Vangold Expands Its Horizons
Paul the Benjaminite
When someone mentions "investment", three words come to my mind: gold, silver and petroleum. These three are likely to see further big increases in price in the relatively near future. Vangold (VAN on TSX.V), as a gold exploration company and a petroleum and gas producer, has got two of these investment areas covered. Not only has it got some of the most prospective gold exploration territory in the world in Papua New Guinea, it is currently expanding its investment portfolio in petroleum and natural gas which is likely to be a major boost to their balance sheet during 2005. This enhanced income should provide sufficient funding for the gold exploration of Vangold's massive Papua New Guinea properties for several years to come, and likely contribute to a very significant rise in the share price.
Revenue enhancement through oil & gas transactions
Vangold has recently entered into an agreement with Culane Energy Corporation whose petroleum property is in Killam, Alberta, Canada. What makes those 640 acres of land a good place for finding oil? According to the December 15th, 2004 news release, some 56 million barrels of oil and 18 billion cubic feet of natural gas has already been produced in that general area. Some vertical drilling has already been done in the area finding an average of 15 meters of porous sands. Oil, being lighter than water, tends to move upward until it encounters a non-porous layer which traps it. So, the ideal place to find a petroleum pool is where an impermeable layer of rock overlays a very porous layer of sand where the liquid and gas hydrocarbons can accumulate. These conditions are exactly what have been found there.
Drilling of the first well was successful and the initial petroleum flow was 300 barrels per day, which is really a gusher! Testing is going on to see at what rate oil flow will be sustainable. The news release made this interesting point: "Geological mapping from existing well control indicates that at least 20 additional horizontal well legs will be required to fully develop this pool. A three-dimensional seismic program is currently being designed that will further help define the pool's areal extent." A 3-D seismic program uses sound waves transmitted through the layers of rock to derive a three dimensional model in order to reveal large "inverted pockets" in the rock, i.e. where hydrocarbons have been trapped. Such 3-D seismic programs do not guarantee that no drilled wells will be dry, but they improve the odds of finding productive areas tremendously.
If we assume that Culane and Vangold will eventually end up with at least 20 successful wells and conservatively estimate the volume, it turns up some very interesting numbers. Assuming that 20 wells were drilled and each put out an average of 150 barrels of oil per day, what kind of revenue would that generate for Vangold?. Let us also assume that the average crude price will be C$47 per barrel. Vangold's share is to be 26.25%. When all the drilling is done and the oil wells are outfitted, Vangold's share of the income stream could come to some thirteen and a half million Canadian dollars per year. Of course, this calculation is merely an estimate and does not include royalties amounting to some 18% which must be subtracted from the top. Production might be much lower. But it could be much, much higher if the oil bearing sands prove to be more extensive than presently estimated. But, the main point is this; the market capitalization of Vangold at the current time (about C$.35 per share X 58 million shares fully diluted including the current private placement) amounts to only C$20 million! If this oil field plays out as expected, Vangold's share of the annual revenues, just based on this joint venture, could exceed 50% of the current market capitalization! Of course, it will take several months for all of these wells to be drilled and rigged and for the petroleum income generated to pay back the expenses involved in drilling and rigging. So, by late 2005, Vangold's after-tax profits should be in the millions of dollars. Even if revenues were only half of the estimate above, the revenue stream of Vangold will be tremendously improved for the life of the oil field, perhaps some three to four years, maybe longer.
But that is not all. Vangold has made an arrangement with a different petroleum company for another joint venture. The news release of December 20, 2004 reported the following:
Vangold Resources Ltd. ("Vangold") announces that it has entered into a Farmout, Participation and Equalization Agreement with an Alberta based oil and gas company to participate in the drilling, completing and equipping of a high impact natural gas well located in the liquids rich Deep Basin of the Alberta Foothills. This deep Foothills region of the Western Canadian Sedimentary Basin contains some of the most prolific multi-zone gas wells in North America as well as dome of the largest accumulations of oil and gas reserves. The area has long been a focus area for Exploration and Production Companies and continues to be today, with recent announcements highlighting discoveries of significant new gas pools. The prospect is covered by high resolution 3D seismic and is close to gas processing facilities enabling a discovery to be quickly placed on production."
As with the oil wells with Culane, this drilling for gas is not a blind effort to find hydrocarbon deposits. The 3D seismic work has already revealed areas which appear to be trapped natural gas in an area with a history of major gas production. The long and the short of it is this: When this drilling is done, Vangold's 21% interest could yield another one million Canadian dollars or more in revenues per year.
An investment in Vangold, is not only an investment in precious metals, it is also an investment in petroleum and natural gas. The kind of revenue projections indicated above would mean that this money could fund an awful lot of gold exploration and mine development in Papua New Guinea, possibly without any outside funding or further share dilution. One major problem with many precious metals exploration companies is that they are here today and gone tomorrow due to bankruptcy. A safer investment is a company producing gold at a profit. Vangold's near term revenue stream will put it in basically the same category as a medium-sized gold mining company which is already pouring gold at a profit.
So how is the exploration on those properties in Papua New Guinea coming along?
Good Progress is Being Made in Papua New Guinea Gold Properties
As discussed before in my three previous reports, Vangold, through its joint ventures with New Guinea Gold, has a major share in seven properties in Papua New Guinea, most of which are in the advance stages of exploration. Six are gold projects and one is primarily copper with some gold. But these are not merely "properties". Each of these is, in fact, a major gold exploration/mining district! They cover an area of some 1700 square kilometers (170,000 hectares or more than 420,000 acres) of land, most of which has been carefully selected for known precious metals anomalies. This partnership has many of the best properties available in Papua New Guinea. Kanon Resources, a fully owned subsidiary of NGG and VAN has recently purchased a drill rig so that work on their properties can continue essentially without letup. Recent news is available on four of these properties:
Fresh technical reports covering most of these properties, co-written by Dr. David Lindley, the geologist overseeing the PNG gold projects, are also available at the Vangold website.
Mt Penck (Vangold 40%) Excellent logistics and a pending resource calculation mean this project is nearing the feasibility stage. Gold levels right at the surface (in trenching) in the Kavola East project have been excellent. Although not correlating well with surface mineralization, recent drilling (6 holes) has borne out that a large low grade system exists there with potential for bulk mine-ability with results as high as 72 m at 1.79 g/t gold and 12.9 g/t silver and 2 m of 26.7 g/t. Other trenching nearby has turned up grades to 40 m at 8.89 g/t. More drilling is expected to begin within weeks. This is but one of six named projects within the Mt.Penck property:
Allemata (Vangold 50%) This vast property, encompassing 243 square kilometers, has good access by road, sea and logging tracks. There are 15 named prospects with Mt. Haluba and Ulo Ulo, both in the NW of the property, being the most advanced. Recent work has been on these two areas, both of which have had small scale mining in the past. Medium to high grade gold has been found in trenching over significant distances. Mt. Haluba has at least two major gold areas, one at least 400 meters long and 60 meters wide. Many old workings in the area and geochemical anomalies suggest it may be much larger. Hence, recent work has been to map the area and to do further exploration in the vicinity. Previously, the best trenching results included 30 m at 9 g/t. The other major gold anomalous area is at least 200 by 80 meters and open in all directions. The best chip sample was 31.8 g/t. Trenching results have been similar at Ulo Ulo, but with the best chip sample at 1.4 m of 71.9 g/t. There are also lower grades of platinum and silver in the area. Results of recent work will be released in mid-February. Further drilling will begin soon.
Bismarck (Vangold 50%) This huge 206 square kilometer Mt. Bismarck property, located in the eastern part of the central mountain range of New Guinea, has twelve named areas of gold anomalies. Six million dollars have already been spent on the area with excellent results especially in the more advanced projects of Tekim and Semben. Both are ready for further drilling. Grades as high as 0.75 m of 23 g/t and 3 m of 156 g/t, respectively, have been found. Tekim features wide spread lower grade mineralization which has been borne out by limited shallow drilling. Semben features high grade quartz veining. Recent trenching work has been on a third project, Awale, to further test a anomalous gold area (> 0.1 g/t) of 500 by 1000 m. Recent trenching has confirmed the wide spread anomalous gold with results to 112 m at 0.46 g/t with higher grade intervals. One creek rock sample contained nearly 14 g/t.
Feni Islands. (Vangold 75% interest) What is happening on Ambitle Island? Efforts to find ore bodies in the island have been hampered by the thick layer of volcanic ash. Still, the moderate to high levels of gold in stream panned concentrates have show that gold is very widespread in the underlying rock throughout the central caldera and southwestern crater regions. The search is ongoing to find the areas with high enough grades of gold to make it economically feasible to mine. Previous reports have shown that there was a huge aeromagnetic anomaly underlying a large portion of the southern part of the island. (This merely indicates an abundance of iron there, but it is often associated with gold.) Drilling of the promising looking Induced Polarization anomaly (which shows some kind of electrically conductive body in the ground, possibly gold) proved that some of that iron was "leaking" through the major geologic faults on the island, but without significant gold. There was also a gossan discovered in the Central Caldera, but drilling showed that it was laterally displaced from its sulphide source. (Such gossans often overlie significant gold occurrences in the ground.). All of this exploration data is leading to new interpretations. The Central Caldera and Southwestern Crater regions together comprise a large area and there are many, many prospects yet to be thoroughly examined. The Central Caldera is probably too geologically young to have significant hydrothermal deposits, but the prospects of finding the missing gossan gold are quite good. Planned prospecting in the area includes another aeromagnetic survey of the Central Caldera. In addition, there have been very significant and high levels of gold found in the geologically much older southwestern crater region which could lead to the discovery of hydrothermal deposits there. The incredible potential of the Feni Islands was previously reported on in The Bluest of Blue Sky Potential, in More Bright Blue Skies Over Feni and in News From Vangold's Papua New Guinea Properties. (This latter report also contains more details, but with older data, about Mt. Penck, Allemata and Bismarck.) The following graph details the wide spread and significant amounts of gold found in stream panned concentrates plus other details.
New exploration will soon begin on the humongous Yup River property which could be the best of them all.
What experts say makes a good buy in stocks:
How do you choose a good gold exploration/mining stock? For shares in general. one common measure is P/E or price per earnings (after tax profits). The book How to Make Money in Stocks by William J. O'Neil describes a more important predictor of a successful stock move:
Our model book studies proved the percentage increase in earnings per share was substantially more crucial than the P/E ratio as a cause of impressive stock performance.
This is saying that, if a company's earnings are rapidly increasing on a percentage basis (per share), it is highly likely that the share price will rise rapidly, too. With the hydrocarbon deals expected to add substantial revenues, Vangold's P/E should skyrocket. Add to that the natural volatility of gold exploration stocks in a bull market and it is easy to see the likely outcome: a substantial rise in share price. Since Vangold's share price is near the bottom of it's trading range of 22 to 93 cents, the downside risk is minimal.
Gold and silver mining and exploration stocks are in a category of their own due to their high volatility. So how does a person choose a company of merit? Famous investment analyst and author, Douglas Casey, in his book, Crisis Investing for the Rest of the '90's, sets out some important criteria for choosing a mining or exploration company. After saying that many small exploration companies go bankrupt and may lack the expertise to find a valuable ore body, Casey says:
Most of your money, therefore, should be in juniors that either are producing or have a proven ore body and soon will be. You want juniors that will turn into majors.
Casey also points out that a good company should have good exploration potential besides its present proven ore bodies. Vangold is not producing gold, yet, but is producing petroleum and gas. Vangold's and New Guinea Gold's PNG projects do have some small proven ore bodies. Can there be any doubt with literally dozens of prospects there is much more to come?
Disclosure:
We own shares of Vangold. I was compensated by Vangold for my time in preparing this report. The opinions expressed in this report are my own.
Paul the Benjaminite, B.S., A.S., completed seven years of university studies including such diverse subjects as chemistry and business. He is a teacher whose professional experience includes eight years as a secondary school teacher of sciences including chemistry, physics and basic geology.
7 February 2005
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