Should New Gold Buy Bayfield Ventures?
New Gold (NYSEMKT:NGD) is a company I follow closely as I think it offers a unique and intriguing risk/reward potential for gold bulls. On the one hand, it offers investors awesome leverage to the gold price insofar as it owns two very large projects — Rainy River and Blackwater — that have high initial capital expenses, but also a lot of production potential. At the same time, the company has four low-cost producing mines that give it cash-flow even in a low gold price environment. This somewhat mitigates the upside leverage but at the same time provides the company with appeal to more risk-averse investors as well as the cash flow needed to fund the two aforementioned large development projects.
Given this, there is one element of New Gold’s business that I find somewhat unappealing — it has $862 million in debt versus just $668 million in current liabilities. This limits the company’s ability to take on more debt to construct its two development properties, and this also means that it is not in a position to expand where the opportunity arises.
One such opportunity that has been staring management in the face ever since it acquired Rainy River Resources is Bayfield Ventures (OTCMKTS:BYVVF). Bayfield Ventures has a market capitalization of just $24 million. It owns an exploration property with incredible potential right next to the Rainy River mine that New Gold is going to be developing. Before I discuss the logistics of an acquisition, let us briefly look at Bayfield’s Rainy River property.
The property consists of three zones — the Burns Block, the B-Block, and the C-Block — all of which are adjacent to or surrounded by New Gold’s Rainy River property, which contains over 5 million ounces of gold and is expected to produce over 300,000 ounces of gold annually for more than a decade once it is in production.
Bayfield has done a lot of exploratory drilling and it has discovered several very promising drill holes containing gold occurrences that are almost uncanny; in some cases, over 50 grams of gold per tonne. To give you a reference point, there are above ground open pit gold mines that operate profitably at 0.5 grams per tonne, and there are underground gold mines that operate profitably at 5 grams per tonne. Given how promising these drill holes are and given the proximity of this land to New Gold’s multi-million ounce gold deposit, it seems as though there is a very good chance that Bayfield will find a highly profitable mine. In fact, it has already found a small defined resource at the Burns Block of just over 200,000 ounces of gold and just over 2 million ounces of silver.