Revolution turns to Red Mountain in BC

VANCOUVER — For Revolution Resources (TSX: RV) president and CEO Robert McLeod, the company’s recent acquisition of the Red Mountain gold property in northwestern B.C. is a lot like coming home.

McLeod grew up 18 km southeast of the property in the town of Stewart before first working on the project as a geology student at the University of British Columbia in 1992.

And now, to honour his family ties to the area — where father Ian served as Stewart’s mayor for 16 years and uncle Don worked to build the local mining industry — McLeod has chosen to use their initials to soon rebrand Revolution as IDM Mining.

Red Mountain’s history dates back to its discovery in 1989, but most of the exploration was completed from 1992 through 1996 by Lac Minerals and Royal Oak Mines. The companies combined for 466 diamond drill holes and over 2,000 metres of underground development, along with extensive engineering and environmental baseline work.

Red Mountain is situated near the western margin of the Stikine terrane in the Intermontane belt. The property hosts four resource-stage mineralized zones named Marc, AV, JW and 141.

Marc, AV and JW are from the same tabular-mineralized body that was split into three through post-mineralization, strike-slip faulting. The mineralized zones are northwest-trending tabular bodies as well as steeply southwesterly dipping, gold-bearing iron-sulphide stockworks.

Red Mountain’s measured and indicated resources total 1.6 million tonnes grading 8.4 grams gold per tonne for 435,400 contained oz., with inferred resources tacking on 807,000 tonnes at 5.4 grams gold for 140,000 contained oz.

The project had been under option by Banks Island Gold (TSXV: BOZ), but the junior allowed its deal with Seabridge Gold (TSX: SEA, NYSE: SA) to lapse in January due to a lack of capital.

“When I took over the CEO ­position at Revolution late last year we were really struggling, and  some serious financial backers had been involved in our work in Mexico and the Carolina slate belt,” McLeod explains in an interview, noting that Kinross Gold (TSX: K; NYSE: KGC) holds 8.4% of the company. “There were also institutions like Sun Valley Gold that deserve to have a shot at participating in the resurrection of this company. So I think we’re doing the right thing, and going about it the right way.”

McLeod describes the situation as “serendipitous,” since Revolution was looking for opportunities globally. The timing coincided with Michael McPhie’s arrival as Revolution’s executive chairman. McPhie had recently vacated the president and CEO position at Hunter Dickinson copper-vehicle Curis Resources (TSX: CUV, US-OTC: PCCRF) to lead JDS Energy and Mining’s new copper and gold divisions.

“We started looking at Red Mountain a little while ago with Rob. JDS pulled apart the economics of the project and we really see a high-value opportunity here,” McPhie says. “We definitely can’t take anything for granted in the current market, but we’ve found that smart money follows good people and management teams. And Red Mountain is a low-cost, near-term development story in a politically safe jurisdiction that also has a prolific mining history. It presents an extraordinary opportunity for B.C.’s next gold mine.”

Negotiations with Seabridge started in early March at the annual Prospectors & Developers Association of Canada convention in Toronto, and Revolution finalized a deal a month later.

Under the arrangement Revolution can earn full interest in the project by issuing Seabridge 29.7 million shares, paying $2 million in cash, and incurring $7.5 million in exploration expenditures over three years.

If Red Mountain achieves commercial production, Seabridge would receive another $1.5-million cash payment and retain a gold stream to acquire 10% of annual gold production at US$1,000 per oz., up to a maximum of 500,000 oz. Seabridge could also opt to receive a one-time cash payment of $4 million for buying back the stream.

“The reason we were successful in picking up the project was that we came to them with a really strong team and knowledge base. The connection with JDS and the mine-development experience really helped,” McPhie continues. “This isn’t just a junior seeing if this might be possible, because we’ve come up with a definitive plan and the backing of some serious mining professionals. Also we think that gold-stream component is pretty innovative. It offsets a lot of the upfront capital for us, and the way [Seabridge] is going to make money is by us getting Red Mountain into production.”

Revolution and JDS will build on a preliminary economic ­assessment (PEA)that Banks Island filed in February 2013. McPhie says the company sees room for improvement in operating and development costs. He describes the current PEA as “over designed” and speculates capital costs could be lower by using infrastructure alternatives and seasonal operations, and scrapping a proposed 7 km access tunnel.

Banks Islands’ PEA contemplated a 1,800-tonne-per-day underground mine that would cost $163 million to develop and produce 115,200 oz. gold annually at cash costs of US$459 per oz. The model featured a 43% pre-tax internal rate of return and $155.4 million net present value (NPV) at an 8% discount rate. Banks Island had assumed a US$1,360 per oz. gold price in its base case, while McPhie says JDS will likely go with US$1,100 per oz.

Revolution will also benefit from a more competitive option agreement, as Banks Island was scheduled to pay Seabridge $11 million in cash so that it could earn a 100% stake, which factored into a lower NPV on the project.

“You could say that during the height of the last couple [of gold bull] markets, people were looking for those big 5 million to 10 million oz. gold assets that could be bulk-tonnage mined and dug out of the ground,” McLeod says. “Of course we come to a time now where markets are looking for low-capital, high-grade deposits. That’s been one of the big failings of the entire industry: mining shouldn’t be about making metals. It should be about making money. And we like Red Mountain because it could have that high-margin rate of return.”

McLeod also likes the exploration potential of Red Mountain’s 171 sq. km property package. He says there is likely minimal upside in terms of expanding existing resources, but that a number of under-explored targets exist across the project.

Other mineralized zones and showings at Red Mountain include: Rio Blanco, McAdam, Cambria, Marc Extension, Hartley, Mike and Brad. The Red Mountain database features 785 rock samples — including chip, float, subcrop and grab — grading over 1 gram gold, 136 samples averaging over 10 grams gold and 43 samples grading over 30 grams gold.

McLeod points out that since that last major surface campaign at Red Mountain in 1996, the glacial ice south in the property has retreated by 1,000 metres, which has opened up unexplored areas.

“Where the real upside will be is in terms of discovering new zones throughout the property,” McLeod adds, pointing out that Red Mountain hosts a hydrothermal system that covers at least 14 sq. km. “I worked on a number of other targets during my time as a
junior geologist at the project, and a lot of them have returned promising surface numbers.”

Along with its name change, Revolution will complete a six-for-one share consolidation as it launches the next phase at Red Mountain. The company is looking to close a private placement worth $5 million that will consist of up to 8.1 million post-rollback, flow-through units at 31¢ per share, and 10.5 million post-rollback common units at 24¢ per share.

Revolution closed at 3.5¢ per share at press time. It has 119 shares outstanding and a $4.2-million market capitalization.