We (ERA) have written reports on a few of them, such as Independence (IGO) ‘s IPO at 20c in December 2001 which rose to almost A$9/share (45x) and is now (2 June 2009) about $4.25/shares (21x) and has so far paid over 50c in dividends. We also wrote a report on Avoca (AVO) on 27 April 2005 when its share price was only 26c and its market cap was only $30m, compared to its current price of $1.86 (7x) and market cap of ~$460m (15x), although it has in fact achieved a higher price of $2.70 (10x). However, the next Avoca appears to be Silver Lake Resources (SLR).

At that time in April 2005, AVO had recently intersected 7m @ 27g/t, 1m @ 162g/t and 60m @ 7.6g/t at its new Trident discovery, but the market was not really interested because its market cap was less than $100m, which is the minimum level most institutions need to invest.

That $100m market cap level came in about 1988, due to the 1987 crash in which gold companies during the mid-1980s had used the money they raised for exploration to “play” the stock market as the returns appeared to be higher than actually exploring. It was hence no surprise really that in the 1987 crash, the Australian gold sector fell from ~4000 to ~1000, with many companies becoming worthless almost overnight.

The $100m level also means that if an institution wants to take a say $3m to $5m position in a company, it does not end up controlling the company. Consequently, there is usually an investment surge when a gold company rises through the $100m market cap level (and subsequently similar surges at $300m and $500m). For offshore the levels are the same except that they are in US$, for example US$100m, US$300m, etc. So the “issue” is how the junior company gets to $100m.

It can do that by increasing the number of shares in issue through raisings, if there in a appetite for them (we wrote in our column in the March Issue of Paydirt that the minimum should become 150m, ideally ~250m). There are many brokers keen to support or follow stocks that want to raise money, because of the potential corporate fees.

However, if like Silver Lake Resources (SLR), you don’t want to raise money because you are generating sufficient cashflow, then the only way is through merit and profitability.

Silver Lake’s current main operating mine is Daisy Milano at Mount Monger, about 50km SE of Kalgoorlie in WA. Daisy Milano had been held privately until Perilya bought it and combined the surrounding tenements into a package in the mid 2000’s. Perilya sank the decline further, but struggled to make a profit mainly because they tried to bulk mine the narrow lodes (including the waste between them), and trucked the ore for toll treatment through nearby plants, such as Coolgardie.

So when SLR bought Mount Monger from Perilya for ~$13m in 2007 it was an unloved asset and many thought that SLR had bought a lemon. SLR gained initial broker support in the IPO, but was gradually sold down in the weak market to lows of 13c to 15c in November/December 2008 when it was ramping up its production and generating > $1m in operating cashflow per month.

At current gold prices of A$1200/oz, SLR is making about A$2m per month having made $8.8m in operating cashflow in the March Quarter 2009 on production of only 13,000oz. The average grade through the mill is ~10g/t with annual throughput of ~180,000tpa, which illustrates that you don’t necessarily need a big operation to make significant profitable cashflow.

SLR’s underground grades are ~30g/t in-situ (over the lodes that are typically only 10cm to 50cm wide), but have exceptional “sweet” spots such as the 20oz/t on 8 Level or the 6kg/t on the 21 and 23 Levels (that we have encountered) south of the dyke. Development on 23 Level (south of the dyke) in February 2009 increased the average grade through the mill by more than 30% to over 13g/t.

This is all currently from the Daisy Milano lodes which produce about 1,000oz per vertical metre (for the ~400m of mineralised strike). So only 50m to 55m of vertical development is required per year to meet the current production expectations of ~50,000ozpa. However, SLR has bought a second mill to refurbish and possibly double the production.

Sources for the second mill are many. Such as the missed block ~150m to 180m on strike beyond 8 Level’s perceived orebody hangingwall/plunge limit, down ~150m to the 15 Level. Drilling from Daisy’s hangingwall eastwards to Rosemary intersected two unexpected lodes apart from Rosemary.

The first lode ~40m away has what looks like spots of visible gold in the core (assays are waiting and the figure of the core was reported to the ASX on 29 May 2009). The second lode (~90m away) is apparently associated with a porphyry and coincides with a historical intersection 80m deeper and ~100m away on strike.

Drilling in the northern end of the field at Leslie is at an early stage (4 drillholes on each 4 position) across 3 possibly parallel lodes (based on surface shafts evidence). And then there is the new Christmas Flats open-cut and the possible underground lodes of Haoma, Maranoa and Austin, plus nearby Dinnie Reggio.

However, it was only when we walked/scrambled out of the trial trench at Haoma and saw the old winder (inset) in Figure 1 with what appears to be stockwork mineralisation in the walls/sides of the trench, that we began to reflect on the Mount Monger goldfield.

Described in old books as an extensive area of dry-blowing, that two-drum winder at Haoma infers serious mining, not simply a single wheel at the top of a shaft or a windlass. Haoma’s shaft in fact only went down ~140m and was the second deepest shaft in the field, after Daisy Milano, with most of the shafts only going to depths of ~50m to ~70m below surface, which was probably the water table.

The Haoma mine was limited underground by a tenement boundary, in fact the drilling from Daisy to Rosemary is the first time that has been able to be drilled from underground, because of the old tenement boundary limits.

But, standing at Haoma, that trial trench appears to be the only trench (that we noticed) that cuts across or through the old workings - so what grades actually come out of Christmas Flats when mining starts in July 2009, should be interesting.

However, the realisation begins to sink in that SLR’s Mount Monger goldfield stretches in a line of almost continuous workings over a N/S length >5km, ie bigger than the Super Pit of Kalgoorlie-Boulder. Grades per mine were typically ~30g/t with some lower ~10g/t averages in the far north and also they were generally lower in the south. So the grade appears to be there and the surface mineralisation too.

Consequently, you wonder why the Mount Monger goldfield did not historically develop – as in (unlike most historical goldfields), there are no major shafts or major underground workings. The goldfield has multiple mineralised apparently high grade lodes, numerous headframes and evidence of old timbered shafts, but most shafts only went down to ~50m or so, it is actually still in pre-Kalgoorlie form as if it has been in a time-warp for the past 100 years (well, it has basically been held privately).

It may not have developed because of a lack of water, as the pipeline ran from Perth to Kalgoorlie, with spurs up to Kanowna and down to Kambalda, but not SE to Mount Monger. It appears to be a relatively fairly dry area - some of the pits that have been unmined for >10 years still appear to have virtually nothing in them. There is no main road of any significance going anywhere, its ~50km from Kal (it would have been a long walk / horseback ride) and no railway and hence no power. So SLR appears to have secured an almost virgin goldfield with staggering potential.

It’s easy to see how Anglogold estimated a potential resource of 2moz for 4.5moz for the field in 2003, but fortunately for SLR it failed to meet Anglo’s then minimum requirement of 5moz, so Anglo did not take up its option.

This estimate was before the Daisy Milano decline had been extended, and the Daisy lode had been extended beyond the dyke, or a trench had been cut at Haoma. And the undrilled ultramafics to the immediate west may also contain something, plus of course those parallel workings to the east such as Fifty Grand, Lucky Strike etc that have not even been looked at.

So Silver Lake appears to have all the hallmarks of being the next Avoca just on its Mount Monger assets (even if the almost 60% jump in the share price from a low of 56c on May 28 through the market cap level of ~ A$100m at about 65c to a peak of 89c on June 2 on daily volume of 2m to 3m shares per day, understandably met with some profit-taking resistance).

SLR also has another project in the Murchison covering the old Tuckabianna, Comet and Moyagee mines. For more details see our (ERA) report dated 29 May 2009 on the SLR website www.silverlakeresources.com.au.

Now, what or who is going to be the next Avoca, after Silver Lake ?

Disclosure and Disclaimer: This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

Figure 1. The old Haoma winder inset in the trial trench at Haoma in SLR’s Christmas Flats area