Part 2

In gold exploration, high-grade discoveries excite the market. This is because retail investors expect a high-grade deposit, if it ever becomes a mine, to be more profitable. But a closer look at high margin projects shows that high grade isn’t always king.

In the first part of this series, we drilled down, pun intended, into some of the main factors that make low-cost gold mines successful. Now we turn our attention to gold explorers. Mineral exploration is a risky venture where only the strongest, and well-funded, survive. While gold miners sell gold and sometimes gold byproducts to offset expenses, gold explorers must watch every penny because they have no revenues; all the money that flows into the treasury comes from private investors or selling shares on the open market.

Controlling costs is therefore essential to a successful exploration program, especially drilling, the most expensive component. Targeting drills holes through sampling, geochemical, and geophysical surveys will save explorers from wasting precious resources and lower drill costs in the long run.

The old mining adage, “grade is king”, presumes high-grades trump all other factors in market valuation.

The truth is a major or mid-tier will only take over a project if it’s economically feasible to develop a mine; grade, size, metallurgy and capital costs/ operating costs are among the most important factors. While high-grades may excuse some sins, they won’t excuse a major flaw and overweighting a single component like grade is the mistake of many investors, both retail and institutional.  There is more than enough risk inherent in resource investment, so we are looking for projects which check the boxes for good jurisdiction, close to infrastructure, good strip ratio, simple metallurgy, etc. The Yukon makes an interesting case with the famed gold rush 120 years ago and yet no active gold mines currently in production.

The Klondike

Canada’s Yukon Territory was the site of the Klondike Gold Rush. Between 1896 and 1899, an estimated 100,000 prospectors trudged up to the Yukon, packing everything they owned on their backs in search of gold nuggets that would turn rags into riches.

According to mining lore, Klondike gold was first discovered at Rabbit Creek, a tributary of the Klondike River, by an American prospector named George Carmack. Carmack staked four claims along the river, after which news of his discovery spread to nearby mining camps. By the end of the month all of the re-named Bonanza Creek was claimed. Later, new sources of gold even richer than Bonanza were found at Eldorado Creek.

Many prospectors waded into the freezing rivers to pan for gold nuggets hidden in stream sediment; others chose to stake their fortunes by buying and selling claims. A few struck it rich, but thousands left disappointed, and broke. Boom towns like Dawson City, built of ramshackle wooden housing, sprang up along the routes.

In three short years, over 20 million ounces of alluvial placer gold was collected. However, once the Spanish-American War began, it replaced the Klondike Gold Rush in newspaper headlines and gold fever receded.

Gold fever redux

For over 100 years there was little gold prospecting in the Yukon, but that all changed a few years into the 21st century, when mushroom picker turned prospector Shawn Ryan dug deeper than other fortune hunters. His unique soil sampling method hit pay dirt in 2004, when Ryan discovered what would become the first showings of the White Gold District. Shopping his soil data around at the PDAC mining conference in Toronto, Ryan convinced Rob McLeod, founder and VP Exploration of Underworld Resources, to buy the claims. The rest, as they say, is history. As told in a New York Times Magazine article:

Every winter there is a giant mining convention in Toronto. There, in a quiet room away from the frenzied exhibit floor, the drunken parties and the aggressive lying, McLeod looked over the soil-sampling data from the White. The data was thorough and precise. It amazed him to see it just sitting there, as it had for a century: 5 miles by 2 miles of anomalous minerals, surrounded by creeks that had been full of placer gold. There was no way to be sure without further exploration, but McLeod wanted those claims.

Underworld discovered gold on its fourth hole in 2008. Shawn Ryan’s prospecting woke up the world to the Yukon’s potential and in 2010 Kinross Gold purchased Underworld Resources for C$138 million.

However, the property was moved to the back burner after a vicious bear market took hold in 2012 – by year-end 2015 the gold price was dangling at just $1,050 an ounce. Allowing Yukon’s geologic potential to continue to go unrealized.

In the midst of the bear, Kaminak Gold grabbed another of Ryan’s properties, a district-scale land package named Coffee. Nobody was interested in developing it though until the gold market turned. When it did, in early 2016, Goldcorp made a play for Coffee, purchasing it from Kaminak for C$520 million.

From bear to bull: Yukon hot again

With two majors now in the game, the Yukon was starting to look hot again – particularly to medium and large gold companies looking for safe jurisdictions like Canada to bulk up their gold inventories. All the “low-hanging fruit” has been picked and gold miners are having to go deeper and farther afield to find the yellow metal, as their own reserves become depleted. Many sold non-core assets during the 2012-16 downturn.

Since 2016, mining companies have invested over US$600 million in the Yukon. Among the high-profile deals:

  • May 2017: Kinross sold all five of its White Gold District properties to newly-formed White Gold, for C$60 million.
  • March 2017: Newmont Mining signed earn-in agreement with Goldstrike Resources for up to $53 million
  • December 2016: Agnico Eagle Mines paid $14.5 million for 19% of White Gold
  • May 2016: Goldcorp bought Kaminak Gold for $520 million

The Yukon’s gold is unique in that it’s nearly all been taken from riverbeds – an astounding 20 million ounces. What’s really mind-blowing about that number is that it was all found with low technology – gold pans and sluice boxes. No mechanized excavation, blasting, crushing, leach pads or flotation. Just a grizzled gold miner sluicing gravel, using gravity to expose gold dust and nuggets.

The Yukon mystique

But the Territory has yet to offer up a gold deposit that makes it into production. That in itself has given the Yukon an exciting mystique – where did all that alluvial gold come from?

We don’t yet know the answer to that question but explorers are getting closer. Victoria Gold’s (TSX-V:VIT) Eagle deposit will be the first Yukon gold mine to go into production, with the first gold pour expected sometime in the second half of this year. As of December, mine construction was 60% complete.

Since taking over Kaminak in 2016, Goldcorp has identified 1.7 million ounces of gold reserves at Coffee, a large orogenic hydrothermal deposit. Kaminak had already done the bull work of completing a feasibility study envisioning an open-pit, dry heap leach mine that would operate for 10 years.

Another key player is White Gold Corp (TSX-V:WGO) owning 40% of the White Gold District first discovered by Shawn Ryan. (Ryan is the company’s chief technical advisor). White Gold’s flagship project is Golden Saddle – Ryan’s first discovery back in the early 2000s – acquired when Kinross unloaded all its White Gold District properties in 2017. Golden Saddle has 961,000 gold ounces indicated and 282,500 ounces inferred.

ATAC Resources (TSX-V:ATC) has been developing its Rackla gold property for going on a decade. The company enjoyed a nearly six-fold increase in its stock price during the second Yukon gold rush sparked by Shawn Ryan. ATAC has put out a preliminary economic assessment on its Tiger gold deposit and has an inferred resource of 1.6 million ounces at its Osiris project.

Successes at Eagle, Coffee, Rackla, Golden Saddle and others have encouraged Yukon gold explorers to up their game. As drill results and studies roll in, though, something else different about the Yukon is being noticed: the grades aren’t that high.


There are many more low-grade gold deposits than high-grade. For every 2.5 grams per tonne (g/t) gold deposit, Mother Nature forms another 10 deposits around 1 g/t. Generally speaking, one gram per tonne works for open-pit mines, but as a rule of thumb underground gold mines require at least 2.5 g/t to be economic.

A Low-grade star

At Victoria Gold’s Eagle project, the average grade is 0.67 grams per tonne. Banyon Gold’s Hyland Gold Project, located between Victoria Gold’s Eagle and ATAC’s Orion properties, has an indicated resource of 0.85 g/t gold-equivalent.

The Coffee project’s feasibility study shows probable mineral reserves grades at 1.4 g/t.

Compare these grades to Pretium’s Brucejack Mine which went into production in 2017. Wedged between two glaciers high up in BC’s Golden Triangle region, the underground Brucejack Mine is 14.1 g/t.

Investors almost always go for high grade, but the Yukon is starting to prove bulk-tonnage deposits can be just as prospective. Costs are also important here. In the first article (Part 1) we discussed some of the factors that can lower production costs at existing mines. Below we get into the main factors that predict the economics of pre-production companies.

Exploration cost factors

Location & infrastructure

Back in the late 1890s, the remoteness of the Klondike combined with its harsh climate meant only the toughest prospectors and townspeople in Dawson City survived. Times of course have changed, and population centers are now connected with roads, power, Internet and most other modern conveniences. Still, exploring in the Yukon presents major challenges; proximity to towns and services is a major plus.

Why will Victoria Gold put the first mine into production whereas ATAC Resources is still quite a bit further behind? The reason is largely to do with location. Victoria’s Dublin Gulch claim block is about 85 kilometers from the Mayo community, and accessible by road year-round.

The White Gold property’s Golden Saddle and Arc Zone deposits are 95 km south of Dawson City. Goldcorp’s Coffee deposit lies 130 km from Dawson. Klondike Gold’s (TSX-V:KG) properties are just 20 km outside the town that sprung up on the banks of the Yukon River in 1896.

In comparison, ATAC’s Rackla property is closer to Mayo than Dawson City. This has made exploration challenging for ATAC and upped their costs.

In 2011 ATAC budgeted $25 million for a 40,000m drill program at Rackla, compared to a budget of $15 million that Kaminak Gold set aside to drill 40-45,000m.

Kaminak was also able to keep their costs down by flying staff and fuel into the property and moving drill rigs and equipment down the river by barge.

Barrick Gold had an earn-in agreement with ATAC to explore its Orion property – part of Rackla – but Barrick abandoned the deal in December 2018.No reasons were given, but it’s fair to speculate that it may have had to do with its remote location.

If a project is suffering from high exploration costs then there’s a good chance it will continue to face this challenge at every stage. Access to power is a key factor in exploration costs and Victoria Gold’s Dublin Gulch benefits from plugging into the community’s electricity grid only 27 kilometres away. The future mine requires 11.5 megawatts of power. Development projects that need to build lengthy power lines from the grid to their properties are less likely to go ahead.

Proximity to surface

How close is the ore to surface? If the deposit is shallow, excavators can dig out ore from an open pit. If mineralization is trapped in underground veins, extraction will be much more expensive because specialized underground mining equipment must be tunnelled in.

The most famous of the world’s shallow deposits is the Carlin Trend in Nevada. Here disseminated, tiny grains of gold are found in almost every rock. The gold is often low-grade (under one gram per tonne) but plentiful.

ATAC refers to its Rackla project as a “Carlin-type” deposit, meaning the gold is disseminated and close to surface.

Klondike Gold made three discoveries at its Klondike District property. In the drill program in 2015, the company was targeting quartz veins up to about 200m underground. The 19-hole program yielded two high-grade intercepts: 75 grams per tonne over 2.8m, and 5.3 g/t over 7.6m.

The high-grade intercepts were exciting because they appeared to meet the objective of locating the source of the Klondike Gold Rush’s placer gold.

But Klondike wanted to test whether there was also gold between the veins, and that’s when they came up with their second discovery. Despite gold found in the Nugget and Lone Star zones was lower-grade (5.1 g/t and 2.4 g/t) it opened up the possibility of an open-pit mine.

Klondike’s drill program shows that the location of the gold can change the exploration model – in this case from pursuing high-grade vein gold underground, to lower-grade disseminated gold near surface. The new model will allow the company to add more ounces near surface faster. The 70-hole drill program in 2017, which focused on the disseminated gold, turned up the 50-km-long Rabbit Creek Thrust fault system, which has gold mineralized zones at both ends of the fault.


In mining, big really is better. An exploration company must hit upon the correct model for adding as many gold ounces as possible to the deposit. Otherwise, it’s just another gold play that is unlikely to entice a larger gold company to purchase the property, or the company.

Victoria Gold’s Eagle Gold Project has proven and probable gold reserves of 2.463 million ounces, while Kaminak Gold’s Coffee project bought out by Goldcorp has 2.16 million ounces in gold reserves. Both the Eagle mine and Coffee mine plans are capable of producing in the range attractive to more senior producers – a rate of 200,000 ounces/year and 184,000 ounces/year respectively.

A project’s scale is particularly important if the shareholders want to a premium on an exit strategy.

Gold recovery

While high-grade gold is preferred by investors, it doesn’t always make a project viable. Ore close to surface is oxidized, meaning it can be processed relatively cheaply using heap leaching, for example.

Refractory ore is more difficult and expensive to process due to the presence of sulfide minerals, which block the cyanide solution.

Crushing methods can also make a difference. In one real-world example, Kaminak Gold dramatically lowered the estimated mining costs, contained in the Coffee project’s feasibility study, by eliminating a third ball mill from their mine plan.

Gold recoveries from heap leach operations can be problematic, especially at new mines. In 2014 Midway Gold was progressing its Pan Mine in Nevada nicely, but ran into trouble on the leach pad. A discrepancy emerged between the resource model, which required 0.44 grams per tonne on the pad, but Midway was only getting about 0.3 g/t. When the company realized the discrepancy came from the resource, a new resource estimate was ordered, resulting in a downgrading; measured and indicated resources fell 36%, or 284,000 ounces. The company soon found itself running out of cash. Unable to get more financing from its key lenders, Midway declared bankruptcy.

The takeaway for investors: make sure the junior you invest in understands the characteristics of the ore and how it will be processed. Having a management team with people experienced in ore processing is critical at this point in the mine’s development.

Just like gold mining, at the exploration stage gold grades are critical in determining whether a junior will be successful in moving the project forward to a resource estimate and later economic studies. But high-grade is no guarantee of success, if exploration costs spiral out of control. As well, lower-grade properties can become valuable if exploration expenses are kept to a minimum, and the property meets most or all of the criteria outlined above.

Nevada is an example where low-grade mines with oxidized ore at surface are viable through low-cost heap leaching. Currently two of the most advanced gold projects in the Yukon – Coffee and Eagle – are easily accessed (good location and infrastructure) and have scale, despite being low-grade.

Don’t make the mistake of overlooking a gold junior just because its project isn’t high-grade. Delve a little deeper into the news flow to see whether the grades are an aberration, or a trend. Scroll through any available studies to determine whether the project has other credentials, such as those outlined above, that could offset the lower grades and make the project economically robust. You just might find that low-grade is king.

For Part 1, click this link to read Low-grade Gold Mines Shame Their High-grade Cousins

About the author: Jack Graham has more than 20 years of experience as a writer and editor specializing in Canadian small and micro-cap stocks.