New Gold (NGD) announced the long-anticipated results of a feasibility study on its Blackwater project last week. As fellow author Investment Doctor already noted, the report included a combination of good and bad news for investors.

• Good news: Production costs will be extremely low at $670/oz.
• Bad news: Initial capex of $1.9B is prohibitive in the current gold price environment.

It can be safely assumed that the Blackwater project will be shelved for now to be reviewed when gold prices rise again.

In the mean time New Gold has emphasized the completion of the updated feasibility study for another project called the Rainy River project which is anticipated for early 2014.

The original study performed by Rainy River Resources before it was taken over by New Gold showed initial capex requirements of $713M and an NPV (5%) of $931M. If these metrics can be validated or even improved upon this project is likely to move up in priority and might well become New Gold's next mine instead of the Blackwater project.

This development has opened a highly speculative back door into New Gold. The large land holding of the Rainy River project contains one block called the "Burns Block" which is situated smack on strike and immediately adjacent to the deposit as it has been explored to date.

The Burns Block is controlled by a micro-cap exploration company called Bayfield Ventures (OTCPK:BYVVF) who have drilled and found substantial mineralisation on this piece of land suggesting that New Gold's deposit continues onto the Burns Block. As if to prove a point, Bayfield Ventures has been pumping out news releases with drill results from this piece of land lately.

The map below illustrates the situation.

(Click to enlarge)

With the Rainy River project moving up in priority for New Gold the Burns Block is a prickle that may well develop into a thorn when it comes to optimizing a mine plan.

We would therefore not be surprised if New Gold will take an increased interest in Bayfield Ventures in order to consolidate the property in the not too distant future. New Gold should have a good indication on the economics of the Rainy River project by now. If economics are adding up and the Rainy River project is likely to proceed to mine development then New Gold might decide to act sooner rather than later and make an effort to get rid of what is still a prickle at the moment.

Bayfield Ventures has a market capitalization of $20M at the time of writing. At the end of July the company reported just over $1M in cash which is less than a year's worth of cash burn at the current rate. The company will presumably go to the market in the not-too-distant future in order to sell equity and raise some capital.

This would be a good point in time for New Gold to step up and acquire a stake in Bayfield Mining; or make an outright takeover bid. In both cases Bayfield investors stand to make some substantial gains compared to current share price levels. We would envisage New Gold retaining the Rainy River properties and spinning out Bayfield's other assets at Red Lake (also in Ontario) into a new entity.

(Click to enlarge)

BYVVF data by YCharts

The stakes of buying shares in Bayfield Ventures are high of course, as is often the case with micro-cap mining junior explorers. New Gold might find that it does not need the Burns Block in order to show an economic project. Or New Gold might simply decide to wait and see if Bayfield Ventures can find sufficient capital elsewhere; and pick Bayfield up on the cheap if it can't.

Bayfield's share price has been holding up remarkably well recently and has appreciated substantially since New Gold's takeover of Rainy River around mid-year. The comparative strength of Bayfield's share price is presumably based on takeover speculation. If Mr. Market abandons the idea of a New Gold takeover then Bayfield's share price is set to drop substantially.

New Gold will probably have to show its cards when finalizing the updated feasibility study for the Rainy River project in the first half of 2014. Bayfield investors should find out within this time frame if they get to cash in on their speculative investment.

New Gold investors will be looking forward to the results, and a decision on where the next mine will be built.