March 29, 2012 - 4:05pm EST by
2012 2013
Price: 0.66 EPS $0.00 $0.00
Shares Out. (in M): 138 P/E 0.0x 0.0x
Market Cap (in $M): 91 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 91 TEV/EBIT 0.0x 0.0x

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  • Junior miner
  • Gold


Rye Patch Gold Corp.


Recent Share Price*: C$0.66

Shares Outstanding: 138.3 million

52 week range: $0.26 - $0.84

Market Cap*: C$91.2 million                                            

*Price on March 28, 2012

Investment Summary


A significantly undervalued advanced stage Nevada gold junior with top notch management, 3.9 Million ounces (Au equivalent) resource, trading well below “in situ” resource value, presence in two major gold trends (Cortez and Oreana trends), joint venture with #1 gold producer Barrick (NYSE/TSX: ABX), 15% ownership by Kinross Gold (TSX: K) (NYSE: KGC), strong institutional shareholder base and with a potential $100 Million value upside due to the acquisition of claims that previously belonged to Coeur D’ Alene Mines Corp (NYSE: CDM).




Rye Patch Gold Corp (TSXV: RPM) (OTCQX: RPMGF) is a Nevada gold junior engaged in the acquisition and exploration of gold properties located in the mining state of Nevada in the United States. The company’s business plan is to increase its gold ounce resource through continued acquisition of resource projects and through organic growth on its existing project portfolio. The Company has 5 properties in the emerging Oreana Trend: Wilco, Gold Ridge, Jessup, Lincoln Hill and Rochester Properties, and 2 properties on the Cortez trend within 3 kms of Barrick’s new Redhill and Gold Rush discoveries: Garden Gate Pass and Patty Project.  RPM was ranked 6th on the 2012 Venture 50, which is a ranking of strong performers on TSX Venture Exchange. The companies are ranked based on market capitalization growth, share price appreciation, trading volume, and analyst coverage.

Macro Picture


What makes Nevada Interesting?

Nevada produces 10% of global Au (gold) and 80% of US Au production.  Both USA and Nevada are safe mining friendly jurisdictions with established mining laws.  Many gold majors have a presence in Nevada and have invested heavily into infrastructure for the purpose of producing gold yet new discoveries are becoming more and more difficult to find.  Between 1998 to 2010, producers have depleted their gold reserves in Nevada by 30%. Actual gold production also declined from a peak of ~9 million ounces in 1998 to ~5.5 million ounces in 2010.

Nevada is fertile ground for deals to acquire ounces

The pressure of declining production and reserves and the need to keep the production infrastructure working makes Nevada an ideal territory for a junior to build resource or reserve ounces. Producers need to acquire ounces to keep feeding ore to their mills in an environment of strong gold prices but declining gold discoveries.

On February 3rd, 2011, Newmont Mining Corporation (NYSE: NEM) announced an offer to acquire Fronteer Gold. The offer values the company at $2.3 billion. Based on Fronteer Gold’s known resource deposit of 8.1 Million ozs (including the interim resource estimate at the Gold Canyon project) this takeover price represents a $288/oz valuation.



Significant institutional ownership with Sun Valley, Sentry Select, Dynamic and US global funds holding around 35%, Kinross Gold (TSX: K) (NYSE: KGC) holds around 15% of the company.



$7.3 Mn as of Dec 31, 2011 & 2012 exploration budget of $5 Million (which can be adjusted if necessary)



What makes Rye Patch Interesting?

  • Huge Land Area in two gold producing trend opportunities in Nevada – Oreana Trend that has 10 M oz discovered  (40 sq miles) and Cortez Trend that has 39M oz discovered (25 sq miles).  Cortez trend exploration just begun.
  • Management has considerable knowledge and experience working in the region. Bill Howald, President and CEO has spent16 years as General Manager Exploration with Placer Dome’s X mine in Nevada (Placer Dome was acquired by Barrick Gold (TSX/NYSE: ABX)). The Chairman of the Board, Joe Kazsjo, was co-founder and Director of Nevada Pacific Gold, which was acquired by U.S. Gold (Now Mc Ewen Mining (TSX: MAQ, NYSE: MUX)).
  • NI 43-101 gold equivalent resource of 1.2M ounces in M&I and 2.7 M ounces in Inferred categories and is aggressively exploring to add more ounces. Next resource update in later part of 2012 in the Oreana Trend could take the total Au equivalent ounces to over 5 Million.
  • The Oreana gold trend is a new and emerging trend. RPM is a significant landholder in this trend with huge land position.  All the ounces of RPM so far are in the Oreana trend. 
  • Cortez Trend Exploration Program for RPM just begun.  The Cortez trend has had two major discoveries so far (39M oz) at Pipeline (1991) & Cortez Hills (2002).
  • Rye Patch Gold’s 100% owned Garden Gate Pass (GGP) project covers 1,300 hectares and is located just two kilometres south of the Barrick Gold Goldrush discovery and near Barrick Gold’s Cortez Hills mine.
  • RPM has entered into a JV with Barrick Gold, Mc Ewen Mining for the Patty Project on the Cortez trend where RPM will be the project operator and can carry a 40% interest through production showing that the majors believe in the capability of the RPM’s management to discover ounces.


Additional Significant Upside

  • RPM recently acquired mineral claims near the Rochester mine that previously belonged to Coeur d’Alene Mines (TSX: CDM, NYSE: CDE) as CDM failed to pay the annual claim maintenance fees. CDM states that their property hosts a measured + indicated + inferred resource of 108.7 million silver ounces and 777,500 gold ounces. Interestingly, CDM also states that the resources of gold and silver increased 73% in a year suggesting the strong exploration potential in this area.
  • As per CDM, RPM’s newly staked claims have 20% of these resources. This alone could be worth at least $100M, which is more than the current market value of RPM. It seems Nevada law is clear and CDM could not get an injunction and court has granted access to RPM to 80% of the claims it staked except a small portion for safety reasons.




Legal Background on how RPM acquired the claims of Coeur d'Alene Mines (NYSE:CDE; TSX:CDM)

On Dec 5, 2011 Rye Patch Gold Corp (TSX.V: RPM; OTCQX: RPMGF) through its wholly owned subsidiary Rye Patch Gold US Inc. announced that it has acquired land and mineral rights by staking open, locatable public lands which contain gold and silver resources in the Rochester Mining District, Pershing County, Nevada. Through a review of the United States Bureau of Land Management ("BLM") mining claim maintenance fee records, Rye Patch Gold identified open locatable public lands and staked claims covering portions of the Rochester and Nevada Packard gold and silver mines and their resource inventory -- approximately 400 unpatented mining claims covering 30.3 square kilometres. An unknown portion of the Rochester and Nevada Packard resources along with numerous gold-silver targets are within the newly staked ground.


The claim maintenance fee is a mandatory fee paid yearly on or before August 31 of each year. Coeur Rochester, Inc., a wholly-owned subsidiary of Coeur d'Alene Mines (NYSE:CDE; TSX:CDM), failed to pay the mandatory claim maintenance fee payment to the BLM rendering its 541 unpatented mining claims conclusively forfeited and void on September 1, 2011. The lands with the forfeited mining claims became open to entry and the location of new mining claims by any third party. Rye Patch identified the open ground and located unpatented mining claims during October and November 2011. Rye Patch completed the monumentation of its mining claims in November 2011. Rye Patch informed the senior management of Coeur d'Alene Mines of the location of the mining claims on November 28, 2011.


According to RPM "The process of maintaining unpatented mining claims in the United States of America is clear and unambiguous. If a claim owner does not pay the fee on time, the claim is forfeited and void. The effect of the law's forfeiture provisions is well-established. Coeur d'Alene Mines failed to pay the annual mining claim maintenance fee on time and the ground became open for mineral location”. Rye Patch investors now have under their control mining claims located on additional gold and silver resources and a portion of the lands formerly part of an active mine.

On Dec 21, 2011 RPM reports that the state district court in Pershing County, Nevada granted access to Rye Patch Gold on the LH claims outside of a court-defined boundary. The Rochester Property - LH Claims - covers 30.3 square kilometres (7,493.2 acres). The District Court has enjoined the Company from conducting exploration activities on approximately 7.4 square kilometres (1,839.3 acres) covering the active open pit, mine dumps and leach pads in the immediate Rochester Mine area. RPM’s position is that all the LH claims are valid senior unpatented mining claims, including those claims within the court-ordered enjoined area.  To ensure the safety of Coeur Rochester and Rye Patch Gold employees, contractors and consultants, the Sixth Judicial District Court outlined an area encompassing the Rochester mine's current open pit, waste dumps and heap-leach pads and a buffer area around them. The enjoined areas affect only a portion of the lands on which the 402 senior LH unpatented mining claims are located. Rye Patch Gold has access to continue exploration and development work on the remaining LH unpatented mining claims. The District Court will enter a formal written order. 

The 402 unpatented mining claims cover 30.3 square kilometres and an unknown portion of the Rochester and Nevada Packard resources along with numerous gold-silver targets which Rye Patch Gold has identified within the newly staked ground.  According to Coeur d'Alene's disclosure statement, as much as 20% of the Rochester mine's reserves and a significant portion of the resource lie within the LH claims.

Based on the statements made in CDE's 10-K Annual Report filed with the United States Securities and Exchange Commission on February 23, 2012, CDE acknowledges, on page 28 of the 10-K, the forfeiture of CRI's 541 unpatented lode mining claims as a result of CRI's failure to pay the mandatory claim maintenance fee to the Bureau of Land Management ("BLM") which were due on or before August 31, 2011. Under United States law, CRI's failure to pay the annual mining claim maintenance fees caused CRI's 541 unpatented mining claims to be forfeited and void as a matter of law. Ownership of and title to the minerals on the federal public lands reverted to the United States government, and any citizen or U.S. company had the right to acquire mineral title through staking unpatented lode mining claims on the open federal lands. Rye Patch identified the open ground and beginning in October 2011 and November 2011 located 402 unpatented lode mining claims which it filed and recorded with the BLM and Pershing County, Nevada.

We understand that the trial for this case is set to happen in Nov 2012.  It is possible that before the case goes on trial CDM and RPM enters into a settlement.  Any such event would be a strong positive for RPM stock.  If not the outcome of the trial will have a strong bearing on RPM stock.  Based on our understanding it seems RPM is on a solid legal ground in this situation. 


Current Fair Value (In situ Value)

In order to evaluate the fair value of the portfolio of properties, we calculated the value of individual properties that currently add significance to the portfolio. The geography and the geology of the properties owned by Rye Patch Gold are all in the Nevada Gold District and hold a lot of promise individually as well as collectively.


We have calculated fair values of (1) Wilco; (2) Jessup; and (3) Lincoln Hill.


Share Value per Attributable Resource:


All three properties have a significant amount of NI 43-101 compliant resources. The NI 43-101 compliant estimates found on the Wilco property are 0.78 million ounces of gold and gold equivalent resources in the measured and indicated category and 2.1 million ounces of gold and gold equivalent resources in the inferred category. For our valuation purpose, we have adjusted the resource values by applying 100% weights to Indicated and a 50% weight to Inferred resources. Typically, the industry standard for “in situ” value for gold is in the $40 to $150 per ounce range, given that there are many challenges in converting the rock into payable metal. Based on the grade and the higher depth in the estimates, we have assumed an “in situ” value of $117 per ounce of gold. The average price of gold was assumed as $1170 per oz well below current prices of ~ $1650 per oz. Fully Diluted Share count was assumed 143 Million


Applying these factors to the resources available on all the three properties (Wilco, Jessup and Lincoln Hill), which have NI 43-101 compliant resource estimates, our calculation shows that at the current state these properties provide a value of $2.08 per share to investors.


Current Fair Value for 3.9 M oz resource: $2.08/share

(+) CDM Claims assume $100M Value: $0.70/share

(+)  1M oz based on drilling completed: $0.52/share

Total: $3.30 (without assuming any resource from the Cortez trend properties). 

Current Share Price: $0.66 (32% of intrinsic per share value of $2.08/share)


Comparable Valuation

The closest comparable peer is Midway Gold (TSXV: MDW), which has a JV with Barrick Gold

at the Oreana trend (where RPM is also exploring) and has a market value of C$180 million, but with 7.8 M ounces of Au. Midway is only present in the Oreana trend.  Granted Midway has moved some of the ounces to Proven and Probable Reserve category.


RPM on the other hand is only valued at C$91 million despite its equally impressive land position at the Oreana Trend and its current NI 43-101 gold and gold equivalent resource deposit of 3.9M oz at its Oreana projects. This resource will likely exceed 5M oz with the revised resource estimate by the end of 2012 based on the drilling done since the last resource calculation.


In addition RPM has a JV with Barrick on a very prolific and well known Cortez trend which it is exploring.   Finally RPM also has the CDM claims and resource value of those claims is we estimate ~ $100M, more than RPM’s current market capitalization.


With all of the above it is fair to say that RPM potentially presents a bigger opportunity to find a sizable and mineable deposit. We see the valuation gap inherent in RPM’s current share price closing as the market discovers it’s potential.

Investment Summary

Given the company’s location, the stage of its development and its increasing resource estimates, and its undervaluation relative to its peer group, it could become an irresistible acquisition target to bigger mining companies such as Newmont Mining and Kinross.



Apart from the generic risks that are inherent for most junior mining companies like Commodity price, environmental, capital raising, regulatory and personnel risks. RPM is exposed to company specific risks like: Losing the court case on Rochester property with CDM will reduce the value of the company and the risk of not getting good drill results in the Garden gate project which is adjacent to Barrick Gold’s properties may also adversely affect the company’s valuation due to market sentiment.


Near Term Catalysts

  • Revised NI 43-101 estimates for Wilco project which is due in Q2/Q3, 2012 after the current drilling program.
  • Ongoing drill results from the $5M exploration program currently underway
  • The next court trial on the case against CDM to defend the title of Rochester property is scheduled for the November this year. RPM has no injunction and has free access to 80% of the property. The positive outcome or CDM doing a settlement in this case will propel the RPM stock to the next level.
  • Good results from the ongoing drilling in Garden Gate and Patty project can drive the stock significantly higher as market will realize that Barrick will likely have to make a bid and there will be competition from Kinross in such a scenario.
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