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11/24/17

Regarding Novo Resources (a mail to friend)

Before anything, I want to make it clear that I'm still neutral on this trade/investment/story/call it what you will. However, in light of today's news and move in Novo Resources (NVO.v) in which this segment...
Over a three-week period, FORACO International SA experimented with various drill bit diameter sizes, drilling dry and wet, various sampling techniques, and a mix of sample collection tooling. Upon careful review of sample consistency, integrity and recovery, Novo has decided it is uncomfortable with the product and its use as bulk sample material for grade estimation. While disappointing, Novo is reviewing other potential options for collecting bulk samples from drilling. As discussed above, Novo is currently putting emphasis on collection of bulk samples from trenches.
...seems to have spooked the market (in my view, rather unjustly) I'm going to share a private mail sent three days ago to a geologist pal who is long the stock because what concerns me most of all isn't the geology, the gold or even the reputations now being staked on success or failure, it's the stock price. Sounds simple? Well yes it is, but it's also where I see the greatest weakness in the package known as NVO and today's action goes some way to back up my thoughts of earlier this week (that have been percolating for a while, I finally got round to writing the mail).

The mail has been edited slightly to keep it on topic (it was a mail to a pal, after all), but the message remains 100% intact. And point 4 is the most relevant one.

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We've had the discovery price blast phase and, for its own sweet reasons, the market has decided to price NVO where it is today. Let's call it between $6 and $8 for argument's sake, normal SD (standard deviation) moves shouldn't worry us. My question now is what will truly move the stock.

To the downside, that's reasonably obvious; Quinton Hennigh's (QH) theory (or theories) fall apart, Pilbara/Purdy's "fails to unlock", the area stays as what it has been for decades as a place to run Jeeps strapped with metal detectors on their undersides in order to look for cool nuggets. FWIW I think catastrophic downside is unlikely, but that doesn't rule it out.

So to the upside, the big Q.

1. Let's recognize first that there's a lot of assumed discovery already baked in (for more details, see mkt cap of company with no resource, scant drilling and results to date but with one helluva good live show with a jackhammer).

2. As far as this non-geol can make out, the geological model proposed by QH is logical, sound and so far at least, empirical evidence backs up the claims. All good. I also agree 100% that QH is honest, straight, not trying to run any moves on anybody. Zero issues here.

3. There are other geological models proposed to explain what QH has found. I'm not going to pretend expertise and I'm sure you've mulled them all over already. In general they're either less or much less optimistic than QH's.

4. The issue: how to prove QH is right. And it's here where I have my major issue with NVO as an investment today because for the life of me, I don't know how anyone can prove what's there under the sand without digging it all up first. We've already seen drill assays are going to be a non-starter to get to an accurate resource because of quite literally the nugget effect (x100). We're about to get results from one small area and they'll be talked up/down by both sides of the argument no matter what they contain, they will not provide any sort of resolution. So, Large Scale Bulk sampling? Yup, take 500kg from here there there and here. Process it. Then tell me all the areas between the samples are the same. Okay. Time for that? Expense? F___ dude, suddenly you're just mining!

5. Now I know you like the play geologically. All good, but where's the investment? Honestly, I see this stock trading where it is for years (or diluted as new paper becomes treasury) because it simply doesn't have any way of proving anything. It's ultimately risk management and the de-risking of the NVO equity is going to be very difficult.

Bottom line: I have no issue with the geological arguments, no matter which side is eventually proven right. But the key word is "eventually", I see years of price inertia as the most probable near, medium and long-term future for NVO.