engineering (“GRE”) with the findings of a preliminary economic assessment (“PEA”), dated 8 November 2021. Unless specifically otherwise stated, all information, text, and illustrations in the following sections were extracted from this document.

The project area is located in Humbold County, Nevada, and encompasses approximately 1,300 hectares in the Potosi mining district, surrounding and including the existing Granite Creek Mine. The mineral rights are both patented and unpatented claims, the rights to which are covered by numerous individual agreements, and which are covered by many royalty obligations. The technical report applies an average royalty of 6.4% and 10% net profit royalty after the first 102,000 ozs AuEq has been produced after 31 August 2011. At the publication date only 6,834 ozs towards this threshold amount had been produced. 

Geology and Mineralisation

The Granite Creek Mine occurs within a northeast-trending structural corridor known as the Getchell gold trend. Mineralisation at Granite Creek is of the Carlin type, associated with several thrust fault suites referred to as the Range Front Fault (“RFF”) Zone, striking north-south, and the CX Fault Zone, striking southwest and dripping south east. Continuity of mineralisation is highly variable.

Figure 3.3.1_1 shows a section looking northeast identifying the mineralised zones that are bound by fault zones. Crux Investor has annotated the section to highlight the location of mineralisation and the names given to these mineralised zones.

The mineralisation is primarily hosted in what is referred to in the technical report as the Upper (pink in cross section) and Lower Comus (grey) Formation, which consists of interbedded shale, siltstone and limestone. In fresh rock gold is mainly contained in pyrite, as microscopic inclusions, or found in arsenian-pyrite rims around fine pyrite grains. Oxidation is extensive in the CX Fault system, occurring along the entire length of the zone and penetrating to a depth of 460 m. Within the RFF system oxidation is more variable than within the CX Fault system. In some fault and shear zones, oxidation may be present to depths of 550 m, whereas in others it may only reach depths of < 150 m. The degree of oxidation has implications for the metallurgical process used to extract gold: heap leaching, conventual milling followed by cyanide leaching, and refractory mineralisation requiring POX. 

Mineral Resource Estimation

For the open pit resource estimation, four pits were considered: Mag pit, CX Pit, A Pit, and B Pit.

The discussion on the methodology used for the estimation exercise indicates that it was not straightforward. It used indicators within the pits, to define high grade domains. These high grade domains are contained in a larger low grade domain. 

A composite length of 6 m was chosen as the optimal length for statistical analysis, as it significantly decreases the variance of the data, while not adversely decreasing the mean of the data set. The outlier threshold was identified for each domain based on breaks in the composite population.

A block size of 7.5 m x 7.5 m x 6 m was chosen. For grade estimation, inverse distance squared (“ID²”) was used. Search distances of the domain estimators were based on the variography for each sub-domain. For the estimation, each block had to be coded for the prospective processing method (Heap Leach or carbon in leach; (“CIL”)) and associated forecast recovery based on grade and cyanide solubility. 

For underground resource estimation mineralised intercepts were grouped by trend and probable domain (= vein). In this manner, thirty-two veins were created. A composite length of 1.5 m was chosen. The major axis of the variography analysis was set along the strike of each vein. Grade estimation was performed using ID³. For inclusion into the underground resources, block grades needed to exceed 5 g/t. 

Table 3.3.2_1 gives the mineral resource statement, effective 4 May 2021, expressed in metric units. 

The table shows that the open pit gold is dominantly contained in the CX and Mag zones, which account for almost 88%.

A very high proportion (i.e., 70%) of the contained gold has been classified as being in the Measured Resource category. Another 60,000 ozs have been estimated in the open pit Inferred category and 319,000 in underground Inferred. 

Figure 3.3.2_1 contains a plan view and cross section through the block model at Mag zone and Figure 3.3.2_2 for the CX zone. Colours warmer than bright green have a grade exceeding 0.75 g/t Au.

The cross section has clearly been taken through the highest grade block of the plan view.

No such illustrations are provided for underground resources, which is unfortunate as there the structures are numerous, and informed by relatively few drill holes. 

I-80 Gold did not drill the open pit resources after August 2021, when it completed a number of holes for metallurgical test work and for geotechnical purposes “in advance of initiating permitting for an open pit and on-site processing”. 

Thereafter the focus shifted to the Ogee target below the Otto Peak/Adam Zone, which is just to the right of the Range Front Fault Zone in Figure 3.3.1_1, and the South Pacific Zone to the north of the Otto/Adam Peak. 

The company has released very impressive results, but it is impossible for an outsider to determine the continuity and consistency of the drilled mineralisation. Figure 3.3.2_3 shows the latest available illustration on drill intersections, reproduced from a press release dated 14 May 2024. I-80 Gold elects to publish a longitudinal section, which is meaningless until the company shows through cross sections that it is consistently testing the same structure, or set of structures. 

One has to refer to older press releases to get a better understanding of what is being drilled. Figure 3.3.2_4 is from a press release dated 1 November 2022 showing a cross section for the Ogee zone, which does not seem to have mineralisation as consistently present as at the Otto-Adams Peak zone immediately above. It is maybe for this reason that all the exploration focus has since the end of 2022 shifted to the South Pacific Zone.

Figure 3.3.2_5 is from a press release dated 13 September 2022 showing a cross section for the South Pacific zone.

The cross section indicates a consistent horizon of approximately 5 m width on the boundary of the Upper Comus unit with the Lower Comus unit. Whether the mineralisation is present over a strike length of more than 600 m and dip length of 250 m, as expressed in a press release dated 13 September 2022 remains to be seen. If this were the case potential resources of 600 m (strike) x 250 m (dip) x 5 m (thickness) x 2.7 (density) = 2.0 Mt. This is not a very material resource addition for the amount and duration of drilling,  

From an October 2023 press release, it is clear that the company has high hopes for the South Pacific target and expected it “to become the mine’s main horizon beginning in 2024”. By July 2024 there is no evidence of this, and Crux Investor concludes that the mineralisation there is more complex than hitherto presented.

With no clear addition to the mineral resources, this valuation is purely based on what was known at the time of the publication of the November 2021 PEA.

Mining

The PEA envisages open pit mining employing conventional techniques using front end loaders and rear dump rigid frame haul trucks. The material will be treated using heap leach or CIL techniques, depending on grade and recovery of the material being processed. The technical report claims that the large block size fully accounts for any dilution. Crux Investor disagrees with this very optimist assumption, particularly for the CX Zone with its relatively narrow high grade structures.

For underground mining three mining methods are under consideration: Cut-and-Fill, both overhand and underhand, and Longhole Open Stoping. With uncertain rock mechanical conditions, the choice is deferred to a later stage. Despite this, assumed ore losses are low at 5% and dilution taken as 0.3 m on the footwall and hanging wall. No overall dilution rate is provided. 

Processing

From the discussion on mineral processing it is evident that this is far from straightforward. There are indications of the presence of preg-robbing carbon, which required increasing the pH to 12 by using additional lime. For heap leaching, agglomeration is required and cyanide consumption will be high. The choice between heap leaching and conventional grinding/CIL processing is determined by geometallurgical modelling using cyanide solubility. Cyanide solubility is a function of grade, degree of pyrite alteration and block elevation. Nowhere in the report is it discussed how pyrite alteration is defined and quantified. 

Heap leach recovery is determined as a function of cyanide solubility and CIL recovery is a function of head grade. For POX a constant recovery of 92% was selected. 

Overall the discussion on metallurgical performance and geometallurgical modelling is far from convincing, and even the technical report raises red flags about the representativeness of test work samples. 

Economic Assessment – Granite Creek

The open production schedule in the PEA assumes a pre-production period of only one year. Crux Investor has adopted the schedule, but starting production in 2027.

Figure 3.3.5_1 shows the open pit production profile as per the PEA in metric units. The diagram shows that waste stripping is considerable, averaging 7.0 over the LOM, including 22.7 Mt pre-production stripping. The LOM is short at 6 years, with approximately 0.20 Moz contained gold sent each year for processing. The average recovery is 72% for the LOM production of 0.87 Moz.  

In addition to open pit mining, 1.53 Mt of underground material is forecast to be treated at an average grade of 8.3 g/t Au. Crux Investor records that the gold content of 0.41 Moz clearly exceeds the gold content of 0.34 Moz in M&I resources, despite ore losses of 5%. It seems therefore that the PEA has included substantial Inferred resources in the schedule.  Whereas this may be reasonable, it is concerning that the Inferred Resources supposedly has a grade that is almost 30% higher than the M&I resources. It is another example of positive bias. Mining is forecast to cease in Year 6, but Heap Leaching and CIL processing continue until Year 9. This means there will be substantial rehandling required to feed the CIL plant. 

The information on capital expenditure and operating cost and the PEA cash flow model are structured such that it is impossible to audit the model and cross-check it against input costs. Total capital expenditure is forecast at US$468 million, mostly accounted for by pre-production development of US$319.5 million. The Heap Leach facility is forecast to cost US$48.7 million and the CIL plant US$57.8 million. No expenditure for mining equipment is included as this will be the responsibility of the mining contractor. What is totally inexplicable is that the PEA model includes only US$148.5 million LOM capital expenditure, which makes the PEA economic assessment farcical. The inclusion of the full capital amount would have virtually wiped out net free cash flow.

Unit mining operating cost of US$2.06/t is suggested, processing cost of US$9.04/t treated, and G&A of US$1.42/t, which amounts to approximately US$6.5 million per annum at steady state production. Unconventionally, US$199 million is included as “contingency” over the LOM.

The mining cost must be solely for open pit operations and the inclusion of US$164/t for underground mining reconciles the total calculated LOM cost with the total PEA operating cost provision. Considering that open pit mining will be carried out by a contractor, Crux Investor deems this rate too low, and suggests US$2.50/t including recoupment of capex and a 10% profit margin. 

Working back from total LOM processing cost for heap leaching and CIL yields rates of US$6.79/t placed, and US$14.28/t treated in the CIL plant, respectively. However, for heap leaching, there are several years of rinsing following the cessation of placement of material on the heap. When calculating the rate during the years of placing material on the heap the rate drops to approximately US$5.0/t. This is too low for material that needs crushing, agglomeration, and leaching with relatively high reagent consumption rates. Crux Investor suggests US$7.0/t. Crux Investor has also raised the annual G&A rate to US$12.0 million at steady state production during the mining phase. With all the amendments the need for including a “contingency” has fallen away.

The validity of the Crux Investor tax model was checked by comparing the calculated Nevada Net Proceeds tax (US$34.4 million) against the total PEA amount of US$41.8 million and the calculated Federal income tax (after reduction of the total LOM capex to US$148.5 million) of US$69.6 million against US$61.2 million in the PEA.  

Table 3.3.5_1 shows the forecast financial performance over the LOM using the assumptions in the PEA, and of Crux Investor in the preceding sections, and assuming a long term gold price equal to the spot price of US$2,375/oz on 8 July 2024.

The cash margin for the PEA inputs is only 33.6%, which is too low for a mining project to give a return. Fortunately, the current gold price far exceeds the price used in the PEA, and with operating cost approximately the same after amendments and removal of the contingency, the cash margin exceeds 52%, and the project has a NPV8 of US$321 million. The reason for the relatively low net present value despite an excellent cash margin is the short LOM and project start modelled for 2027.

Review of the Lone Tree Project

The information has been extracted from an NI.43-101 compliant technical report by GeoGlobal LLC (“GeoGlobal”) with the findings of a MRE, dated 21 October 2021. Unless specifically otherwise stated, all information, text, and illustrations in the following sections were extracted from this document.

The technical report gives little information about the tenement area except for including a map with the property boundary that shows that the historical pit and process areas are well within the boundaries. No royalties are discussed, but from the pit optimisation inputs these seem to amount in total to 3%. 

Geology and Mineralisation

Gold mineralisation at Lone Tree is primarily controlled by two principal structures referred to as the Wayne Fault Zone and Sequoia Fault Zone. 

The Wayne Fault Zone is a system of relatively narrow, north-northwest, and north-northeast trending faults forming an anastomosing complex of brittle shears. The principal component of the Wayne Zone is the Powerline Fault, where higher gold grades are associated with the hanging wall and footwall margins of the fault, which averages 15 m in width. The Powerline Fault is a high-angle zone dipping 65 degrees west and trending north-south over at least 2,500 m along strike.

The Sequoia Zone is located in the southeast of the deposit area. It strikes North-Northeast over 600 m and dips 75 degrees west. Post-mineralisation faulting has displaced or cut out mineralisation within the Sequoia Zone, and has had a significant effect on the continuity of mineralisation, both down-dip and along strike.

In the southern third of the deposit, between the Wayne and Sequoia fault zones, is a horst (= raised) block referred to as the Antler High Zone. Here there is mineralisation hosted within a dense network of very narrow fractures similar to a stockwork, which are served by feeder structures that are parallel to the Wayne and Sequoia zone fault structures. 

Of the three mineralised zones, Wayne is by far the most important. Gold is present as sub-micron inclusions in fine-grained pyrite and arsenopyrite. In the oxidised portions of the deposit gold occurs as micron-sized particles in iron oxide minerals such as goethite and limonite. Post-mineral oxidation extends as much as 210 m down major structures such as the Wayne Zone. This aspect is of critical importance for the economics of Lone Tree, but is hardly discussed in the technical report. Given the depth of the existing pit the remaining “resources” are most probable fresh rock, with refractory gold that needs to be made amenable for cyanide leaching after oxidation by roasting or POX. 

The technical report gives no information on the metallurgy of the remaining mineralisation, confining itself to a generic discussion of processes. Crux Investor finds it incomprehensible that the authorities allowed this MRE, as the study does not properly address the criterion of reasonable prospects for eventual economic extraction. In the footnote to the resource statement, it is mentioned that only oxide and transitional mineralisation inside the conceptual pit is included, with a prospective recovery of 90%, but this is nowhere substantiated. For this reason, this section will not discuss the estimation methodology and has just presented the resource statement in Table 3.4.1_1. 

The table shows that Lone Tree has substantial mineralisation with attractive grade, provided it is not refractory material. 

Figure 3.4.1_1 contains a cross section through the block model to illustrate the depth of the “mineral resources”. The illustration does not give a bar scale or other indication of scale, which is against the technical codes, and should not have been allowed by the authorities. It does give the impression of considerable depth of the existing Lone Tree pit, possibly in excess of the depth of oxidation of 210 m mentioned above. Judging from the relative size of mineralisation and waste, the prospective strip ratio would be between 5 and 6. One of the reasons for cessation of mining activities was the large inflow of groundwater.

I-80 Gold through its activities at Lone Tree seems to concede that the deposit is of no economic interest as all current studies relate to reactivation of the autoclave that is supposed to service the other mineral assets of the company on a “hub and spoke” arrangement. 

Exploration since 2021 was supposed to have been focused on the Buffalo Mountain target southwest of Lone Tree. However, the last mention of drilling there is for the December 2022 quarter. The lack of follow-up points to disappointing results.

Based on the lack of drilling at Lone Tree, company management seems to endorse Crux Investor’s view that the mineral resources here are of little interest. 

Review of the Ruby Hill Project

The information has been extracted from an NI.43-101 compliant technical report by Wood Canada Limited (“Wood”) with the findings of a MRE effective 31 July 2021. Unless specifically otherwise stated, all information, text, and illustrations in the following sections were extracted from this document.

The Ruby Hill Project mineral tenure consists of 173 unpatented lode mining and millsite claims, five patented lode mining claims, and surface rights of approximately 666 hectares. 

There are four royalties on different parts of the Ruby Hill mineral tenure that would apply to production from the Ruby Hill project. The royalties range from 2.5% to 4.0% and include an offer of first right of refusal. A 3% NSR on all production is assumed for the financial inputs to cut-off grade calculation and the construction of conceptual mining shapes.

Geology and Mineralisation

At Ruby Hill two styles of mineralization occur:

• An early polymetallic (Au-Ag-Pb-Zn) carbonate replacement (called skarn) type in limestone units proximal to intrusions; and
• A later Carlin type located in favourable rock units bound by high angle structures that are interpreted as conduits for hydrothermal fluids responsible for the precious metal mineralisation. 

The Carlin type deposits constitute by far the most important type for mineral resources. 

Two main blocks can be distinguished in the project area, separated by the Holly Fault, which trends to the north and dips almost 80 degrees east. To the west of this fault is the Mineral Point Trend, and to the east the Archimedes complex. 

The Mineral Point deposit is situated within the nose of a district-scale NNW-trending open anticline that plunges gently to the north. The eastern limb of the anticline dips 30 degrees east and the western limb 35 degrees west. At Mineral Point mineralisation is preferentially associated with a particular formation called the Hamburg dolomite, which is typically vuggy and silicified. The deposit is 2.7 km long, 700 m wide and up to 150 m thick. 

The Archimedes complex consists of the West Archimedes, East Archimedes, 426, Ruby Deeps and Blackjack deposits. 

Figure 3.5.1_1 shows a plan of the project area identifying the location of the various deposits and with the trace of the Fence Section Line, below which this section shows the location of these deposits at depth. 

The main mineralised bodies at West and East Archimedes are focused along the NW-trending Blanchard fault zone. Second order control to mineralisation within West Archimedes is determined by steeply dipping, N-trending normal faults (such as Holly), whereas at Archimedes East, the second order control to mineralisation is the N-trending Graveyard fault and East Archimedes fault.

The West Archimedes zone is roughly cigar shaped, NW-trending over 500 m, varies from 130 m to 360 m wide and 60 m thick. Mineralisation extends from surface to approximately 50 m below surface.

The East Archimedes mineralisation is a NW-trending, roughly tubular shaped body, approximately 400 m in height, 240 m thick, and 570 m wide. The upper portion flattens and flares out to the west and connects to West Archimedes. Mineralisation extends from surface to approximately 420 m below surface

At the 426 Zone mineralisation forms a rod-shaped body plunging shallowly to the northeast that is 420 m long, 60 m wide and 60 m thick. The top of the zone is approximately 300 m below surface, but it is 150 m below the bottom of the current East Archimedes pit bottom. It has not been affected by oxidisation and the gold must be considered refractory. 

The Ruby Deeps zone is a north-northeast striking, shallowly east dipping zone. The zone is 720 m long, 150 m wide and 200 m thick. The top of the zone is 480 m below surface and 300 m below the bottom of the West Archimedes pit. Within this zone there are several tabular horizons of higher-grade mineralisation that are 12 m to 30 m thick.

The Blackjack zone is a pod of replacement style zinc mineralisation. It measures 150 m long, 150 m wide, and is 285 m high. The upper part of the Blackjack zone is partially oxidised with a high-to-moderate ratio of cyanide soluble to total fire assay gold, but sphalerite is un-oxidised. The lower portion of the zone is un-oxidised.

Mineral Resource Estimation

According to the technical report “conceptual mineral processing parameters, including assumptions about metallurgical recovery and product quality were made to support assessment of the portion of the gold and base metal mineralization having reasonable prospects for eventual economic extraction”. In other words, the MRE numbers are speculative and should be approached with caution. 

For the estimation a structural model, lithology model and oxidation model had to be created. The oxidation model is based on wireframing the ratio of cyanide soluble gold to total gold grade. Most of the drill intersections above the base of oxide surface have a ratio of cyanide soluble to total gold grades ranging from 0.8 to 1.0, and the majority of drill intersections below the base of oxide surface have ratios of less than 0.3. The material between the base of oxide and top of sulfide surfaces is a transitional zone containing a mix of high, medium, and low cyanide soluble to total gold grade ratios. Figure 3.5.2_1 shows the depth of the various redox zones along the Fence Section.

The section illustrates that most of the remaining resources are transitional and sulphide mineralisation, which makes the lack of metallurgical test work for these material extra concerning. 

The frequency plots for gold assay grades have a very high coefficient of variation of 4.6, which makes for a more complex geostatistical treatment than ordinary kriging (“OK”). The MRE reduces the variance of grades by compositing the 1.5 m samples to 3.0 m (not for underground resources estimation!), and “to further manage the high variance of the gold grades the probability assigned constrained kriging (PACK) method was selected”. As soon as resource estimations have to rely on all kinds of contortions, there is an extra risk associated with the estimation. This is aggravated by the presumed long search radii used for grade estimation: 360 m along the major axis, 200 m along the second axis, and 200 m along the minor axis. 

Table 3.5.2_1 gives the mineral resource statement, effective 31 July 2021, expressed in metric units. 

The total estimated resources of 7.7 Moz is very impressive at face value. However, the grades are generally very low for the prospective processing routes. Of the open pit resources almost 86% are in Mineral Point. When referring to Figure 3.5.2_2 which contains a cross section through the Mineral Point block model, it is evident that better block grades only start at 100 m below surface, close to the base of oxide boundary in Figure 3.5.2_1. 

The legend in Figure 3.5.2_2 seems to be wrong as the dark blue blocks have supposedly an upper boundary grade of 2.4 g/t, which is probably too high by a factor of 10.  When referring to Figure 3.5.2_2 it is evident that little to no gold was intersected shallower than 150 m, which is the base of oxide mineralisation. Crux Investor therefore concludes that the Mineral Point mineral resources are not potentially economical and should be disregarded. It seems that I-80 Gold management agrees with this view as all drilling since the acquisition has been done away from Mineral Point. 

Drilling started in early 2022 at Ruby Hill testing the 426 and Ruby Deeps deposits. Management was so confident about the success of the planned drilling campaign that it stated in a press release dated 10 May 2022: “we are looking to advance to mine development in the next twelve months”. On 7 November 2022 the results of a scoping study for the possible restart of the existing Ruby Hill mill were published. The study considered processing of oxide mineralised material, which was estimated to involve US$8.9 million in refurbishment expenses, and considered converting the plant to a base metal flotation plant producing lead/silver concentrate and zinc concentrate. The preliminary cost estimate for this is US$65.7 million. 

Although the company reported very attractive intersections, as is clear in Figure 3.5.2_3 (extracted from a press release dated 29 November 2022), these are not confined to one distinct well-defined horizon. Mining will involve considerable dilution resulting in an average grade of questionable economic value. 

Maybe the unexpected complexity of Ruby Deeps is the reason why management’s attention drifted away to other targets, in particular Hilltop to the southeast of Ruby Deeps. 

The Hilltop deposits (Upper, East and Lower) are however polymetallic carbonate replacement deposits (“CRD”). Individual intercepts can have very impressive grades over extended length as shown in Figure 3.5.2_4 from a press release dated 25 April 2023, but these are often not supported in adjacent holes that pass a short distance away. It is again not obvious that I-80 Gold is dealing with large, high grade deposits. 

In conclusion, despite having completed a tremendous amount of work, it is hard to put a value on the Ruby Hills prospect. It is noticeable that no updated MRE has been released, and mine development is severely delayed. 

Valuation of I-80 Gold Corporation

Cash Flow at Corporate Level

Figure 4.1_1 gives the corporate-level cash flow based on the cash flow models earlier in this report and typical corporate expenditure based on actual 2023 figures. This diagram presents a very optimistic picture, as it ignores cash flow relating to servicing debt and the metal streams. The terms and conditions relating to these are too uncertain and complex for an outsider to model and have been accounted for in Section 4.2, which derives the company's Enterprise Value.

The above diagram has ignored Lone Tree and Ruby Hill, both ongoing investments and potential future development costs, as well as positive cash flow, as these are uncertain. It should be noted that the ongoing cash drain of US$100 million per annum has only been modelled for the next two years. This is almost certain, whereas positive future cash flow is very uncertain, particularly given all the concerns raised about the validity of the mineral resources and their complex metallurgy. 

Discounting the cash flow at 8% gives an NPV of US$399.8 million. 

The Enterprise Value of I-80 Gold Corporation on 8 July 2024

At a share price of C$1.46 on 8 July 2024, the market capitalisation of I-80 Gold with 384.9 million issued shares is C$561.9.0 million, or US$410 million. 

The latest available financial statements are for the quarter ending 31 March 2024. 

These show that 11.3 million options are outstanding, of which approximately only 2.6 million are in the money at an average exercise price of C$1.34. At the time, 13.6 million warrants were outstanding, all of which were well out of the money, with the lowest exercise price being C$2.40. However, the equity placement on 1 May 2024 included one warrant for every two shares placed, with an exercise price of C$2.15 per warrant. Potentially, this could add 34.8 million shares (= 9% of the existing issued shares) to the issued capital should the share price perform well. 

On 31 March 2024 current assets were US$39.6 million. With the C$115 million raised and US$130.6 million current liabilities, net current assets would presently be approximately negative US$7.1 million. The company has debt of US$89.3.6 million.

Based on the above, the Enterprise Value on a diluted basis for I-80 Gold is C$699.4 million (US$510.1 million) as shown in Table 4.2_2.

The diluted Enterprise Value of US$510 million is high compared to the NPV8 of US$400 million. However, it should be noted that I-80 Gold accounts for its debt and metal stream obligations as derivatives and that the actual cash flow servicing these may well be much higher than accounted for. 

In conclusion, progress to converting I-80 Gold into a sizeable gold producer has until now been a failure and will remain so for at least another two years. A review of the projects that receive the most attention in terms of exploration and studies raises serious questions about whether they will ever make the grade. Given all the concerns about the mineral resources, metallurgy, and cost inputs set out in the main body of this text, as well as the delays experienced at the various projects, Crux Investor rates I-80 Gold as not an attractive proposition. Nevada as jurisdiction is one of the global best, but the deposits I-80 Gold advances are very complex. Moreover, these are leftovers of mines where the best and easiest resources have already been mined. This is probably the reason why progress has been so slow and costly.