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Mr. Hyde Buys Barkville Gold Mines

I am two investors rolled up into a single portfolio.

On the one hand there is the meticulous researcher, searching out value that has been overlooked by the market.  This fellow is the investor that does most of the writing here, drawing logical conclusions from stepped out deductions and well thought out inferences.  We might call him Jekyll the Investor.

But there is another fellow that haunts these pages from time to time and who comes from a somewhat different place.  He likes to jump into more speculative positions, sometimes with no more reading then a news release, a quick scan of the company’s presentation and a few back of the napkin calculations.  While he still does more work than most do on the stocks he chooses, it is not with the same care as his counterpart.  Time is of the essence to him. He is especially attracted to gold and oil stocks that hold the opportunity of a big score, and you saw his work with the purchase of Gold Standard Ventures a couple of months ago or with the purchase of Mart Resources a couple of weeks ago (while he perhaps isn’t so thorough, he is still often quite lucrative).  We could call him Hyde the speculator.

Now to be fair, Hyde is not some sort of willy nilly gambler.  He has honed his craft with over 10 years of studying the business of getting commodities out of the ground.  The reason that he can take such quick action is because he has made enough moves, both good and bad, to develop an intuition about it.

Hyde begins to watch Barkerville Gold

I’ve had my eye on Barkerville Gold Mines (CA: BGM) for a month now.  It wasn’t a close eye, and I wasn’t really interested in buying stock in the company so much as I was curious about what they would do next.

I owned Barkerville 2 years ago for a brief one month stint when gold prices were going up and the best thing to buy was the cheapest junior with a story and a property.  I wrote about my purchase of the stock here, and then about my sale soon after here. I think I summed up my reason for being so quick to be in and then out quite well with this comment:

My experience is that you can make some money on juniors by projecting out cash flows based on a successful mine and then waiting for other people to make those same calculations.  But you are better off selling out before you test out the theory of whether those cash flows are realized.  

Mining is hard, and its pretty easy to screw up a mine and there seems to be just as many disasters as there are successes.  So unless you are willing to play this ‘greater fool’ game with your finger on the trigger, you’re probably better off in the long run with the big producer.

This is something I am trying to remember with these gold juniors we have been talking about lately.  The numbers we and the analysts are throwing about are legitimate for a trade, but don’t start believing them.

I added the bold and I think it is a sentence that shouldn’t be forgotten.  Even with mining stocks where I have the honest intention of holding through the duration of development (ala Atna), it is important to remember that numbers are just that, numbers, if things appear to be going wrong, it is always better to sell first and ask questions later.

Since that brief run I haven’t followed Barkerville very closely.  I took a quick look again about 6 months ago but was turned off by what looked like the high costs of maintaining a mill that couldn’t be delivered enough ore.   They seemed forever doomed to struggle with the high costs that come from a mill running at partial capacity.   Their eventual savior was another deposit that was unfortunately a number of miles away and that had some long-lead time permitting to be done before it could be brought to production.

I started following Barkerville again after beginning to lurk on a junior mining message board over on Silicon Investor called Microcap Kitchen Canadian Stocks.  What drew me to the board was that one of the posters, diddlysquatz, was listing companies that were trading at a price below or equal to their net cash position, and I’m always a sucker for cash on hand.

The folks on that board have been pointing to Barkerville for some time, and they have done an excellent job of picking out the run before it happened.  I saw the stock going up but I didn’t know why so I didn’t make any plunge myself.  But I was intrigued when I saw that Barkerville Gold was halted for trading Thursday morning.  I wondered if there might be some sort of merger, or maybe a drill hole, and the more cynical  part of me wondered if a diluted offering was in the works.

Well today at lunch I saw the stock trading up some 50% and it was pretty clear this wasn’t a dilutive offering.  I did a quick scan for news and almost didn’t believe what I saw.

The indicated resources, between the elevations 3,550 feet and 4,550 feet above sea level (town elevation 4,000 feet), estimated by Geoex for the Gold Quartz open pit model on Cow Mountain are 69,039,000 tons with an average grade of 0.154 ounces gold per ton (5.28 grams/T) and 10,626,100 ounces of contained gold as summarised in the following table.

In fact, I didn’t believe what I saw.  I wrote the following on twitter:

$BGM:CA Barkville resource at 10Moz? Is this for real? If it is the stock is suddenly very cheap

And while Jekyll has difficulty swallowing the thought of buying JC Penney up 2% on an up day, Hyde does not even consider that Barkerville Gold is up some 50% in the last hour when evaluating his potential purchase of the stock.  So I jumped in, albeit with a small position.

Honestly however, I’m still skeptical.  It just seems too good.  10Moz at over 5g/t of open-pittable indicated resource?  I put indicated in italics because this isn’t an inferred resource estimate.  Indicated ounces generally have some substance (I would ignore the geologic potential that the company provided, if anything it makes me wonder what they are doing here, building a resource or promoting a stock).   And at what looks like a strip ratio of a little over 1?  It seems extremely low for a pit that will contain 5 g/t gold.  I keep thinking I must be missing something, because even with the stock up some 50% on the day, it does not appear to be up nearly enough.

I took a quick look at the company that performed the resource estimate, Geoex Limited, and they aren’t some sort of one hit wonder.  They have produced estimates for Rubicon and San Gold in the past.

This is purely a speculation that there is not something here I am missing, and that the basic points of resource size, grade and strip are all legitimate estimates.  There’s no report available on Sedar yet, so I really can’t evaluate this on anything more than the numbers from the news release, which are the basic figures and not much more.  We’ll have to see what the stock does on Tuesday when it opens; if I am not missing anything, we should see it move higher.  If it doesn’t than I am probably best to assume someone knows something and that I would be better off leaving the speculation for someone else.

Nevertheless, Hyde felt it was worth a couple of bucks to speculate that the resource is indeed without a hitch.  If it is, then this stock is going much higher.

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14 Comments Post a comment
  1. It really does seem too good to be true. By itself, 10M of Indicated resources at a high grade (around 5g/T) would be huge. That by itself I would find difficult to believe. But on top of that, they are saying that there is a potential for 65-90M ounces. That would almost be Bre-X sized in terms of the deposit. If you actually already have 10M ounces, why hurt your own credibility by claiming a potential of 65-90M ounces?

    They’re probably just lying.

    1b- The area has never produced 10M of gold in its entire history.

    1c- The mineralization exists in quartz veins. In the resource estimate, the geologist is extrapolation mineralization out 100 feet horizontally and 100 feet vertically. If they don’t assay waste rock in the drill core, then the deposit size will be inflated even further.
    ————–To calculate the resource, a horizontal search ellipse area that has major and intermediate axes of 100 feet and a vertical minor axis of 50 feet was used and to be considered an “ore” block must have at least 1 drill hole intercept within the search volume otherwise the block was tagged as “waste”.—————-

    If the veins ran contiguously then this would be reasonable. But they almost certainly don’t. You really need a lot more drill intercepts to determine the geometry of the veins. An ore block should be considered Indicated only if there are at least a few or several drill hole intercepts within the search volume. (And perhaps the search volume should be reduced to determine Indicated resources, which would lower the number of contained ounces.)

    In normal practice you would cap high assay values, but that might only be a 20-30% reduction in overall grade.

    1d- The area has been mined and drilled before. It’s unlikely that someone would find deposits (not just one) of such a large size. The most recent MD&A states that historically there have been “1.2 million ounces of lode gold” in the entire area… it’s so unlikely to find several times that.
    If they were doing greenfield exploration like Voisey’s Bay or Bre-X (yeah I know that Bre-X turned out to be a fraud)… exploring where little previous exploration has been done… it would be more believable.

    2- If you skim through the Financial statements, expenses on corporate administration is just ridiculous ($11.7M in 2012). That’s something like 10-20% of their market cap. They spent over $1M on travel on entertainment (!!!). There are also a number of related party transactions.

    June 30, 2012
    • I admit I am somewhat skeptical too however as I said I have given them the benefit of the doubt by buying a few shares. What allowed me to take a small plunge was that Geoex seems to be a legitimate firm that has provided resources to other juniors. I expect we will know from the share price movement early next week whether this is for real or not.

      Btw – I’m not sure about your comment that the extrapolation was done 100ft vertically and 100ft horizontally. When I read that they used “a horizontal search ellipse area that has major and intermediate axes of 100 feet, and a vertical minor axis of 50 feet was used” I interpreted that as there being an “egg” of investigation around the center of each block, and that egg was 100ft radial in the horizontal direction by 50ft in the vertical direction. So the extrapolation is twice as far horizontally than it is vertically. I don’t see a drill map anywhere that gives me a sense of the spacing they have. Do you have a link to one?

      July 1, 2012
      • GlennC #

        Oops, I meant to say 50 feet vertically.

        I haven’t looked at a drill map or a map of all their drillholes. In theory you could construct one if they listed the co-ordinates of all their drillholes.

        2- I’m not sure if I would say that a firm is legitimate if they have done work for other juniors. I would look at their technical reports for other companies and see if they are aggressive.
        For example, skimming through the San Gold technical report, I see that it goes into this “geologic potential” nonsense that you don’t see in other technical reports.

        I see that they bought the property from Black Pearl (now Canada Lithium) for not that much in cash and shares. I happen to be familiar with Canada Lithium because I own it. Back in the day, Canada Lithium released a tech report saying that one of their properties had in the ballpark of 1 million ounces. Then they raised capital in a private placement. In the subsequent quarter, the property was written down to almost 0. Now Canada Lithium is working on building their lithium mine. They are involved in a lawsuit because the tech report by Michelle Stone overstated the amount of lithium in the ground and they had to report a “material reduction”.

        There are a lot of consultants and consulting companies (e.g. Behre Dolbear) that will issue aggressive technical reports. I think that companies may specifically hire them because they will deliver an aggressive report.

        3- To some degree, you could say that we won’t know whether this is real or not unless they build a mine and it is profitable. I guess that’s the problem with resource and mining stocks. It may take several years, if not over a decade, to figure it out. Whereas when you deal with companies with cash flow, it’s a lot harder to lie to investors and their books get audited (whereas the “auditing of rocks” is very poor; look at Bre-X).

        3b- On the other hand you could look at the promises this company has made in the past as they’ve been around for a while. I have not done that. On the other hand, sometimes even possibly shady companies will come across incredible finds (e.g. Diamond Fields / Voisey’s bay).

        4- In the short term I don’t think that the fundamentals will matter.

        July 1, 2012
    • Steve #

      “If you actually already have 10M ounces, why hurt your own credibility by claiming a potential of 65-90M ounces?”

      This comment by the poster is 100% bang on and it was also something that instantly came into my mind when I saw the “incredible” NR. No true professional would ever state something ridiculous such as “geological potential” in a formal NR without any quantifiable data to actually back it up … I’m not even sure if such a statement can be allowed by the regulators.

      Nothing much has changed with this company or its prospects and what it has/had was always there for the past year or two, even with the drilling activity. Any credible stock just does not tank from the $2’s to low 30 cents range and then suddenly announce a 10-fold increase in ounces at more than double the previously reported grade. Thus, the way I see it is this is just a one time exit strategy of further mining investors by allowing everyone heavily involved to be able to get out and salvage their investment. Or as a way to raise funds (that is desperately needed) either by a subsequent PP around $1+ or by way of encouraging warrant holders to exercise.

      This is a classic pump. Only difference is they actually have some gold and they will have some modest production. But management credibility and professionalism is/was never existent.

      July 5, 2012
  2. Kevin #

    As a fellow owner of Mart, I fully believe that mispriced opportunities exist in the marketplace. That being said, where is a link to the NI 43-101? Making this PR without releasing the NI 43-101 is a yellow flag. If it’s real, why wouldn’t you provide the backup data? This is Bre-X II until they provide the report. Additionally many people touting Sprott’s ownership. They have a measely 2+ million shares in their Canadian Equity Fund and another 2 million shares in their gold fund. So maybe $5 million invested out of nearly $2 billion. Insignificant portion of the fund, and insignificant % ownership in BGM. Finally, why with all the drill hole data are these just indicated resources? Isn’t that equivalent to an oil company’s “possible” reserves? In other words, just as easily aren’t there, as are there. You have nearly 1/2 million feet of drilling and the best you can do is indicated? So this becomes a trust issue and management’s personal spending habits suggest buyer beware. For a company losing $22 million per year ($12 million w no exploration costs), and with 22 million warrants outstanding at $1.10/sh or less, the recent price spike buys more time for dilutive funding, how convenient. Wonder if the 43-101 will be released prior to the first round of warrant expirations in August?
    Appreciate the blog. Kevin

    July 1, 2012
  3. Kevin #

    From Exploration Insights via IKN:

    Let’s just visualize what this deposit would have to look like on the ground. It is an order of magnitude richer per cubic meter than the Timmins Camp in Ontario. To support such a resource, the 1,000 by 300 by 300-meter block of ground at Barkerville’s Cow Mountain would have to host approximately 39 kilometers of Mother Lode type veins, at a density of one 2-meter wide vein spaced every 7.6 meters. This assumes each and every vein is consistently grading 5.28 grams per tonne gold along a 300 meter strike and 300 meter depth. Got it?

    As a geologist, I will steer away from commenting on some corporate anomalies at Barkerville such as the recent resignation of a couple and the very short tenure (45 days) of a CEO appointed in early March.

    I do not have the luxury of having the final NI43-101 report supporting this resource in hand, so my initial review comes from the June 29, 2012 news release and other publically available information from the company’s website and SEDAR. Having reviewed these over the weekend, I would like to address several technical red flags I see around the reported resource at Cow Mountain.

    1) This resource is a quantum leap in size and grade over the last resource for the Cariboo Gold Project published by Giroux (2006) which, at a 0.01 oz per ton cut-off, included an indicated resource of 479,504 oz gold at a grade of 0.046 oz per ton gold and and inferred resource of 112,992 oz gold at a grade of 0.033 oz per ton gold. Such growth over such a short time would be extraordinary, especially the increase in grade.
    2) All of the resource at Cow Mountain is classified as indicated and none is classified as inferred. It is exceptional to see a resource, especially one of this magnitude, display this high of certainty.
    3) The news release mentions that if a block falls within the search ellipse of one drill hole, it is classified as “ore.” Most resource calculations require more stringent criteria for resource blocks to be classified as indicated.
    4) From a drill plan map available on Barkerville’s website, I calculate there have been 238 surface drill holes completed at Cow Mountain between 2007 and 2011. In the news release, there is a mention of 2,638 drill holes totaling 145,600 meters, mostly historic, used for calculating this resource. Although results from 2007-2011 drill holes are available in recent news releases and the NI43-101 update report from 2009, data from the vast number of historic holes is not readily available. This lack of transparency is disturbing.
    5) There are all of seven cross sections showing drill intercepts on the company’s website. Text displayed on these sections is painfully hard to read due to the very small font size used. Gold intercepts on these sections as well as in recent news releases are mostly narrow, typically no more than a few meters, and of highly variable grades ranging from less than one gram per tonne gold up to rare intercept grading >100 grams per tonne gold. On the sections, no attempt has been made to connect veins from one drill hole to the next. A full set of cross sections like those described as having been employed by the resource modeler in the news release are not available on Barkerville’s website. This makes a critique of the news release’s assertions nearly impossible.
    6) A review of recent news releases indicates some drill holes have occasionally intersect narrow, very high grade veins. Mesothermal lode gold systems such as Cariboo commonly display such “nuggety” gold. What is disturbing is that the company has employed extreme grade smearing utilizing these high grade spikes. For example, on December 12, 2011, the company reported an intercept of 62.3 meters at 14.2 grams per tonne gold in hole CM11-102. Within this are two intervals (veins), 0.9 meters at 858.1 grams per tonne gold and 0.7 meters at 84.6 grams per tonne gold. I calculate these smaller intercepts contribute 95% of the gold to the longer intercept, yet represent only 2.5% of its length. Although these high grade intercepts are intriguing, one look at the cross section displaying this hole indicates they do not extend to other nearby holes. Therefore, it is likely these represent small volumes of material, certainly not the large high grade zone implied by the longer reported intercept.
    7) Reporting “geological potential” is highly unconventional, but it is done very liberally in this news release. The QP asserts that the Island-Cow-Barkerville belt potentially hosts 405-684 million tons at 0.12-0.16 oz per ton for 65-90 million oz gold. The Rainbow unit of the Barkerville sequence is stated as being the preferential host to veins at Cariboo due to its brittle nature. The news release implies that the resource modeler used this observation to make certain assumptions about volumes of rock, vein density, etc. to help calculate this potential. While such theoretical exercises are entertaining, they are highly speculative and have no place in a news release.

    The seven red flags I have presented here are hopefully enough to provide you a taste of my initial review of Barkerville’s resource. This story comes at an interesting time given the current doldrums in the market. I’d urge subscribers to give the observations above some thought and undertake your own due diligence before jumping into this stock.

    We have now beaten this one up sufficiently. It is up to Peter T. George, the resource modeler contracted by Barkerville, to, in his upcoming NI 43-101 report, fully illuminate investors on the methodology he employed to calculate this astounding resource. Like Brent, I shall be preparing a cold gin and tonic about 45 days from now in preparation.

    Cheers, QH

    July 3, 2012
    • Wow -thanks for that. Those are all very interesting comments. Can they just publish a subscribers service like that?

      I found myself saying the same thing about the intercepts on the website (http://www.barkervillegold.com/s/Cariboo_Gold.asp?ReportID=397756). You can’t read them at all. I also thought that the geologic potential part of the NR didn’t need to be included.

      Still… there are a lot of shares trading at high prices. I thought it would have tanked today if something was up. Apparently someone is putting big money into the stock? And what would the geologist who came up with the resource have to gain in the whole thing if he was indeed inflating it? The whole thing is confusing.

      I’m still holding my position. Its tiny and its been an interesting experience so far. Maybe I’ll just exit it and be done with it though; not because I think one way or the other but because I don’t know what to think. We’ll see what happens tomorrow.

      July 3, 2012
      • “I thought it would have tanked today if something was up. ”

        I would expect the stock market to act as a weighing machine in the *long* run. Don’t juniors always have crazy price spikes on “news”?
        Or if you look at penny stocks on the US OTC markets… a lot of them are obvious scams yet they will see crazy price spikes.

        Plus, some investors/speculators make money simply by playing the greater fool game.

        “And what would the geologist who came up with the resource have to gain in the whole thing if he was indeed inflating it?”

        That’s why he got hired in the first place. A junior will want to hire geologists that deliver very aggressive reports. (e.g. look at Canada Lithium claiming a lot of gold before writing down the property in the subsequent quarter. They knew the property was junk but commissioned the report anyways because they needed to raise capital.)

        July 4, 2012
      • I decided to hold on to my Barkerville

        July 4, 2012
      • I’m out today at 97 cents.

        July 5, 2012
  4. glennchan #

    Hey it takes courage to say that you sold at a loss. I respect that.

    July 5, 2012
  5. Kevin #

    Brent Cook also has comments that are unfavorable w/r to BCM. http://www.northernminer.com/news/updated-barkerville-climbs-50-on-10-6-million-oz-resource/1001505371/

    {The huge jump in both the tonnage and grade has raised the suspicion of observers.

    “It can’t go from half a million oz. at half the grade to 10 million oz. at twice the grade, you can’t do that, it doesn’t happen in reality,” said geologist Brent Cook of Exploration Insights in a phone interview. Cook said his initial reaction to the news was disbelief.

    “It got me to pull out my copy of ‘Gold Today, Gone Tomorrow,’” Cook said of the book about the Bre-X scandal}

    Dr_Airtime also had interesting thoughts w/r to Peter George (GEOX Geo) on Investorshub Value microcap jr. miner board: http://investorshub.advfn.com/boards/read_msg.aspx?message_id=77210983#

    {BGM.V – Geo has no Credibility

    Two words: Peter George.

    One word: Sell.

    Just caught his name associated with the 43-101 from the news article that Diggg just posted previous. Look at the very bottom of the PR and Diggs prior post linked at the top.

    My good freind who is new school of Vancouver mining scene tells me that everyone in the new and old school knows that any resource with Peter George as the 43-101 Qualified Person WILL NOT STAND. Yes we have NI 43-101 now but things don’t change and the 7-10M oz resource is a pump.}

    July 5, 2012
    • Thanks. I saw the dr. airtime comments on Ihub. They were somewhat responsible for why I threw in the towel.

      July 6, 2012
  6. Meef #

    I bought on friday and cashed out on tuesday. Seeing 30% profit and not taking it is moronic. Lesson learned?

    July 15, 2012

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