Novo Resources Corp. ( “Novo” or the “Company” ) (TSX: NVO, NVO.WT & NVO.WT.A) (OTCQX: NSRPF) just announced quarterly updates for the first full quarter of their Nullagine Gold Project. In this post, I’ll expand a little bit on some of my thoughts and opinions on what is going on. Mind you, I am inexperienced and have only owned shares of the company for a few months so there will likely be many mistakes in this article. If you notice mistakes or something that is incomplete, please correct me. I am here to learn. This article contains my personal opinions and I’m not being paid to write this. I am a shareholder of Novo Resources Corp, and Novo also rents banner space (and nothing more) from my website. This makes me biased and gives you all the more reasons to do your own due diligence. Let’s have a look at the important points here: 1. No lost time injuries at Beatons Creek. This means that no major injuries were sustained by any of the employees working on that project, and there will be no loss of productive work time as a result to injuries. I see it as positive because it means that the company’s team will be able to continue working as planned, under normal conditions. This doesn’t surprise me, and I wouldn’t have it any other way.
2. An increase in gold production. Novo Resources booked a record gold production of 5,898 oz Au in June, a 16.5% increase over May. While this is by far not a lot of gold, the production is growing, and as you’ll see further on helping to increase the revenue when costs are dropping. As you can see below, the growth in production has been great so far, and I expect the production to keep growing throughout 2021, and beyond, but they might have to turn on additional processing power, to increase mill throughput.
It is also worth noting that the average grade in June was 1.45 g/t Au, an increase over Q2 2021 average grade of 1.30 g/t Au. Hitting 2g/t Au would be very good, placing them among the higher grade open-pit mines out there.
3. An increase in revenue. Novo booked C$11.9 million revenue, which represents an 11.4% increase over May, for a total of C$31.7 million in Q2 of 2021. Although this sounds positive, I always remind myself that this company is only getting started, so I will expect higher revenues through the next couple of quarters and year. I am not crazy about the fact that the revenue grew slower than the production. I will have to ask Dr. Quinton Hennigh why that is.
4. Positive operational cash flow in May & June.
The Nullagine Gold Project achieved a positive operational cash flow in the months of May & June. I’m sorry if this doesn’t make sense, but this looks like a big deal to me. Let’s remember that Novo is a junior with tremendous growth potential and even better exploration potential, that is already generating positive operating cash flow. I don’t think this is to be ignored. Now let’s see when the positive free cash flow comes along.
5. Higher production & processing rates.
We’re seeing another increase in mining & processing rates for Novo Resources.
They mined 232,000 tons of gold-bearing conglomerate material in June, and 134,000 tons of the same material was processed (milled) in June. A total of 477,000 tons was mined in Q2 2021, and a total of 366,000 tons was processed in Q2 2021. Things are starting to get better, and I wouldn’t mind if they were going even faster. In danger of stating the obvious, Novo can mine a lot more rock than what they can process. In June, they mined over 40% more than what went through the mill. I’m not sure why, and I’m not sure I completely understand what’s going on here. I intend on asking Dr. Quinton Hennigh about it, but I would like to see them turn on additional power online to process all of the rock that is being mined, and increase the grade. Hopefully that can be done while still keeping the costs lower. I would also appreciate an update on Steinert, which I hope Dr. Quinton Hennigh would be able to give me.
6. Recovery rates are growing. We’re almost there. Recovery rates went from 94.4% in May, to 96.6% in June. Higher recovery rates are better, and +96% is already far above average. Though, 98% might not be impossible on this project. So, there is work to be done. I have no idea what the limit is, but if the +96% is attainable, that would also not be a bad deal, in my eyes.
7. Costs are dropping. Last time I spoke to Dr. Quinton Hennigh, he told me that Novo’s team doesn’t live the high life. They save on everything they could. Well, it appears there’s improvements to be had, and Novo had them in Q2. They now have an agreement with Roy Hill Holdings Pty, which allows them access to its private airstrip and the flights to and from there. The airstrip is roughly 100 kms south of the Nullagine project. This will lower the costs and likely increase efficiency, and switches can now be done quicker and at lower risks.
Something else Dr. QH told me last time was that it’s been hard to get drill results to a laboratory lately, due to (among other things) Covid-19. The assay-testing company with whom Novo works has now commissioned two machines at its Maddington facility in Perth, which means quicker turnover times for Novo. There are also plans for the build out of a sample preparation laboratory at the Nullagine site project.
Both of those things are seen as positive as they improve efficiency and lower the costs. Although not by a huge margin immediately, this also shows me that Novo is keeping their long-term focus. Which is the main reason why I bought shares in this company - the long term.
8. Significant increase in cash balance. Novo ended the quarter on June 30, 2021, with a cash balance of C$46.3M, which represents an increase in available cash. However, I have seen a lot of critique around how Novo manages its money, and a lot of negativities have been coming from its outstanding debt, which far surpasses Novo’s available cash. While Novo is by far not a debt-free company, and while I would like to see them turn the positive operational cash flow into a positive free cash flow, which is then used to pay off debt and eventually dividends (let me dream), Novo is not dead in the water, and definitely not in a bad position after a totally spot-on move by Dr. Quinton Hennigh, to acquire almost 10% of New Found Gold Corp for pennies, which are now worth significantly more. So, yes, the cash position is about $46.3 million, but the value of Novo’s market investments is closer to $200M, totaling about C$250M in liquidity. This could prove to be a tough pickle in the future when the company needs money, though.
After the last dilution, it became clear that Novo shareholders are tired of share dilution. I thought the ones who were saying that were overreacting and probably haven’t seen the light of day in a long time because this has always been a long-term bet, but I still don’t welcome dilution with open arms. However, I also believe in the New Found Gold story, and I would hate to see Novo selling shares to finance development, but I am just a naïve 25-year-old, living with his parents, so I’ll let the thinking to Novo’s team, which I have chosen to trust. And so far, so good. If Novo had sold NFG when it issued shares a few months ago, the cost of that money would’ve been higher. So, good call on their side. I am also not sure whether Novo can freely sell those shares of NFG, but I do plan on asking Dr. QH about it, and about the way they plan on financing the development further on. 9. Some (meaningless) thoughts.
Novo gave shareholders a great, well-deserved Q2 of 2021, and first quarter for the Nullagine project.
However, the stock didn’t react to the news at all. Partially because of lower gold prices, but I guess mainly because investors have either lost trust after recent share dilution and they need some time, or because not many people would like to hold this stock for 10 years. A lot of the people I see on the internet want a 10X in 10 months, and not in 10 years. Novo is not a 10X in 10 months type of stock, in my eyes. It’s also not a cushy ETF-like investment. It’s a tough-to-understand project with challenging financials but a huge upside if managed well, in my opinion. Novo Resources is, in my eyes, a junior gold company trading at a producer’s premium, which is to say: a lower premium than other juniors, who have less exploration potential. As a shareholder who wants to accumulate more, I like that. As an existing shareholder of the company, I don’t like that because if the operational cash flow doesn’t grow into free cash flow quick enough, it might end up diluting the shares again to expand the business.
What I like more, though, is that we’re already seeing positive operational cash flow, which I expect to see growing, and hope to see turning into free cash flow sooner rather than later. This positive operational cash flow will presumably be used for more exploration and more development and more exploration and more development over time, essentially building what Dr. Hennigh has always talked about - a huge gold mining company. I am not a financial advisor and as mentioned (and proven) above, I am anything but experienced, yet I will go out on a limb and say that I wouldn’t be in this stock if I were after a quick 10X. This can be something very big in the future, but we could also be stuck with a lagging per share price during the current cycle. This is not a quick trade for me, so I don’t care that the news didn’t move the stock. I’m happy that the steps taken in Q2 are all in the right direction and following the company’s long-term plans, goals and dreams. To me, Novo is an investment coming from trust and respect of their team and founders. This is very important to understand. I think one should know why they bought the stock in the first place. If it were for a quick 10X, they were likely wrong, and they might want to reconsider their purchase. During bad news, I am not unhappy because I know why I own the stock, and I know who I’ve given my money to. However, if one is holding the stock but can’t trust the team, they might want to re-think this as well. I have all the reasons to trust them, and will continue to hold my shares with a positive outlook for the future. The way I see it now, $NVO trades at C$500M, with roughly C$50M in cash, and C$200M in holdings (which will likely keep growing). So, even if we subtract the rather large debt, the price that Novo is trading at is either justifying the value side (cash flow growth potential) or the growth side (exploration potential) but certainly not both at the same time, under one roof. I have never been attracted by timing the market or seeking out tops and bottoms as that seems impossible to my limited mental abilities, but what I do want to become good at is figuring out when things are cheap and when they're expensive. So, instead of calling this the "bottom" for Novo (which I am not), I will just call it very cheap at these prices. I hope to be able to speak to Dr. Quinton Hennigh this Sunday, and I hope he’ll be able to explain some of the questions I was left with. If you have any questions or remarks, I’ll be happy to hear them. This is not financial advice. I own shares of Novo Resources. Novo Resources is a paying customer of this website. This article contains only my opinions. I can’t guarantee the quality of the information shared herein. Always do your own analysis and read the full disclaimer on the disclaimer page of this website.