Fri Mar 12, 2021

Tracker: Discovery Harbour nails exceptional win-win

deal with Newcrest on property nobody knew it owned
Publisher: Kaiser Research Online
Author: Copyright 2021 John A. Kaiser

Discovery Harbour Resources Corp (DHR-V: $0.060)

Tracker - March 12, 2021: Discovery Harbour nails exceptional

win-win deal with Newcrest on property nobody knew it owned

Discovery Harbour
Resources Corp made a
surprise announcement
on March 10, 2021 about a
strong farmout agreement on a
Nevada property called
Fortuity 89 that nobody knew
DHR owned. Discovery
Harbour was assigned a
Bottom-Fish Spec Value rating
on December 18, 2020 based on optimism that the 100% owned
Caldera project in Nevada's Walker Lane would finally get a permit
from the Forest Service that will allow it to start testing the deeper
potential of this low sulphidation epithermal system in the summer of
2021. SVR Overview Tracker January 15, 2021 explains the
background of this play and the headaches the junior experienced
last year. The headache was aggravated on January 20, 2021 when
the incoming Biden administration issued Order No.
3395 suspending all decision making authority of agencies operating
under the Department of Interior for 60 days. This affected the
permitting activities of agencies like US Forest Service in whose
jurisdiction the Caldera project sits. The order ends on March 20,
2021 unless extended, though, given how slowly permitting
continued to proceed during the Trump administration, it is not clear
what the Democrats were worried about. CEO Mark Fields is
optimistic that the order will not be extended and that a drill permit
will be in hand in time for drilling to start in July when the raptor
nesting season is over.
The 3,400 hectare Fortuity 89 property is a 10 km by 5 km north-
south oriented claim block located about 5 km west of the 3,000
hectare Caldera project. Except for a small outcropping area it is
covered by basin gravels and falls within the jurisdiction of the BLM
rather than the USFS. There are no trees, old workings or rocky cliff
nesting places for raptors. And the project is south of the sage
grouse habitat range. Discovery Harbour generated this prospect by
investigating the area surrounding the Caldera project which sits
within a mountain range. The Caldera deal with Genesis included a
small claim covering the outcrop out on the flats. In 2017 Discovery
Harbour did some sampling and prospecting work at Caldera and the
team also visited the Fortuity 89 claim. Kennecott drilled a series of
shallow vertical RC holes into the outcropping area in 1986 which
yielded only anomalous 20-40 ppb values (most were 200-300 ft,
one 500 ft). Kennecott only assayed for gold and silver, no pathfinder
elements. Larry Buchanan's epithermal model was only published in
1981 and alteration studies were not yet used in exploration to the
extent they are today. The geochemistry work Discovery Harbour did
at Fortuity 89 indicated that the outcropping surface represented the
very top of an epithermal system. Since the Caldera project already
has numerous zones of gold mineralization interpreted be at a level
above the boiling zone where much higher grade bonanza veins
would have formed, Discovery Harbour did not do any further work.
Newcrest Mining, meanwhile, had done its own regional study of the
Walker Lane which included remote sensing studies that caused it to
home in on the Fortuity 89 target. In 2020 Newcrest approached
Discovery Harbour about a possible deal on Caldera, but DHR had
already financed to drill it and wasn't open to a farmout. As part of
the confidentiality agreement the discussion shifted toward Fortuity
89 which was only a small claim. Newcrest and DHR worked out the
terms of a farmout agreement and collaborated to expand the
package to its current 3,400 hectare size through staking. The
agreement was announced on March and it kicked off a trading
storm that saw the stock jump from $0.045 to trade about 35 million
shares in the $0.06-$0.09 range. In July 2020 DHR had done a $3
million private placement of 54,545,454 units at $0.055 with a full 3
year warrant at $0.10. Pallisades Goldcorp, which has become
notorious as a clip and flipper, took down a $500,000 chunk. But
DHR crashed back to the PP price before it came free trading when
it became apparent that a drill permit was not happening. When I
wrote up the SVR Overview Tracker in January I warned that drilling
was now not happening before July, and there was a big private
placement overhang still to be digested. The heavy volume on March
10 and half that on March 11 will have allowed much of the PP paper
to rotate into new hands which are likely strong ones betting on the
outcome of the summer drilling program at Caldera.

The Newcrest deal involves a firm (USD figures) $1.5 million

exploration commitment in year 1, after which Newcrest can elect to
spend $10 million by the end of year 3 to earn 51% (phase 1). It
must pay DHR $250,000 if it proceeds to Phase 1. Newcrest can
then elect to earn 65% by spending another $20 million by the end of
year 5 (phase 2). That would be $31.5 million spent over 5 years. It
then has the option to increase to 75% by delivering a positive 43-
101 PEA with a minimum 1 million gold ounces by the end of year 7,
though it can extend this by one year with a $500,000 payment to
DHR. Newcrest believes a completely preserved low sulphidation
epithermal system is present at Fortuity 89. These are structurally
controlled systems which won't be any deeper than 1,000 m. If it is
gold and possibly silver enriched LSE deposit, Newcrest will have
generated more than enough information to support a PEA (30%-
35% uncertainty) with the $31.5 million it took to vest for 65% within
5 years. Delivering a PEA vests Newcrest for 75%, but it also
triggers a requirement to purchase DHR's remaining 25% at a fair
value based upon "assumptions using standard industry valuation
methods" which presumably involves the discounted cash flow model
used in 43-101 economic studies. But if Newcrest vests for 65% and
declines to go for 75%, the ownership flips to 51% DHR and 49%
Newcrest. This is a strong win-win agreement that respects the
needs of both major and junior; Newcrest and Discovery Harbour
deserve congratulations for coming up with this deal.

The deal also gives Discovery Harbour a 2% NSR on that portion of

Fortuity 89 not covered by an existing 2% NSR that covered the
original claim and had a 1 mile area of influence. Newcrest can
reduce that NSR to 0.5% through a fair value payment upon vesting
for 75%. The other 2% is split between Genesis Gold and another
party. Genesis (Don Merrick and John Zimmerman) is the vendor of
the Caldera project and recently sold its Nevada royalty portfolio to
Metalla for USD $4.1 million in cash and stock. Metalla now not only
holds a 1% NSR on the Caldera project, but also a 1% NSR on what
will likely be the guts of the Fortuity 89 project.
Discovery Harbour may now have two major drill programs underway
this summer. Newcrest still has to do some geochemistry, though
since gravel covers most of the property, that will not take long. It will
also do geophysical surveys to try and see controlling structures
through the gravel. The property is under BLM jurisdiction and
because it is a big expanse of nothingness securing drill permits
should be quick. Discovery Harbour is optimistic that when Order No.
3395 is lifted it will not be long before its Caldera permit is granted.
Because it did not do raptor nest survey last year it will have to wait
until July to start drilling, but getting rid of the permitting uncertainty
will give the market a boost.
DHR has established 8 target areas within Caldera of which it has
selected 5 (Barak, Adara, Gemina, Darius and Faustus) for drilling at
10 drill sites (A-J in the diagram above). Caldera has an extensive
exploration history that includes 142 RC holes (15,072 m) which
intersected high grade gold mineralization that never hung together
sufficiently to yield a resource estimate. Although high grade
bonanza zones are not necessarily present, it is possible that they
are present at depth if there is lots of gold in stringer like zones near
the surface underneath the silica cap that forms as part of a hot
spring. Mark Fields has pointed out that copper, zinc and lead values
are absent in soil samples, which he regards as evidence that the
boiling zone for these gold zones is preserved at depth. The Caldera
project is an intriguing play because these gold zones have never
been drilled in the 200-800 m depth range where thicker, rich
bonanza veins that lend themselves to underground mining would
have developed. Discovery Harbour plans to drill targets to a vertical
depth range of 300-500 m in search of the boiling zone.

As of December 31, 2020 Discovery Harbour had about $2 million

working capital and 94.5 million shares issued, of which insiders,
including Richard Gilliam (also a major shareholder in KRO Bottom-
Fish Spec Value rated Favorite Endurance Gold Corp) own about
32%. The biggest handicap is the existence of 54,545,454 warrants
at $0.10 expiring in July 2023 that are held by 117 placees. The
Fortuity 89 farmout news has helped move much of the original long
position into new hands. For the placees to profit they will need to
exercise those warrants which likely will not happen until the stock is
above $0.20. That is not likely to happen until drilling is well
underway and assays are coming back in August, so the big
discovery speculation window will be September-October. By then
Newcrest, which must spend USD $1.5 million within 12 months,
may have its own drilling underway at Fortuity 89. Fully diluted DHR
is at 165.8 million shares which means the 100% owned Caldera
project at $0.06 has an implied value of only $10 million. The main
milestone awaited is confirmation that a drill permit has been
received.