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Pure Gold Stupid Cheap for Takeover

Pure Gold owns the Madsen underground mine in the Red Lake mining camp near Goldcorp's world-class Red Lake and Campbell mining complex. The planned production profile and grade compares favorable to recently-acquired operating gold mines and advanced projects in Canada (Island Gold, Lamaque, Timmins, Seabee, Macassa, Casa Berardi). Purchase price and subsequent market valuation reveal these underground Canadian gold mining projects tend to trade at a premium to asset value. Well at least at some point in their development or operating lifetime. Pure Gold currently trades at substantial discount to NPV. That will change.

The Madsen resource has grown during 2017 to 1.5+ million ounces Indicated at nearly 10 grams per tonne gold. They're not done either as another resource update is due by year end which will include satellite areas and infill drilling. Significant exploration potential will continue to exist as with typical Red Lake Archean gold deposits (they tend to go forever, if it were possible to dig deep enough). The cost to put the mine back into production has been estimated at roughly US$50 million (I've included wriggle room beyond the numbers in the 2017 PEA). The net present value after tax with an 8% discount (my calculation) is slightly under U$200 million. Meanwhile the shares in mid-November 2017 sport a fully-diluted tag of US$80 million (0.4x P/NAV). This P/NAV ratio should reach 1.0 at some point, probably when things become clearer to the market.

So what needs to become clear? Well interestingly not very much. The company's name "Pure" Gold is pretty apt here. It's a pure gold mine, and the company, management and project are pretty "pure" in terms of being devoid of excess baggage and problems.

This is a former operating mine that produced 2 million ounces mainly from a single shaft. They have virtually all of the mining infrastructure in place, almost ready to go. New development and mining will be conducted via extension to the existing ramp (a much simpler and cost effective method compared to shaft haulage). The geology and metallurgy are known so no surprises there (see Rubicon's Phoenix deposit nearby for problems that can occur when you don't understand the controls over a gold deposit). The grade at around 10 grams per tonne is good (Casa Berardi, Seabee and Timmins = ~3-5gpt, Island Gold & Lamaque = ~10gpt, Macassa = ~20gpt).

The management has proper experience (including exploration in the same camp) and prior success (projects that were taken from discovery to sale including Fronteer Gold and Terrane Metals). These are professionals not promoters. They own 5% of the company which is decent. "Strategic" investors like Goldcorp, Anglogold Ashanti and Rob McEwen (former CEO Goldcorp) own another ~15%. That's very good.

The company doesn't have any debt, it's got a relatively small number of options and no warrants (so the share overhang isn't massive), and the share structure while a bit bloated at 200 million shares isn't considered blown out.

With the upgraded resource including infill drilling and satellite areas scheduled for release before end of 2017, we might be tempted to conclude that upward price movement is imminent. Alas, there is just one thing that isn't "pure" here, and until it is, the shares are probably not going to reflect true value.

What possibly could require further clarity? The plan. Development and production path haven't been made fully clear just yet other than assurances that once a decision is made, production can be fast-tracked. So there is in fact one matter of purity that isn't resolved for now. When it happens, and we're talking months not years, expect to see the share price reflect the nature of the asset.

Post-script: In early 2018, Pure Gold has finally put a timeline on its mine decision, stating that the Definite Feasibility Study will be completed before the end of the year and the go-ahead decision for startup will be made then.

Disclaimer: This is not investment advice, just an opinion. Consult your own expert.

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