Maritime Resources (MAE) – Gold Explorer Targets 100,000oz pa

Maritime Resources Corp.
  • TSX-V: MAE
  • Shares Outstanding: 236M
  • Share price C$0.16 (18.09.2020)
  • Market Cap: C$39M

Interview with Garett Macdonald, CEO of Maritime Resources (TSX-V: MAE)

Maritime Resources is a gold explorer with gold exploration assets in Newfoundland and Labrador, Canada. This includes the Green Bay project, Whisker Valley and Orion. Maritime Resources claims that these gold properties are strategically located on the Baie Verte and Springdale Peninsulas, an allegedly ‘prolific’ gold/base metals mining district. The area does appear to exhibit plenty of geological potential. It hosts as many as 15 past-producing gold and base metal mines. 2 additional mines are currently producing, with up to 371 gold and base metals prospects.

Maritime Resources also makes the claim that this region is underexplored. Maritime Resources doesn’t have a large gold resource right now, but it is aiming to build one at an accelerated pace via systematic exploration and various bankable studies. Having raised $8.7M in a bought deal private placement in August, Maritime Resources is a gold explorer with sufficient cash to push through a feasibility study for the ‘high-grade’ gold asset, Hammerdown. The February 2019 PEA threw up some nice numbers: a LoM AISC of $939/oz and an average 57,900oz gold pa over the 9-year LoM. Expect to see a PFS further clarify this potential in the near future as Maritime Resources targets 100,000oz gold per year.

We Discuss:

  1. 2:09 – Company Overview
  2. 2:49 – Business Plan & Strategy
  3. 4:43 – The Project: Acquisition, Data, & Plans
  4. 7:06 – Confidence for Success: Team Experience, Infrastructure, & Reliance on Price
  5. 11:44 – Where is the Value Proposition for Shareholders?
  6. 15:35 – Cash Position & Plans for Raises
  7. 17:22 – PFS & Economics: What Numbers are They Expecting?
  8. 20:30 – Mitigating Costs: Management Remuneration and Shareholding
  9. 23:23 – Differentiation: Why Choose Maritime Resources?
  10. 24:50 – Emulating Success: Timeline for Deliverables

CLICK HERE to watch the full interview.

Matthew Gordon: Let’s get that 1-minute overview of the business and I’ll pick it up from there.

Garrett Macdonald: Maritime resources – we’re listed on the TSX-V. Our focus is Gold, and we have a singular focus ion Newfoundland, Labrador. We have the Hammerdown Gold project. That’s our key asset. It’s a former high-grade producing mine, previously owned by Richmont for 4-years in the early 2000s. We’re looking to restart that mine and we have a lot of potential around the mine, as well as the new projects called Whisker Valley just located north of Hammerdown.

Matthew Gordon: Perhaps we can talk about your business plan and the business model. What is it that you’re trying to be?

Garrett Macdonald: The overall business plan for the company is to get into production and to explore for new resources. About 18-months ago, the new team came into Maritime, backed by Dundee Goodman, Merchant Partners, Sprott and 1832 Asset Management. Those are our 3 main shareholders. The idea was that were hopefully going to be able to bring the Hammerdown mine back into production during this high Gold price cycle that we’re in, using existing facilities that are in the area. There’s a process plant, a nugget pond metallurgical facility that we might be able to use. It is the former plant that actually processed all the ore from Hammerdown when it was running before and it’s sitting there? We’re looking at a low-capital, high-grade, high-margin start-up, roughly around 70,000oz pa from a high-grade deposit that was already mined once before, so it’s a well-known entity. It’s a very clean milling ore: high-grade narrow veins. That’s the business plan to get started.

Ultimately, we would like to get up to 100,000oz pa or more. We see that potential in Newfoundland, but to start with we’re looking at that 70,000oz at Hammerdown.

Matthew Gordon: What gave you the confidence that you could go back in here and do that? What data have you inherited? How did you actually come across this project?

Garrett Macdonald: Maritime is on this asset for over 10-years and in the last probably 2-3-years there’s been a lot more drilling, a lot more interest in the project. When we came in about 1.5-years ago, we started with an infill program update at the resource, we looked at a new mine plan, we came up with the new PEA study in February with some really attractive economics: USD$1,375Gold, we were looking at a USD$111M NPV. 50% IRR after-tax. As a Scoping Study, it looked good, it gave us the confidence that we could move on to the next step. We’re doing some more work now, more risk, more technical work.  Drilling came up with a new resource and my plan again, just to tighten things up even further, as we go into Feasibility.

What we noticed with Richemont mining here was they were mining with a cut-off grade of around 8-9g cut-off grade. In this Gold price, their average grade of the time was around 16g, so very high-grade mine. Richmond was really not that well known for duration, they were well known for underground mining which they were very good at, and we found putting through the core and the historic drilling is that they didn’t sample outside of the main veins that they were mining. We started looking at it. We started to see grades in the 3-4. This would not be considered ore to them back then, but for us in this price environment, it certainly is.

We saw the potential to start with an open pit versus underground railway using the facilities that are in the area to keep the capital cost down and basically that gives us a starter project to work from and we can use the cashflow from that to then bootstrap ourselves up into 100,000oz.

Matthew Gordon: What was the history there, where have you guys come in from?

Garrett Macdonald: I’m a mining engineer. My background is I was with GDs energy and Mining as a VP of project development. The main work that I did was focused Dalradian in Northern Ireland. I led the Feasibility Study on that one. That’s really what got me interested in this one because we did hear about the project in Newfoundland that looked a lot like Dalradian, at least geologically. It is a smaller resource at 1Moz compared to the 5-6Moz they have. But when I went to check it out, it looked very similar: high-grade narrow veins and wide open for exploration as well.

I came in about 1.5-years ago. We started building up the team. We announced a new vice president for sustainability from Kirkland Lake Gold -Perry Blanchard. We also brought on an advisor to the company as well as the CEO of Dalradian currently, Eric Tremblay. We started to notice there was a lot of potential here that needed to be fleshed out. We really spent the last year and a half just doing the work, getting the resource tightened up through the drilling, technical programs, environmental programs, community relations getting the whole package together to be ready to go to that next step for Feasibility

Matthew Gordon: What level of confidence do you have about this bull market that were in at the moment?

Garrett Macdonald: We had a really good result at USD$1,375. Anything above that is gravy as far as I’m concerned. We’re not relying on a higher Gold price to make the project work. At spot price it’s a USD$300M project, of course rising tides lift all boats, but we’re focused on developing a high-quality project. We have high grades: the Hammerdown open-pit measured and indicated is over 9g – that’s a pretty rare thing. We have an average life of mine grade through the PEA study of nearly 8g through the mill, so it is a high-grade resource. We think we can bolt on a low-capital cost solution to give us that starter project that pays back the capital in maybe 1-2-years.

Matthew Gordon: Have you done anything like this before in terms of a low-CAPEX start-up-type project? Where are you getting the confidence from to think that you can deliver a low-CAPEX solution?

Garrett Macdonald: The confidence comes from the jurisdiction that we’re in we in the Beaver Mining District of Newfoundland. It’s a mining area so we’re not in remote situation by any chance. We have fantastic local labour available. Well-skilled individuals. We have services suppliers nearby, road access, power lines. We are only 1km away from power. The whole business plan for Hammerdown is take an existing high-grade resources, a Brownfield site with veins exposed at surface, to send these veins to there are sorting plant on site, move the dilution as best we can and truck the order to a mill that’s already there with the tailings pond that’s already built and permitted. That’s why I think we can keep the capital costs low.

Matthew Gordon: This your pre-concentration process, so who owns the mill?

Garrett Macdonald: The mill right now is owned by Rambler Metals and Mining; they are a UK Copper company. We came up with an agreement with them after our PEA in March that basically gives us 1 year to evaluate the plant for use for Hammerdown. We’re just still doing some test work on that to go and negotiate a deal that will allow the ore from Hammerdown to go through the plant and nugget pond.

Matthew Gordon: You produce cash which you’re then going to plough back into the ground. Is that right?

Garrett Macdonald: That’s right. 

Matthew Gordon: Where does the value come from for shareholders?

Garrett Macdonald: Value for shareholders – this thing will spin off significant cashflow every year. We think that the value certainly would come from the additional deposits we have in the area. We have 2-3 resource potential deposits that should be developed as we get more drilling into them. This area hasn’t been explored well over the years. Last week we announced the results from our new projects called Whisker Valley. We’re seeing 1oz material in veins in bedrock with significant Copper and Silver credits as well, so we think there’s potential to grow our resources in this region to get to that 100,000oz pa production profile or more. The 1-year payback, roughly at these prices I think is a pretty compelling investment considering we are now sitting at a USD$250M         market cap with USD10M in cash.

Matthew Gordon: Someone takes you out or the share price goes up? These are things which you know until the beginning of this year didn’t really matter. Why do you expect it to now?

Garrett Macdonald: If you look at our price to NAV ratio, we are on the very end of the low side and that’s the upside for us. As we move into a producing company to get up to that 0.5, 0.6 or even closer to 1 ratio, where we should be as a producer, that’s the rerating that investors should look for at the moment. We’re on the very low side of where we should be.

Matthew Gordon: Where where’s the real growth? Where’s the real excitement come from? Where’s the sex and the sizzle?

Garrett Macdonald: 2 things from our exploration potential – Richemont at the time when they were there looking at Hammerdown, they were mining these veins are trying to keep their mill going in a USD$300 p/oz Gold environment. They stepped away from it in 2004 and left it there. With Gold prices where they are now, we think there’s potential all around Hammerdown. It’s a pure shadow of the headframe story. There are deposits that we have on site that haven’t been fully explored, limited exploration below 250m anywhere on our project so we think there is potential of depth as well. We’re working on that. Now; we’ve got two diamond drills turning at site right now, so we’ll be drilling all the rest of the year at Hammerdown with 2 drills searching for the other parts of Hammerdown look-alike deposits. It is very structurally controlled: dozens of veins have shown up at the connection of several different faults. We think that that could repeat again along strike and also at depth. That’s where one of our major upsides will be if we’re able to find a new deposit at Hammerdown.

The second one is this new riskier-value project, we’re finding high-grade veins the look like Hammerdown. It’s early days yet, but you know so far so well. We’re finding 1oz veins in bedrock – that’s exciting but more work to do.

Matthew Gordon: You’ve raised about USD$12M since May this year. How much cash have you got today?

Garrett Macdonald: We’re sitting right now at around USD$10M in working capital. That’ll take us through probably until next year this time. We’re really well-financed at the moment. Our main focus is exploration, Feasibility and permitting. I look for those 3 things to happen over the next 12-months.

Matthew Gordon: Why move so slowly? Why 2 drill bits? Why not more?

Garrett Macdonald: I don’t think we’re moving slowly at all. We just added a third drill at Whisker Valley this week, so we have 3 drills running. They’re going to be drilling all fall, up until the end of the year. We’re working already on our Feasibility Study and we’ve already submitted our application for project permitting. Project registration was submitted this summer so over the next 12-months these are the catalysts that we see for the company. Number 1 -project permitting that we hope to receive by this time next year. Number 2 -Feasibility Study which is important as that’s the key you need for project financing. When we look to spring of next year, we’ll be looking at ways to raise the money to build the project.

Matthew Gordon: What other targets are you going for?

Garrett Macdonald: For the Feasibility Study, and you are right -the PEA Studies are your snapshot in time +/- 30% It’s just a Scoping Study to get you comfortable enough to move to the next step and spend some more money to derisk the asset even more. One of the big things that we did this summer to support that was an infill, grade control program at Hammerdown. We investigated over 10,000m of drilling, very close, basically getting our drilled spacing down to 12m or less in some cases.

In my experience as well – I was mining engineer with Placer Dome and I am very used to narrow vein mining, and the more data you have the better. To support a good quality resource to go into Feasibilities we invested 10,000 of infill and grade control work in the project so that will be the basis for an updated resource later this year. That forms the basis then for our mine plan and the capital estimation that’ll come in the first half of next year.

The same goes for metallurgical test work; more test work on the ore sorting. People sometimes have questions about preconcentration and the effectiveness of ore sorting. I can tell you that you need ore-sorting to make this project work. It’s a nice to have so if you remove ore sorting from the PEA Study completely and you just ship mined ore, it’s still a very attractive project. We want to make sure that we don’t rely on something brand-new.

The other thing I can say about sorting is that it works really well on the right deposit and Hammerdown is like that sorting on density by looking with x-rays for pyrite very effective at doing the same test program that we did on Dalradian and had very similar results. That seems to work really well. The other main thing on the Feasibility that we want to look at, of course, is capital costs. We’re talking all the time with local contractors, pricing in door designs. We’re doing all the work now to get ready for that Feasibility with good quality information. The best thing you can do right now is de-risk, focus on the detail. We’re not looking to sell the company. We’re focused on just de-risking the asset, and if something happens and a bid comes in, we will look at it, but I honestly think that’s probably the right thing to do is just stick to your knitting, get the details done and dialled in so you’re ready either to go it alone or do something else if the opportunity is the right one.

Matthew Gordon: There’s a lot of Senior Management involved, how many are paid and how many are actually doing the work?

Garrett Macdonald: On the on the board we have 3 other directors other than me. John Hayes, Peter Mercer and Mark Ashcroft, so we have a small board fee for them annually. On the management team we have 2 advisors as well: Jeremy and Eric. We have a CFO, Corporate secretary and a new VP of environment and sustainability. Tania is our IR manager. We just added Perry Blanchard. He’s our VP of environment and sustainability. We think that’s a key hire for us. Perry will be in charge of all thing’s health and safety, all things community, government relations, permitting, environment and sustainability. He’s a local resident of Kings Point. He’s literally 5 minutes away from the site. He was formerly the manager of health and safety and environment at Kirkland Lake Gold.

Matthew Gordon: Why is it that so important now? Why are you so concerned about ESG?

Garrett Macdonald: I think you have to be. If you think you’re going to build this project and we do, then I don’t think you want to wait. The sooner we have someone in place for that the better. That’s my experience. It’s never too early. We already have a very good relationship with the local communities. I want to make sure that that is strengthened further. Perry is a great hire; he’s local, he knows the people, he knows the area. If you’re going into a production decision here, you have to have that position place. He’s actually the one of the first executives we’ve hired for the project, that’s how important we feel about ESG.

Matthew Gordon: How do you continue to be remunerated yourself? Are you buying shares in the open market, what are the options you’ve got?

Garrett Macdonald: That information is available on SEDAR. We don’t have a bonus plan. We have stock options; all management and board participated in the last 3 finances. I own 1.3M shares myself. If we are asking investors for their money, we want to put ours in too. We haven’t had any raises; it’s been pretty steady since we joined.

Matthew Gordon: How do you differentiate? Why you and not the 200 other companies saying the same thing all around the world?

Garrett Macdonald: I hear that too. I think the differentiating factors for us are several things: 1 is grade. We have a very high-grade deposit. It was mined once before. We have a process plant that we could use nearby. We are in a province that actually wants mining, which is really important. Our great local support from our communities and we have great support from our major shareholders, Sprott and 1832 are well-known investors. I think if you wrap it all up together, adding in the exploration potential that we have, now that we’re well-financed and able to run with 3 drills, push ahead through Feasibility and permitting in a province that wants mining investment. It’s not 1 thing, it’s a collection of all of those, and starter project that looks really attractive.

Matthew Gordon: And you will be in production soon

Garrett Macdonald: Correct. 2022.

Matthew Gordon: What are the next big moments we should be looking for?

Garrett Macdonald: We’ll have drill results coming out throughout the year, with 3 drills we will probably have results come in every couple of weeks for the next several months. We have the permitting decision on the project and the province, so that could be another catalyst. I think we’ll start getting news out on some more results on our test work that supports the Feasibility.

It’s definitely shifting more from drilling for Feasibility to drilling for exploration discovery right now. That’s the recent change in our focus from the drill point of view. We’re really branching out and testing all of our targets that we’ve been working on for the past 2-years.

Matthew Gordon: I know you are trying to compare yourself to what’s been happening at Pure Gold, in what sort of timeframe?

Garrett Macdonald: If we can get Hammerdown up and running in 2-years, within the next 5 I’d like to be at 100,00oz or more, which would be a Pure Gold-type company.  It’s funny – Darren and I used to work together at Placer Dome, so we’d like to emulate the success they have had, which has been really great.

Newfoundland is a special place. We have so much potential for new discovery there. It’s been an area that’s been really well-prospected but not well explored so we’re definitely interested in exploring, adding to what we have, and we can get Hammerdown off the ground then I think we’ll have success to get over 100,000pa.

Matthew Gordon: What land package is sitting there at the moment? Is there scope for more?

Garrett Macdonald: It is huge. We have over 300 square km of land. We have lots of land that we need covering Hammerdown and Whisker Valley so everything we need for our facilities, for our site plan for the mine and a huge area to explore.

Matthew Gordon: Let’s stay in touch. We’ll speak to you soon.

Garrett Macdonald:  Thanks very much.

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DRDGOLD (DRD) – Super High Margin Gold Tailings

DRD Resources Ltd.
  • Shares Outstanding: 86.46M
  • Share price $12.17 (29.09.2020)
  • Market Cap: $1.052B

Interview with Niël Pretorius, CEO of DRDGOLD Ltd. (NYSE:DRD)

DRDGOLD Ltd. engages in the business of retreatment of surface gold. It operates through the following segments: Ergo, FWGR, and Other Reconciling Items. The Ergo segment treats slime dams and sand dumps to the south of Johannesburg’s central business district as well as the East and Central Rand goldfields. The FWGR segment focuses on the slime dams in the West Rand goldfields. The company was founded on February 16, 1895, and is headquartered in Rosebank, South Africa.

The company pioneered mining methods in South Africa. Pretorius states the company has now come full-circle and is focusing exclusively on the recycling and re-mining of tailings, both around the Johannesburg area and now, more recently, the Carletonville area. DRDGOLD attempts to provide a unique combination of processing extremely high volumes of material and nano-extraction methods.

We Discuss:

  1. 1:11 – Situation in South Africa
  2. 3:13 – Company Overview
  3. 4:16 – Ergo Project Progress Update
  4. 6:45 – Processing Tailings: Efficiency & Technology
  5. 20:19 – Problems for Growth: Mitigating Costs & Grade
  6. 24:15 – Pipeline of Projects: Discussing Deals, Partnerships & Terms
  7. 36:22 – Differentiation and Uniqueness: ESG Component
  8. 38:30 – Share Trading & Market Views on Liquidit

CLICK HERE to watch the full interview.

Matthew Gordon: Give us a 1-minute overview of the business and I’ll pick it up from there?

Niel Pretorius: DRD Gold has been around for as long as the Gold industry has been around South Africa. It started out from the 1890s. it has evolved completely into surface reclamation. We recycle Gold tailings in and around the Johannesburg area. Recently also in the more Witwatersrand part of production area of South Africa. Our company is owned 51% by Sibanye Stillwater who acquired some additional assets. Then for the rest, it’s held through the listing in Johannesburg and also on the New York Stock Exchange.

Matthew Gordon: Can you give us an update on where you are at with that project?

Niel Pretorius: Ergo is the mothership of the organisation. It operates in 2 prongs: one is of a low volume and then the other one is a much larger low-grade plot. It produces material or recycles material from 7 sites, give or take. This is slimes and slag that is pumped to the different fonts, where it gets recycled and then deposited onto the large tailing’s deposition. That deposition facility is to be increased in size in order to extend the life of Ergo and to maintain its current production run rate over time. It’s a high-volume set up with an extraction efficiency recovery of 200 parts per billion of the material that gets put through this pump. Our waste operations, that’s the one that we acquired from Sibanye Stillwater. Much lower volume – about 500,000 tons per day. That is the first phase, over the next 3 years that’s going to be upscaled to also north of 1 tons a month. That requires an additional tailings deposition facility and then it too will have a life of 18, potentially 23 years. The tailings facility that we’re building is large enough for a regional consolidation of tailings, and that’s really for the next generation of management to at least have something that was built in such a way that it can play a similar role to Ergo where it is big enough for the consolidation beyond the current resource, or what the resources were 10 years ago when the business started.

Matthew Gordon: Can you explain in a little more detail about how your process works and perhaps give us more of a clue about what’s unique about you?

Niel Pretorius:  I don’t think anybody else moves more tons per employee than we do. The features that differentiate our business in the mining environment are mechanisation, technology, automation. The setup of this plant, being a macro volume environment with almost a nano extraction efficiency requirement meaning that we need to set up this thing in such a way that it needs very little human intervention. Our approach in terms of technology is that the human element is still the dominant part of this human and machine interface. We place smart technology at the disposal of smart individuals. That’s the whole model, but it’s extensively automated. Its technology driven. We collect data from 40,000 different data collection points at the Ergo plant. This information is analysed on an ongoing basis. You could literally follow every key dynamic that can impact the efficiency of this plant on a 24/7 basis that gets analysed on a day to day basis. That’s the sort of thing that enables one to maintain production even when you have these interruptions or disruptions associated with the pandemic. Because it’s not a labour-intensive environment, social distancing is our reality; people do not work in close proximity. A lot of the stuff that happens is done with remote-controlled automatic devices, etc, but that’s helped us a lot. That’s one of the reasons why Covid for us hasn’t been that disruptive. We did interrupt operations for a 10-day period when the lockdown started in South Africa, but that was really to make absolutely sure that the changes in behaviour required to enforce proper social distancing and ensure that everybody’s been adequately counselled in terms of using sanitizer, etc, and also to not have to use public transport. We consider that to be a major risk; for employees to have to take public transport to come to work and go back again. The commute is now all done with private transportation.

We had a 10-day disruption then we incrementally went back into the workplace. Some of the sites were up and running very quickly, in others we had to take a more systematic approach. If you were to look at our numbers, and we released those a few weeks ago, you can see the reduction in tonnage and in production, obviously, is lopsided towards the negative but which was offset and positively affected by increases in Gold prices as a consequence of global reaction to the lockdown.

In terms of financial performance, it was an incredible period for us. We’ve seen margins we’ve never seen before, and with the business that is geared for this sort of environment, that was able to overcome most of the challenges. We are very proud of how our personnel responded to the pandemic. Out of just more than 3,000 employees, we had fewer than 30 cases and nobody has passed away as a consequence of that. At the moment, with the lockdown level way down, we only have 2 positive cases that haven’t fully recovered. Key to the whole thing was the response of our personnel.

Matthew Gordon: What does that data tell you now? Has anything changed in the last year since we spoke?

Niel Pretorius: Not really, no. The data collection, or the way in which we manage information, it’s not so much improved the efficiency as enabling us to keep Ergo in a stable state. There are fewer distractions, fewer changes and fluctuations in performance. Because the way that information has been looked at you don’t really have a reporting sort of climate; the conversations taking place are analytical because you’re not looking for – are we within range? We know we are in range because that information is readily available to everybody. What the conversation typically looks like is – what are these numbers telling us? How can we get it slightly narrower? How can we make this range even tighter? What is the impact of this dynamic? Have we fully considered the impact of this dynamic? The next step for us is to go into big data analysis. At the moment, we are maintaining the relationship and interface between line of sight dynamics, 7 or 8 dynamics within the plant itself. The big data could tell us something that’s happened in one of the remote corners of the operation is finding its way and amplifying certain responses over a period of 2, 3, 4-months’ performance. That’s going to be an exciting new step for us; analysing the data and setting the plats up accordingly. If you multiply everything by 2 million, in the tiniest of changes, it could have a profound effect on the performance of the business. Having said that, those changes are small, incremental and they’re informed by analytical conversations as opposed to your typical command report-type of conversation that you have in a mining environment.

The way forward for us, because the quality of the data gives us a pretty good idea of the balance we need to maintain in terms of throughput rate –  time spent in the plant,  volumes throughput, it gives us a very good idea as to how we should balance the availability of water and where the key risks are in terms of cost. A big step for us over the foreseeable future, and we’re talking now, is dealing with the risk of quality of electricity supply and also cost uncertainty around electricity supply. Obviously, the electricity supplier could fold in Africa, then it takes the entire economy with it. That is a very real risk in the South African economy. Those things are linked, but that doesn’t mean that it cannot do something about immediate risks posed by the quality of electricity supply and the cost associated with that. We set up a hybrid arrangement with both storage as well as power generation by way of solar panels. We are setting up significant, and these are modular in design, the battery storage capacity gets charged during off-peak periods and also by the solar panels in place. On the one hand, it acts as a shield against peak power tariffs; if you charge them during off-peak and draw from those batteries during peak, that means that you avoid by and large a high tariff of peak periods of the day. They are significantly high tariffs, so you basically supply the entire project for the CAPEX on that basis. It also smooths the delivery of power; if you have panels instrumented to the peak, as we are, these are sensitive devices so the spikes, the surges and the drops in power supply, the quality of power delivery are bad for your instrumentation. If it goes through these batteries first, it means that you have a smooth delivery. It also acts as a power backup if there’s a sudden drop in power. Our arrangement with utilities is that we don’t need to reduce the power by 10%-15%, we can do that by just switching certain components on and off. The power bank will shield us against that as well.

That’s the near-term approach in terms of delivery. Because of the quality of the information, we know what the impact is going to be. We know how long we need to be around in order to justify this. We can assess value to know whether it’s worth our while, etc. Systemically, this is the way that we can look at every aspect of the business; we break down the economics of our throughput. We break it down to on a per ton basis, extraction per ton; everything we do is look at net worth.

Of course, if you look at the numbers over the last year, 1kg was the average for the year up until June, we reported record numbers. The Gold price is now stuck just north of 1M rand p/kg. Whilst the price is still hovering around 100 grand. There hasn’t been a significant impact on the cost because such a large percentage of our costs haven’t risen. You do the numbers and then you see how on a per ton basis, these margins have opened up and stayed open as a consequence of what’s been happening in the Gold price environment, but also relative to our ability to respond to the impact of COVID.

Matthew Gordon: I know that’s an ongoing process of evaluation. Is that something you’ve got an answer for now?

Niel Pretorius: Yes, we are expanding the site of our tailings centre. We need to make sure that we have sufficient capacity in tailings deposition to continue to treat the material we need to in order to maintain production.

A few years into the future, compared to where we are now, in order to maintain throughput rate, to ensure you have the right sort of mix, the right combination of material to maintain a sustainable head grade, there’s an ongoing process of opening up new recovery sites and systematic closing down of those that are finished. You go through different cycles: not all tailings dams fit the size and also through different phases of complexity. The more sites you have, the more complicated your model is and the higher your prices are. At the moment, for example, we are treating material from around 7 sites where we are recovering material from. That’s probably as complicated as it’s going to get. Over the next few years, the number of sites we will be recovering from, in accordance with the mine plan, the near-future mine plan will reduce. Instead of mining from 7 sites, we will be mining from 4 sites. They will be higher and volume but slightly lower in grade. That’s where the offset comes in: less complexity, fewer sites, which means your per ton costs drop. Then of course, because the grades slightly lower your revenue per turn would also adjust. On the whole, that pretty much gives you, I wouldn’t call it a flat line, but that’s you how you maintain sustainability – through the mix of material and the development of different sites. You do not have as many moving parts.

3 years from now, we’ll have fewer moving parts, slightly lower recovery per ton, but fewer moving parts, which lowers cost per ton.

Matthew Gordon: We talked previously about Far West. How things are going there, how the numbers seem to be good. But anything we should be aware of?

Niel Pretorius: Absolutely. DRD Gold’s project pipeline is pretty much paid out and we have sites that are going to be developed. At the Far West operation, we started out with phase 1 initially in order to get into production sooner rather than later, but phase 1 is sustainable in its own right, but you couldn’t really go beyond 12-years of production mining only with our existing infrastructure. We are keen to get into the 2nd phase, which is the upgrading of volume throughput to just north of 1M tons. They also advised a larger tailings deposition facility and that was part of what we positioned for in the transaction: early phase, lower volume, high-grade production in the longer term to get it to 18 to 23 years. The second phase is a bigger plant and bigger deposition, provided obviously, that the investment climate remains positive.

The part that I find exciting about the relationship of all the parts are the short-term planning; you need planning in the transaction, and this is now emerging as this relationship is developing. There are still a lot of assets within the Sibanye portfolio that are not core assets in terms of strategy, in terms of mining obviously is more focused on people underground, in terms of the Gold mines they have. Increasingly, we could identify some of those and bring about a larger scale consolidation of service tailings. Also, this is something that I think is definitely going to be picking up momentum is venturing into other metals, one of the largest Platinum producers and this is certainly something that at this point remains a target, is how assets which are perfectly suitable for surface processing are not given the recognition that putting it in a bespoke brand that is associated with the recycling of tailings environmental clean-up, the market premium that is attributed to doing that. It’s definitely a conversation that we would want to accelerate now that we have a little more freedom of movement.

Matthew Gordon: They’re going to look at how much money you’re making and structure a new type of deal aren’t they?

Niel Pretorius: Remember – because they’re an interested party, they have a large stake, every transaction comes to a very significant script. It has to be independently verified, etc. Sibanye is mindful of how important good governance is in maintaining the credibility of the strategy. That is governance we also closely follow. Their stake in DRD Gold is worth what the other investors say it is worth it. They don’t trade issues. It’s the rest of the market that trades the issues, and if the market gets the sense that there is a new interference or funny business, that’s going to find its way into the valuation stock. The other sections are looked at obviously, with regard to the potential value they might have, but it is very significant for what we want to do.

In terms of Platinum, I do believe that the environment is different compared to Gold. With Gold, you have exposure to the Gold price. You sell it at the spot, it goes to the metals exchange, bullion banks, etc It’s not a particularly complex trading environment. Platinum and other PGM metals, that’s a completely different scenario. They get varied relations with clients. They use off-take agreements. This is often Palladium-based, but they have different users, consumers and buyers of these metals which is far more complicated. That’s not something we have a lot of experience with. Looking at these transactions, one would take a closer look at exactly what it is that we will do in the value chain. What is it that we will produce? Is it going to be a concentrate? Is it going to be a final product? Are we going to be selling to Sibanye? Are we going to be selling to the end client etc? Along those lines, we will be able to model these transactions and they are capable of being modelled. It means that you would probably not see the same potential multiple that we saw with the Gold transaction because those were carrying a -600 million negative value in terms of rotation rate etc. It wasn’t within the context of its structured existing series of relationships or system of trading, whereas for Platinum it is completely different. There are existing arrangements, existing clients, etc. Somehow, we need to find a way of fitting into this larger process to add additional value to an existing platform that’s going to be easier to model. I think it will be quite simple to do to scrutinize those from a governance perspective, but maybe not quite as powerful in multiple dynamics, or multiple in terms of market cap.

That is my early take on it. The market might take a completely different view. They might say hey, this is now multiple commodities, diversification of risk, different economic cycles. This is actually starting to pick up a bit of momentum. Maybe there’s what’s called a growth dividend – that’s an accepted term in investment.

Matthew Gordon: How do you ensure that you can secure that line of forward-looking revenue from them?

Niel Pretorius: The first phase of the Far West was very important for exactly that reason. They are not obliged to use anything, but now I can go and do a transaction with whomever they please and we’re not the only kid on the block, there are other players as well. Delivering to the expectations that you create around Far West Gold project was very important to us: we wanted to establish credibility to deliver to the expectations. In terms of the greater value composite, I believe that the spiel on the website and how they present themselves, their key value is how mining improves lives. If you look at the social investment mantra that we developed over time, we want to enhance the quality of life for those who live in proximity to our operations. There was alignment even before there was a relationship. I see in how it presents the DRD Gold as part of its greater group, there’s a lot of focus on the ESG aspect of our operations. The fact that rehabilitation through mining is such an important part of our brand identity, there’s a consistency in values which they present so I don’t quite know how Sibanye sees us in terms of how important the economic success of the company is the main priority for them. I know that the things we do in terms of sustainability and environmental clean-up, finding solutions for the social impacts of mining. Mining in such a way that it’s increasingly energy-friendly whilst also working-wise, making sure that the impact of mining operations is contained, the environmental impact. They don’t impact on surrounding communities, etc. Those are incredibly important values for the Sibanye Group. The fact that there is now a company, a group member, that core to its strategy, that lives those values, and those values are as important as the commercial success of the business. The commercial success is more of a consequence of the very deliberate pursuit of many of those valuable components. That is an important feature of that relationship.

Matthew Gordon: Have the conversations happened already where they said, you are the one for us moving forward? Are those deals still to be negotiated?

Niel Pretorius: I’m not sure there’s anybody else who has this as core to their strategic thinking. Sustainable development as a whole feature of our strategic thinking of how it informs the deployment of resources and capital, I do not know there’s been that consistency in approach and strategy. It is embedded in the DNA of our company. It’s not to say that we have it 100% done; there are issues that still need to be fixed. We are sitting on that site that is 100 years old. It is going to take time, but I think you can’t fake your way through sustainable development.  The moment you start treating it as marketing and not a core value, you’re going to be called out. It’s hard enough as it is. I know in the hearts and the minds of my colleagues how important these things are, and we still come under criticism. We are still blamed for doing this, that and the following. If it’s superficial if it’s artificial – I’m sorry – you’re not going to get anywhere.

I think Sibanye may have spotted that there is integrity in that mantra, that there’s integrity in our strategy that there’s a genuine pursuit of those values. I think it resonates with them; they believe those things and they want to be invested in a company that is giving those outcomes.

Matthew Gordon: Do you think that Sibanye should actually give up some of their position to allow a few more shares to trade in the marketplace because despite having a good year, your volumes of trade could be better if there’s a bit more float out there?

Niel Pretorius: The fact that Sibanye has a controlling stake in the company is something the market likes. A big part of the increase in our market cap has been as a consequence of that. Sibanye invested just more than 1Bn Rand capital of our company, no strings attached, at the beginning of the year. There was no expectation of special dividends or anything like that. Sibanye wanted to have a controlling stake in the company, and we will apply that towards the growth and expansion of our company. If they were to reduce below there, I think the market might wonder why.

If you were to listen to any presentation by the Sibanye board executive on where they are going to go, it reminded me of the early days of Randgold, when you had these phases and this is what we’re going to do and this is the next thing. There’s an energy and I think the market likes that energy and that we are associated with it. Lobbyists are aware that ESG and sustainable development is a core value. There’s an excitement about what’s going to happen next. To be associated with it, this expectation of growth, innovation something new is very valuable.

I think it’s funny; the way that our stock is viewed by the market, you’d be silly not to share that with the members. Sibanye is doing things and we are right there in the slipstream; wherever they go, we will be going with them.

Matthew Gordon: Do you think the market thinks that you were a take-out target for Sibanye? Is that what they are reading into it?

Niel Pretorius: I don’t think so. I think they see us as right there in the slipstream. As Sibanye grows, there will be opportunities for us to also grow, spread our wings and find new exciting things to do. We’ll be right there.

Matthew Gordon: I think it is a fantastic company, you’ve done some great things in the last couple of years. Keep going. I’ll speak to you soon. Thank you.

Niel Pretorius Thanks very much for the opportunity, I enjoyed this conversation. Thank you.

Company Website:

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Fortune Bay (FOR) – Re-evaluated 2011 PFS Gives Golden Cause for Hope

Fortune Bay Corp.
  • TSX-V: FOR
  • Shares Outstanding: 29M
  • Share price C$1.28 (14.09.2020)
  • Market Cap: C$36M

Interview with Dale Verran, CEO of Fortune Bay Corp. (TSX-V:FOR)

Verran is new to Fortune Bay. He comes from the world of uranium having worked at Denison in Saskatchewan where Fortune Bay’s assets are located. They have 2x 100% owned gold projects; combined they have a historic 2.1Moz of M&I, with potential exploration upside. They are hoping to advance their Goldfields as they have been underexplored.

We were keen to understand if this is more than just another company hoping to take advantage of the current excitable gold market. Is there a project with solid fundamentals? Verran is equally keen to explain why he and the board are excited about what they see in front of them. They are open-pit targets. And Verran says the 2011 is well written and they hope to be able to improve on it.

They raised $2.7M in May, they have $1.8M in cash today. All very tight. Hoping to drill, work on a resource estimate and high-level PFS review. They will need to raise capital soon, once they have re-look at the data they have. Is there any urgency with this team?

We Discuss:

  1. 3:00 – Company Overview
  2. 4:37 – Business Foundation and History: The Plan
  3. 7:34 – 2011 PFS Relevant Numbers & Economics Today
  4. 9:05 – Corporate Structure: Cash Position, Raises, Team Experience
  5. 11:45 – Accelerating the Process: Plan of Action
  6. 14:29 – Standing Out as a Gold Explorer: Why Fortune Bay?
  7. 18:33 – Money Allocation and Goals to Meet Before the Next Raise
  8. 20:59 – Company VS Market: Obstacles and Limitations
  9. 23:30 – Management Shareholding, Objectives & Targets

CLICK HERE to watch the full interview.

Matthew Gordon: Give us that 1-minute overview of the business and then we’ll pick it up from there.

Dale Varren: Fortune Bay is a Gold explorer and developer listed on the TSX-V under the symbol FOR. The company is two 100%-owned Gold projects located in Saskatchewan, Canada and in Chiapas State, Mexico. Combined, the projects host 2.1Bnoz in measured and indicated and 0.9Moz in inferred resources. Those are historical estimates, and both projects offer significant exploration and development upside. These projects have been under the radar for some time. They’ve been inactive and recently we set on a path to unlock value in these assets. Just over a month ago, at the end of July, we announced plans to the Goldfields project to advance that through various exploration and development activities and that’s expected to deliver numerous catalysts over the next 12-18-months.

Matthew Gordon: When you say underexplored, no-one cared that you existed, is that what you mean?

Dale Varren:  We went through a lull in the Gold market, from 2011 we had a bit of a false start, and in 2016. The Gold market picked up significantly recently, so the company is moving, the project is moving and it’s certainly a really exciting time to be doing that.

Matthew Gordon:. Is this just another one of those companies that’s been dug out of the cupboard and put in front of people hoping that you’ll find enough investors to put money into this to give it a chance?

Dale Varren:  For companies, these are really exciting times, the company went through a whole bunch of different transactions back in 2014-2016 when the current company was formed. Since then, there’s been a lot of interest in these projects, but no actual work is done and obviously, with the uptick in the Gold price it’s really excited the board to get the projects moving. I was brought on just over 2-months ago.

Matthew Gordon: What have you been brought in to do? What do you think you’re going to be able to do for these assets which other people couldn’t do?

Dale Varren:  I was really excited by this opportunity when it came across my desk, just firstly in terms of a company in today’s market with Gold resources on the books at decent grades. They’re both open-pit targets. The projects hadn’t had much done on them and the Gold price having moved up so much, at the Goldfields project there’s already a PFS that was done in 2011 that had robust economics. Obviously, we know what happened subsequent to 2011 with the lull in the Gold price, but we’ve started to look at all that in detail and we are really impressed with the work that’s been done there, the quality of the work. We’ve had independent consultants come on and review that PFS and it’s a robust study. The real exciting part is we get to build on that study and it’s a study that was done using a Canadian Gold price of CAD$1,250/oz. Today the Canadian Gold price has more than doubled: sitting at around CAD$2,600/oz. On that basis alone, it’s a really exciting project to move forward in this market. Obviously, things have to be relooked at instead of CAPEX/OPEX, and that’s not even including what we see on the exploration side. There’s a lot of potential around both the deposits on the Goldfields property both Box and Athona.

Matthew Gordon: What are the relevant numbers from the PFS that you can talk about today?

Dale Varren:  The 2011 PFS is an open-pit mining scenario of the box and Athena deposits. Box going first, having approximately just over 70% of the resources. It’s a 13-year mine life with a mill capacity of 5,000t per day. Gold recoveries at Box of 91%, at Athona 91%. In terms of the economic highlights, using that Gold price of CAD$1,250 p/oz, the CAPEX was CAD$149M using a 14% contingency. The NPV produced was CAD$144M. That’s a pre-tax NPV at a 5% discount rate, and the IRR produced was 19.6%, also on a pre-tax basis. Those real economics are certainly robust. Obviously, in today’s terms, we need to plug in a new Gold price and we also need to relook at those CAPEX/OPEX costs and make sure they are going to be realistic in today’s terms.

Matthew Gordon: How are you going to move this thing forwards? Start with the corporate structure: who is involved. How much money have you got in place?

Dale Varren:  The corporate structure: this company was run by a chairman, Wade Dawe, who goes back to the early 2000s when he started Linear Goldcorp. They had some success and went to Brigus Gold. Eventually, Brigus Gold merged with Apollo Resources and that sold to Primero. That was a big success, and it’s out of that transaction that these assets came into play. Wade is still on the board and he’s helping drive the strategy forward. The company is well-funded. We’ve got a lot of insider ownership. Both board and management owning around 19%, so there’s a strong alignment with shareholders there. He is really excited to take our strategy and put it into our projects and execute on that.

Matthew Gordon: Have you been able to raise capital? If so, how much? What are the plans?

Dale Varren:  Going back to May, we raised CAD$2.7M in hard dollars and that’s being used to fund the company now through various activities. Our current cache is around CAD$1.8M. That’s going to see us well into next year. In terms of what we’re doing on the technical side, we have some fieldwork plans for September, we initiated a mineral resource estimate. We are doing a PFS and high-level review, various activities on the go but we are looking to drill, really as soon as possible, at Goldfields. That’s going to require some additional funding so we’ll look to the markets later this year and look too obviously, flow-through financing would be attractive. We haven’t decided on an exact amount yet, we are still in the process of looking through the data defining drill targets, that involves creating new geological models for the Box and Athona deposits. That’s going to guide our exploration and we’re going to be able to put a really solid plan around that, look at what it’s going to cost and then we can look to raise the money for that project.

Matthew Gordon: Wade Dawe – Are you under any pressure from Wade to accelerate in order to take advantage of the current environment?

Dale Varren: There is a strong drive from the board to move this project. We have an aggressive strategy, but we realise that strategy is realistic, one advantage in Saskatchewan is that it’s a great place to operate; everyone knows that it’s a top-ranked jurisdiction in Canada. My experience there with Dennison Mines, having done lots of drilling programs in Northern Saskatchewan and studies. I’m familiar with all the players in the space, and we really have a good plan to advance that quickly.

We differentiate ourselves from other companies in that we’re not starting a PFS from scratch. We’ve got so much great data to build upon. There’s been so much good work done in the past. We really feel that that allows us to fast-track this project in terms of both advancing the development path, in terms of a future PFS, but also in terms of exploring the project where we see a huge amount of potential.

Matthew Gordon: What sort of company are you going to be?

Dale Varren: That’s right. That immediate focus on Goldfields and doing that. Absolutely

Matthew Gordon: What happens when you get the PFS?

Dale Varren: With Goldfields, we are going to keep marching down that development path and continuing to de-risk the project. We want to create a project that’s going to interest the mid-tier miner. Once we’ve done a PFS we will be in tandem with the updated mineral resource estimate followed by a potential future PFS. We’re going to be doing exploration and based on those results, we can then look to include those additional resources in either an updated PFS or put it all together into a Feasibility Study. But if we create a good project in a good jurisdiction, we believe there is going to be interesting as we move down that path.

Matthew Gordon: What’s your plan for growth for this company? What are shareholders buying into?

Dale Varren: In the short term, they are buying into Goldfields, that’s our main story. That’s where we’re going to focus. We’re not going to confuse shareholders with lots of different assets. We’re going to have a real focus that’s got a catalyst and we’re going to move that project forward as quickly as we can. Obviously, creating a good project you have lots of favourable opportunities outcomes down the road and that’s going to create value for shareholders. At Athona, it’s a fantastic project, a great asset. It’s not as advanced as Goldfields. We can’t move that down the development path line as quickly, the exploration path, so we are currently looking at that project in detail. We are looking at the data, pulling it apart. There’s a lot of opportunities, a lot of value to be unlocked, lots of exploration potential development outside, and we look at various options to advance that and we may not advance that necessarily ourselves. We might look to find a suitable partner that can advance that project for us, and that’s obviously finding the right person in the right company, the right operational capability, financial capability as well.

Matthew Gordon: Now or down the line?

Dale Varren: There’s certainly been a lot of interest in the project going back prior to me joining, and currently it’s a great asset. The people who know about it know it’s a good project, so there’s certainly interest in it, we just need to look at evaluating a potential suitable partner and then see how that unfolds over the coming months.

Matthew Gordon: Plus, you don’t have the money to do too much with it yourself?

Dale Varren: That’s right. You know that capital is valuable to us, that is shareholder capital. We want to really allocate that wherein the short term we can we can use that effectively. We certainly see the value to do that, but not at the same time necessary, and that’s where I think the value could be in sharing some of that risk with another suitable partner and focusing our story on Goldfields in the short term.

Matthew Gordon: What happens to the team down there? Would you look to partner?

Dale Varren: We’re open to various options at this stage. It could be anything from an outright acquisition where, if there are some cash and shares, we can use some of that to even fund Goldfields in the shorter term. We’d also be open to earn-in option agreements. There have been earn-in option agreements on the project in the past, Kinross was there in 2007 to 2009, and they did the last really significant work in terms of drilling on the project. So, there’s been those types of arrangements in the past and we’d certainly look to attract a partner to do something similar in future.

Matthew Gordon: Where do you think the market is attributing value? Are they giving you any credit for Mexico, Ixuatan?

Dale Varren: Absolutely, I think there is value in there, it’s hard to answer that question; we don’t have analysts’ coverage yet. It’s still early days for us so it’s hard to see exactly where the market is putting the value. The value in our story is having two advanced projects and having a plan for one of them in the near term with another one a little down that pipeline

Matthew Gordon: Two advanced projects, do you seriously think these are advanced projects?

Dale Varren: We consider them advanced exploration projects in that sense, we’re not a junior explorer. We’re not going out and doing greenfields exploration. We’ve got two assets with resources, and we’re looking to expand those resources and take this project through development stages to de-risk them.

Matthew Gordon: What do you think you need to deliver before you can go out and raise this money at the end of the year?

Dale Varren: Where we stand at the moment, we’ve got these good assets. With Goldfields, we are busy putting together geological models. The project, going back to 2011, the models that were created were very simplistic and the exploration was done just on chasing mineralisation. There was no emphasis on understanding the structural controls on these deposits. By developing good models that can guide exploration and demonstrate targets on the deposits, that’s going to help us raise that money.

Matthew Gordon: Can you break  down as to how you intend to spend CAD$1.8M between now and into next year?

Dale Varren: We’ve initiated a mineral resource estimate and that process really involves, as we’ve got to put together a technical team; we’ve got a technical director and a senior project geologist for the Goldfields projects. We are really pulling apart that data, putting it into solid databases. We are reviewing that in detail. That’s obviously taking the time. We are doing a QAQC on that and then we’ll move into a fieldwork stage where we will be looking at the rocks, doing a historical tour, looking at the outcrop, some of the trenches and building these geological models, and that’s going to form the basis for mineral resource estimates. A lot of the spend over the next while will be focused on out-field activities involving the data and then leading into a mineral resource estimate. At the same time, we will be allocating money to a high-level PFS review. We’ve started that process and we’ve done an initial exercise to look at the PFS. We will be continuing that through Q3 and Q4 this year to basically look at where the opportunities and risks are with doing a new PFS and also identifying any data gaps so when it comes to next year, combined with our potential drilling program, we will also be looking to collect any additional data needed to go towards a PFS Study.

Matthew Gordon: What were some of the things that you saw when you walked in that made you nervous?

Dale Varren: On face value, when you look at the company’s assets, you pull the tech reports off SEDAR, you have a quick look through and you think, this looks great. But of course, you’re looking at a resource estimate from a PFS going back to 2006, the PFS which includes the resource estimates going back to 2011. You open these up you think, what am I going to discover here? Is there going to be any skeletons in the closet, and what we found is everything’s been really well done. This is not just coming from our company side, but from independent consultants, who say that the PFS that was done is a really robust study. The feedback we’ve had on it has been very complimentary. On top of that, we are seeing opportunities in that PFS for creating more value on the project and improving economics.

Matthew Gordon: Are you at all worried that if Gold falls back or resets a bit, you’re going to be left behind?

Dale Varren: I think we were already seen as a robust project at CAD$1,250/oz, so we’ve got a lot of buffers to work with. We’re really confident that with what’s in place already in terms of that historical PFS, plus the exploration upside, we can really create a much better project here. The exploration itself – we are seeing high grades that were drilled below the resource estimate that hasn’t yet been included, and it’s open at depth. This is at Box and there’s similar exploration potential at Athona. There are lots of ways to grow and improve this project. Even if the Gold price does pull back, we’re in a really strong position to advance on an existing PFS that is robust.

Matthew Gordon: You’ve come in. Have you bought any shares yourself?

Dale Varren: I have. I bought 60,000 shares.

Matthew Gordon: Have you been given any?

Dale Varren: I haven’t been given any. I am obviously incentivised with some options that are linked to certain performance objectives, but those I bought with my own money.

Matthew Gordon: What sort of objectives do they set you?

Dale Varren: It’s all about creating shareholder value.

Matthew Gordon: What does that mean?

Dale Varren: You want the share price up, grow the market cap for the company as well. Those objects are very much aligned with the path we’ve selected. When I came on board, we had some really good strategy sessions and we decided how to do we move this these projects forward, and that was rolled into my performance incentives and our broader teams. The board also has significant ownership in the company, so we feel very much aligned with shareholders.

Matthew Gordon: What are the other things that you are incentivised by? What targets do boards set CEOs?

Dale Varren: It’s really about technical objectives to deliver value on the project, both in terms of resource expansion, in de-risking the project through studies – those types of initiatives really to move the project forward. Our company has got a commitment to really putting money in the ground, not only having a lot of necessarily corporate type spend overheads but focusing on the ground. We believe if we explore well, add ounces with the drill bits, the project’s value is going to come for us, that’s where we are really focusing shareholder money to get the best returns taking the projects forward.

Matthew Gordon: Thanks for that interesting story. I appreciate you spending the time today talking us through it.

Dale Varren: Thanks, Matt. Thanks for having us.

Company Website:

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Novo Resources Company Report – Review of The Egina Project

Read this extract from the Updated Novo Resources Company Report. To access the full report, click here. Published in the Crux Investor Club 1st September 2020.

Unless specifically otherwise stated, the information, illustrations and text in the section have been extracted from a NI.43-101 compliant technical report by Novo Resources, dated 30 April 2020.

Figure 6_1 serves as a location map of the project area and mineral tenement plan.

Figure 6_1 | Location and Outline of the Tenement Area – Egina Project

The project area is indicated by the tenements in yellow (Pioneer Resources JV), light green (De Grey Mining JV), purple (New Frontier JV), and the light blue blocks immediately to the west (100% Novo Resources). The project area is accessed 80km from Port Hedland or 140km from Karratha via the sealed Northwest Coastal Highway, and via a reportedly well-maintained, graded South-bound gravel road for a further 40km.

The greater Egina Project comprises 16 tenements, including 2 granted Mining Leases (“ML”, 100% Novo Resources), 13 granted Exploration Licences (“EL”), and one granted Miscellaneous Licence (“L”). Of the EL’s 418km2 is held 100% by Novo Resources and 557km2 in joint venture with a beneficial interest between 60% and 75%. One of the mining leases is subject to a royalty of 5% in addition to the Western Australia state royalty of 2.5%.

Gold mineralisation at Egina is largely found in an erosional blanket at, or close to, surface.

Whereas Novo Resources has recognised 3 styles of gold mineralisation at Egina, lode mineralisation, gold-bearing conglomerate in the Fortescue Group similar to its other 2 project areas, the one on which it focuses here are gold-bearing gravels that blanket an erosional surface “covering most of the Egina area”. The gold in these conglomerates is interpreted to have been derived from the erosion of basement rocks and the gold-bearing conglomerates of the Fortescue Group. It is therefore a very different type of target from Novo Resources’ earlier exploration projects.

Figure 6_2 shows a map in the Farno mineral right area drawn from ground penetrating radar (“GPR”) surveys with the base of the transported erosional material palaeo-drainage pattern, and the scope of trenches and diggings executed by Novo Resources. Subsequent auger drilling confirmed the accuracy of the GPR data.

Figure 6_2 | Base of Transported Erosional Material Derived From Ground Penetration Radar Surveys

The statement about the conglomerates “covering most of the area” may be correct, but the above map clearly shows sampling activities to be confined to the deepest section of the palaeo-drainage pattern extending 800m parallel to the drainage and 200m perpendicular to the drainage. Novo Resources refers to the deeper sections as“swales”.

In addition to trenches dug by the vendor of the mineral rights, 6 trenches were excavated for a total of 2,213 linear metres. Using metal detectors nuggets were extracted weighing in total 1.13 kg, but these were heavily concentrated in an area of 100m x 50m around a bulk sample given the identity number 19EGTR006A.

A significant component of the higher-grade gold mineralisation is characterised by very fine to extremely coarse nuggets ranging in size from less than 10 μm to more than 10mm (nugget mass of 4.6 gram). Given the coarse nature of the gold, very large samples are required to obtain a representative grade. For this reason, a bulk sample programme was carried out, mostly in 2019, the sample locations of which are identified by the grey squares in Figure 6_2. To guide the selection of the bulk sample locations 489 test pits were excavated and 294 “Mobile Alluvial Knudsen (“MAK”) mini samples” of 1 tonne collected. It is noticeable the technical report gives no results for the MAK mine samples. These may not be representative of the local grade, but would have been indicative of the potential of the area.

The most reliable grade results are obtained from bulk samples and Table 6_1 reproduces these.

Table 6_1 | Novo Resources Corporation | Bulk Sample Results – Egina Project

The table shows the weighted average grade to be very disappointingly low at 0.35g/t Au, which is to some extent positively biased by siting the extra-large bulk samples in most favourable spots (see Figure 6_3).

Figure 6_3 | Head Grade Versus Bulk Sample Size

The average recovery achieved by the gravity recovery plant is 70.4%, the efficiency of which is highly determined by the feed grade (see Figure 6_4).

Figure 6_4 | Gravity Recovery Versus Head Grade

The results above shows that the deposit, despite containing at times spectacular gold nuggets, seems to have a very low overall grade of 0.35g/t Au, which would yield at best 0.28g/t Au per tonne mined when treating it by (cheap) gravity processing. This converts to US$18/t at a gold price of around US$2,000/oz. Given the limited size of the area with this type of deposit and the very low prospective revenue per tonne mined, the Egina project is at this stage of no economic interest.

The most recently discovered swale at Panorama (as usual by now Novo Resources has moved on and made another exciting discovery) does not change the above conclusion unless the sample results there prove to be vastly superior to the Farno area.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Novo Resources Company Report Preview – Review of The Purdy’s Reward / Comet Well Project

Read this extract from the Updated Novo Resources Company Report. And to access the full report, click here. Published in the Crux Investor Club 1st September 2020.

Unless specifically otherwise stated, the information, illustrations and text in the section have been extracted from a NI.43-101 compliant technical report by Optiro Pty Ltd (“Optiro”), dated 30 April 2019. Whereas the technical report refers to the project as the Karratha project, this study prefers to reference these as Purdy’s Reward and Comet Well, because the first exploration results here caused the price to tenfold and the market capitalisation to reach around US$1Bn before the company moved to Comet Well and got the market again excited for a second, albeit lower price spike

Figure 5_1 serves as the location map of the project area and mineral tenement plan.

Figure 5_1 | Location and Outline of the Tenement Area – Purdy’s Reward and Comet Well

Novo Resources reached a billion-dollar valuation in 2017 on the back of excitement over Purdy’s Reward and Comet Well

The Purdy’s Reward – Comet Well project is located 37km south-southeast of the Karratha town centre or 55km by road: sealed road for 47km and thence 8km by graded dirt road.

The plan above includes 47 tenements, comprising 2 granted Mining Leases, 32 granted Exploration Licences (with another 8 under application), 3 Prospecting Licences and 1 granted Miscellaneous Lease(with another 1 under application). These can be subdivided into a number of groups, namely:

  • Controlled 100% by Novo Resource
  • The Artemis Joint Venture area of 213.1km2 in red covering Purdy’s Reward– originally 50%, fully acquired in March 2020 for A$1M and 2 million Novo Resource shares and a 1% point retained net smelter return royalty. This is a pitiful price for a half beneficial interest in a prospect that was valued at US$1Bn at some stage.
  • The Gardner/Smith Joint Venture Area of 50.8km2 in orange covering Comet Well – 80%

Figure 5_2 is a geological map for the area, extracted from an old press release in preference of a similar map in the technical report to better illustrate the relative location of the Purdy’s Reward and Comet Well prospects.

Figure 5_2 | Geological Map Showing the Relative Location of Purdy’s Reward and Comet Well

The map shows the Mount Roe package, which is a basal sequence of the Fortescue Group in which the gold-bearing conglomerates occur, in olive green.

The Fortescue Group volcano-sedimentary sequence at Comet Welland Purdy’s Reward dips shallowly (~10 degrees) to the southeast, and has a stratigraphic sequence that is characterised by from bottom to top:

  • A variety of gold-bearing conglomerates (the Lower Conglomerate)punctuated by a thin (<20m) sequence of angular volcaniclastic rocks and a 5cm to 20cm thick tuff marker unit, described as a massive mafic rock with minor fine quartz eyes.
  • Above the volcaniclastic rock and “tuff” is the “UpperConglomerate” and related sand and silt beds, minor felsic tuff, and chert. Blanketing the upper sedimentary sequence is the Mt Roe Basalt.
  • Overlying the Mt. Roe Basalt is a thick sequence of sandstones and quartzites with lesser amounts of conglomerate and siltstone, belonging to the Hardey Formation. The conglomerate tends to characterise the base of the Hardey Formation in the project area.

Figure 5_3 is a longitudinal section along the strike of the geological strata to illustrate the variability of the vertical distance between the Upper Conglomerate (in red) and Lower Conglomerate (in blue)between Comet Well on the left and Purdy’s Reward on the right. The vertical dimension is exaggerated 3 x.

Figure 5_3 | Longitudinal Section With Upper (in red) and Lower Conglomerate (in blue)

At Purdy’s Reward gold nuggets are found in a thin-skin of conglomerate, sands, and muds that directly overly the basement. This gold-bearing horizon has an irregular local geometry, dipping 5-10 degrees to the southeast.

At Comet Well, the lower gold horizon occurs immediately on top ofthe basement rocks as well and the upper gold horizon is present within a variety of coarse sandy conglomerates that occur immediately above distinct volcaniclastic package. Both gold horizons outcrop in the Comet Well area and dip shallowly (5-10 degrees) to the southeast.

The main method of exploration up to the date of the technical report has been the excavation of trenches and pits with sample sizes that were progressively increased from 50kg to 300kg to, most recently, 5-tonne bulk samples. This was an attempt to get to representative grades given the coarse nature of the gold nuggets.

The April 2020 Crux Investor Report highlighted significant permitting problems around the ability to take bulk samples large enough to be considered representative at Purdy’s Reward / Comet Well

The area has also been subjected to diamond drilling with 208 holes for 11,998m (therefore an average depth of almost 58m), but only37% assayed. Given the observation of requiring large sample sizes, diamond drilling serves little purpose apart from establishing the lithological profiles.

For this reason, this study has ignored the diamond drill assay results and only reviewed the results of 49 bulk sample with a mass of approximately 5.6t, depending on the thickness of the conglomerate at that sample site. It should be noted that sampling was much more complex than the Beatons Creek exercise as it involved jackhammer work and pre-cutting boundaries with a diamond blade.

A total of 155 samples were taken from 57 bulk sample sites. The results are summarised in Table 5_1. The gaps in the numbering have purposefully been included to highlight that these results are selectively reported. It, therefore, excludes samples with nil gold.

It is very concerning that, of the selected results, less than 30% have a grade of 1.0 g/t Au or higher. The average grade is well below 1.0 g/tAu.

Given the irregular nature of the deposit, the spotty presence of gold and prospective very difficult mining conditions the indicated average grade is far too low to be of economic interest.

Grades from bulk sampling are uneconomic, rendering the project worthless

The announced acquisition on 18 June 2020 of a mechanical sorter does not change this conclusion. Pre-concentration does not add gold to the production, but can only reduce the amount of material having to undergo a more expensive concentration process. Such a benefit comes at a loss of gold, with the loss of revenue possibly less than the operating cost saving.

Crux Investor notes that the earlier Crux Investor report commented at length on representative sample size, bulk tonnage requirements of up to 100,000t samples, and small mine-permitting issues. This report acknowledges all of those points but has not investigated them deeply since the grade information from the samples gathered to date indicates that the project is uneconomic.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Novo Resources Company Report Preview – Technical Review of The Beatons Creek Project

Read this extract from the Updated Novo Resources Company Report, focuses on one of their assets, Beatons Creek. To access the full report, click here. Published in the Crux Investor Club 1st September 2020.


Unless specifically otherwise stated all information, text, and illustrations have been extracted from two NI 43-101 compliant technical reports in support of an updated resource estimation, the first by Tetra Tech, with an effective date of 10 August 2018, issued 20 November 2018, the other by Novo Resources management issued 13 May 2019, with an effective date of 28 February 2019.

The 2019 technical report, issued by Novo Resources, uses largely the same data as the 2018 technical report, written by Tetra Tech. The 2019 update includes the addition of 2018 diamond and trench data as well as a range of different interpretation methods. Crux Investor notes that Novo Resources itself is the signatory on the 2019 resources update. The two authors of the 2019 Resource Estimate, which included a 30% increase in tonnes, are Chairman and President Dr Hennigh, and Dr Simon Dominy, Principal Advisor Novo Resources (since 2017).

Crux Investor believes that no matter how much internal expertise a junior mining company has, signing off on resources internally should not be done until there is an established track record of conversion to production. This is a Red Flag.

Two recent Resource Estimates share much of the same data. Importantly the most recent (improved) estimate was published by Novo Resources, not a Third Party. This is a Red Flag

The updated 2019 Resource Estimate included a 30% increase in tonnes driven predominantly by an improved geological framework from the recent diamond drilling program compared to the previous 2018 estimate supported by the technical report titled “NI 43-101 Technical Report Resource Update, Beatons Creek Gold Project, Pilbara Region, Australia” issued on November 20, 2018 (the “2018 Resource Estimate”).

The Beatons Creek project is located in the Pilbara region in the North-Western part of Western Australia, 1,364 km North-Northeast of Perth and 296km southeast of Port Hedland (Figure 3.2_1).

Figure 3.2_1 | Location of the Beatons Creek Project in North-western Australia

The Beatons Creek area is adjacent to and west of the town of Nullagine, which is 296km Southeast of Port Hedland and 170km North of Newman by road.

Figure 3.2_1 | Extent and Outline of the Beacons Creek Tenement Area in 2018

The Beatons Creek Gold Project area consists of 21 predominantly contiguous tenements totalling 167.9 km2; these tenements include Exploration Licences, Prospecting Licenses and Mining Leases. The mining licences were bought from Millenium and the other licences controlled via the Creasy Group. Comparing the tenement area outlined in the 2018 technical report with the August 2015 technical reports shows a very large reduction in ground held with only the mining licences unaffected.

Geology and Mineralisation

The host rocks to the gold deposits at the Beatons Creek Gold Projectoccur towards the top of a more than 800m thick sequence of poorly-stratified, poorly-sorted conglomerate sequence with clasts from several rock types. The “Mineralized Unit” is 40m thick within which the much narrower individual gold-bearing conglomerate beds occur. These are located in an area within a few kilometers of the village of Nullagine.

Figure 4.2_1 | Geological Map for the Beatons Creek Project

Figure 4.2_1 shows the geological map for the project area with the conglomerates shown in orange-yellow with small circles. The resource outline within this formation is shown in grey.

Conglomerates occurring above and below display similar characteristics to those that are gold-bearing, but are largely devoid of appreciable gold. This will make it difficult to visually control mining the correct horizon.

Two types of conglomerates are evident and apparently interbedded with one another within the gold-bearing section of the Beatons Creek Gold Project. They are:

  • Fluvial (= river deposit) type ferruginous conglomerates, and
  • Marine lag type ferruginous (= iron rich) conglomerates.

The fluvial type conglomerates are composed of various rock types with the clasts varying in size from pebbles to boulders and in contact with each other (= clast supported, not totally surrounded by a fine matrix). Individual horizons are less than 1 metre to several metres thick and continuous over tens of metres (only!) according to Tetra Tech, but ~50m across and traceable over hundreds of metres according to Novo Resources management.

Crux Investor is much more inclined to follow the Tetra Tech guidance. Historic reports of mining activity from the late nineteenth century point out that the old-timers mined gold out of horizontal tunnels (adits) approximately 1m high in pockets of high-grade. A further corroborating factor is that the ore blocks in the Novo model are only 1 m thick.

Marine lag-type conglomerate is typically also tightly packed with clast sizes varying from cobble to boulder, and also clast supported. Individual boulders can exceed 1m diameter and are of varying composition, but are dominated by hard, resistant, siliceous boulders of several types including vein quartz and chert. Individual beds are between 0.3m and 2m thick (according to Tetra Tech, 1.5m according to Novo Resources management) and sheet-like, being continuous over hundreds of metres according to Tetra Tech, but with the main two marine lags continuous over 2.5km, according to Novo Resources management.

The discrepancy in the description in reports published by Tetra Tech and by Novo Resources less 6-months apart is a concern. NI 43-101 Technical Reports are supposed to represent a summary of data and they typically rely on data provided by Qualified Persons representing the Company in question. Nevertheless, it is normal for third party entities to actually complete resource estimates unless the Company is very large as an in-house resource estimate cannot be seen as independent and risks being biased.

The Resource Estimates from 2018 and 2019 were completed on different data sets, and the interpretation is markedly different on the continuity, geometry, and presentation of mineralisation. Crux Investor would have been much more comfortable if the 2019 Resource Estimate update were carried out by Tetra Tech, as an update to the 2018 Mineral Resource Estimate.

The two conglomerate types are interstratified with the fluvial type deposited in a delta and with the marine lag type deposited as sea levels rose with the wave action winnowing out the finer, lighter sediments. This process repeated several times to create the stack of interbedded conglomerates now evident. The conglomerate beds dip at approximately 20 degrees, so little is exposed at surface. Because the mineralisation dips into the ground, strip ratios and overburden increase quite quickly, generating logistical challenges that all deposits face.

Gold mineralisation within the conglomerates occurs as fine grains, larger flakes, and rounded particles rarely exceeding 2mm occurring in the matrix together with detrital (= weathered from pre-existing rocks) pyrite, referred to as buckshot pyrite. The pyrite particles range in size from 2mm to 65mm in diameter. There seems to be a correlation between higher gold grade and pyrite content and the particle size of buckshot pyrite.

Mineral Resources

As noted above a number of NI 43-101 technical reports have been filed on Sedar for Beatons Creek, dating from 2013, 2015, 2018 and 2019. This Crux Investor report focuses on the most recent two resource estimates, from 2018 by Tetra Tech, and from 2019 by Novo Resources.

The greatest difference between the 2018 and 2019 mineral resource estimates is geological interpretation and the addition of some diamond drill hole and trench data…

It is hard to make exact comparisons between the two resource estimates as the numbers are provided differently. On a qualitative basis, Novo Resources note that “There are a number of differences between the 2019 Mineral Resource estimate and the previous, with the greatest difference being a change of geological interpretation and the addition of 2018 diamond drill holes and trench samples.”

The report goes on to say that “key differences relate to:

  • Addition of 2018 diamond drill hole and trench data;
  • Different geological interpretation, more constrained wireframes;
  • Different block model size, larger estimation blocks;
  • Different variography based on the data set applied within new wireframes;
  • Different SGs based on new data;
  • New oxide-fresh surface;
  • Coherent resource classification – no spotted dog effect;
  • Higher underground cut-off based on potential mining scenario; and
  • Different pit shell based on new optimisation at the current gold price.”

Tetra Tech used 27,503 samples from RC holes, 680 samples from diamond drill holes, and 1,696 samples taken from trenches. The 2019 exercise used 3,767 composites sourced from 2,423 RC samples (64%), 229 diamond core samples (6%), and 1,116 trench channel samples (30%).

When comparing the map with the distribution of samples/drill holes for the 2019 resources estimation, reproduced in Figure 4.3_1, with a similar map in the 2018 technical report it is evident the later exercise includes substantially more diamond drill results (red dots) and a few more pit results. The differences are so minor, it should not explain a major difference in resource size.

Figure 4.3_1 | Map Showing Locations of Samples and Drill Holes for the 2019 Resource Estimation
Figure 4.3_2 | Modelled Reefs Solids – 2018 Resource Estimation

Comparing the reef models of 2018 and 2019 estimation, both undertaken by Novo Resource geologists, shows the later exercise filling the gap on the left in Figure 4.3_2 extracted from the 2018 technical report of the reef shown in brown yellow.

The different interpretation fits in with the difference in a statement on continuity of the marine lag conglomerate observed in the preceding report section. The 2019 interpretation provides a cross-section in support of the interpretation that is far from convincing with one RC hole around 500m north of a RAB hole and 800 m south of trench samples. One can well imagine Tetra Tech not being prepared to make this interpretative jump given the variability of the reef elsewhere. The 2019 model also includes a number of faults that terminate conglomerate horizons.

Simplistically, the wriggly outlines to the bottom right of Figure 4.3_2 are for the fluvial conglomerates and the more regular outlines to the left for the marine lag conglomerates with a transition zone in between.

Figure 4.3_3 | Cross Section (top) and Longitudinal Section (bottom) for Beatons Creek

Noticeable is the considerable variation in grade both downhole (e.g. blue and orange bars next to each other) and between holes. The grade bars are usually for a short section within an interpreted horizon, sometimes at the top, sometimes at the bottom.

The illustration also shows the transition from oxidised mineralisation to sulphide mineralisation, ignoring a transition zone.

The illustration does not reflect the complexity of mineralisation with the 2019 resource estimation having seven marine lags included. In total 44 mineralised domains have been identified for grade estimation based on lag number (9x), lag type code for marine/channel and fault block (9x). As it was found the grade does not change from oxidised to fresh mineralisation, this was ignored for grade estimation.

Sample assays were composited to a length of 1 m with the statistics hardly changing and the coefficient of variation (“CV” = standard deviation / mean) generally below 2.0, which is excellent for gold grade population giving confidence in the block grade estimation. This was further improved by reducing the CV below 1.5 by applying top cuts to the grade.

For the more widely spaced drilling of 100m x 100m up to 200m x 200m a block size of 40m x 40m x 1m was used. For more closely drilled areas a block size of 20m x 20m x 1m was used. The established grade for such a block were assigned to sub-blocks down to 2.5m x 2.5m x 0.25m to capture the volume of the resource outline.

For reporting purposes, a cut-off grade of 0.5g/t Au was used, which is too low given the assumptions of a gold price of US$1,311/oz metallurgical recoveries of 95% (sulphide) and 90% (fresh) mining cost of US$2.4/t for oxide material and US$3.68/t fresh, processing of US$17/t-US$19/t, and G&A expenses of US$3/t. However, given the current gold price, the cut-off grade is low.

For underground resources, a cut-off grade of 3.5g/t Au was used.

Table 4.3_1 gives the resource statements for Beatons Creek, effective 10 August 2018 (Tetra Tech) and 28 February 2019 (Novo Resources).

Table 4.3_1 | Novo Resources Corporation | Successive Resource Statements for the Beatons Creek Project

The increase in resources is largely driven by a change in geological modelling. Crux Investor is concerned by the higher grade in Inferred Resources over Indicated resources without adequate explanation

The table shows that gold contained in open pit resources has increased by more than 20% and underground resources by more than 250%. The few additional sample points cannot explain the increase, in particular as the area drilled by diamond core holes were not included in the resources statement. The difference must be predominantly attributed by a different approach to modeling. It is somewhat concerning that the grade of Inferred resources in the latest resource statement is much higher than Indicated Resources. The geological rationale for higher grades in inferred resources is not discussed, and this is a point of concern. Crux Investor notes that inferred resources at a higher grade than measured and indicated resources, without good geological supporting data is a Red Flag, and is improbable.

Figure 4.3_4 shows a map with the resource classification for the various areas highlighting the higher confidence resources to be where fluvial conglomerates predominate and lower confidence for the more continuous marine lags, which are generally deeper and could not be tested to the same extent by trenches and pits.

Figure 4.3_4 | Resource Classification – Beatons Creek

Please note the resource outline differs from that indicated in Figure 4.2_1.

It is unfortunate the resource statement does not give an indication of the relative contribution of fluvial and marine lag deposits, but visually it seems the fluvial deposits are the most important in the Indicated Resources.

Comparison of Bulk Sample Results and Modelled Resources Grade

During 2018 a bulk sample programme was carried out where 2t samples were collected over 1m thickness. The scope of sampling included 45 primary samples and 13 duplicate samples of oxidised mineralisation. The grade was determined by fire assaying of a gravity concentrate from each sample and separately assaying the tailings by 3 different methods.

The bulk sample grades were found to be consistently lower than the block model grades for those sites, which in turn were found to be consistently lower than the uncut trench sample results

The reported results for all samples, including 6 samples with grades below 0.5g/t Au, which is the cut-off grade, is 2.16g/t Au. Novo Resources also reports the weighted average grade of 2.42g/t excluding these 6 samples. Why this is applicable is not clear as in practice it will not be possible to exclude such material when mining.

The weighted average grade above 0.5g/t Au was determined at 2.39g/t Au for the primary samples and 2.42g/t including field duplicates. The average grade of the duplicates was 1.87g/t compared to 2.07g/t for the original samples. The CV for the pairwise samples is 22%. The average grades established by various methods are shown in Table 4.4_1.

Table 4.4_1 | Novo Resources Corporation | Comparison of Mean Grades (g/t Au) at Selected Bulk Sample Sites

The bulk sample grades were found to be consistently lower than the block model grades for those sites, which in turn were found to be consistently lower than the uncut trench sample results. Whereas the technical report puts a brave face on these results, even postulating these could indicate a potential upside above the global oxide block model grade of 1.88g/t Au, the 25% lower average bulk sample grade compared to the forecast grade as per block model could spell problems, especially considering how carefully the samples were collected.

In practice when commercially mining the narrow conglomerates with gold-bearing and barren sections visually indistinguishable, much dilution can be expected.


In 2016 the company carried out test mining excavating 29,560 tonnes of mineralised material. The waste and ore-bearing reef were all free dig. Each 12-hour period 4,000 cubic metre material was removed using one 80t excavator, a loader and 3 articulated dump trucks (“ADTs”) with 40t haulage capacity. In addition, a D9 bulldozer was used to ensure the floors were flat. According to the discussion in the technical report, the hanging wall of the conglomerate was easily identifiable as transition of soft sandstone to quartzite boulders of conglomerate. The footwall was also visually identified, but without details how this was accomplished. It should be noted, the above is at variance with the geological description of gold bearing and barren conglomerates interstratified. It raises the question to what extent the bulk mining site was representative from the overall resource area.

It should also be noted mining was under strict geological control with test pits being dug in order to provide grade control for the sub-horizontal reef. As the reef was found to vary in thickness from 0.5m to 2m and has an undulating footwall such test pits will be required in practice at great density to be optimally effective. The undulations represent the sea floor in this depositional environment, which implies test mining was on the more continuous marine lags only.

The new Resource Estimate shows bulk sample grades are in line with trench sample grades…but this was achieved only by ignoring 6 of the lower-grade bulk samples

Even with such strict geological control mining dilution was estimated at 20% (in the illustration in the technical report about the sampling process this is given as 20%-30%) and “ore” losses at 5%, mostly due to being removed with the overburden during stripping. Under commercial mining conditions, these numbers can be expected to be higher.

In total 29,560 tonnes of mineralised reef were mined and 86,876t of waste for a strip ratio of 2.94. Of the mineralised reef 2,760t were classified as low-grade and stockpiled. No information was provided about the criterion used for this classification. The estimated average grade from test pit samples was 2.42g/t Au, which is much higher than the block model grade of 1.65g/t Au. However, the calculated head grade after treatment of bulk sample material including 20% (?) dilution was 1.86g/t Au, therefore reconciling well with the trench sample result. The technical report, however, ignores that the calculations were carried out excluding the low-grade material.

Metallurgy and Processing

The discussion on metallurgical testwork that has been carried out is extremely brief in the 2018 and 2019 technical reports. This is not because of lack of testwork as according to the 2018 this was undertaken to examine gravity concentration, flotation and cyanide leaching in addition to comminution testwork.

For oxide material the mineralogical characterisation shows the gold tobe present from very coarse (good for gravity concentration) to very fine at 1 μm (requiring leaching). As the majority of gold is liberated (free milling) a good recovery can be expected.

Comminution tests show the rock hosting mineralisation to be moderately hard with an average ball Bond Index of 14.2 kWh/t and average abrasion index of 0.26, which is also moderate.

Typical overall recovery from a process of gravity concentration and leaching of the gravity tailings is forecast at almost 95% with more than 58% percentage points recovered in gravity concentrate. The 2018 report however includes a graph for gravity recovery as a function of feed grade with sharply dropping numbers at lower grade (see Figure4.6_1).

Figure 4.6_1 | Gravity Gold Recovery Versus Feed Grade

For fresh material mineralisation gold was shown to be strongly associated with a nickel arsenic sulphide (gersdorffite), as well as with chalcopyrite and carbon grains. The latter could cause high cyanide consumption and reduction of gold recovery. A further potential complication is the higher than average presence of Hg, As and Sb, but no further detail is provided.

Comminution tests show the rock hosting mineralisation to be hard with an average ball Bond Index of 18.8 kWh/t and average abrasion index of 0.26, the same as for oxide material.

The tests were on composites with grades of 5.46g/t and 4.35g/t, which are far higher than resource grades and therefore cannot be considered representative.

Test results indicate gravity recovery of 50% to 80% from “a well-designed and operated process plant”. Leach results show extraction rates of above 93%. An overall recovery rate of 92%-93% was suggested.

Tests of tailings samples indicate poor settling characteristics which would result in higher water retention (therefore increasing water consumption with less water recovered back to the plant) and reduction of the minimum strength below what is required for slope stability factors of safety.

Further metallurgical testwork is required on representative sulphide material as recovery issues and deleterious elements may create further problems…

A trial mining test in 2016 excavated 29,560t, but treated only 9,680t due to a host of problems such as crusher breakdowns and “inefficiencies”. Whereas problems were experienced, it is not clear why not all material was treated, when this could have been done over a longer than planned period. The 2019 technical report glosses over this work, but the 2018 report includes a detailed description, which still leaves gaps in the numbers and reconciliations.

The calculated head grade of treated material (which excludes low-grade, stockpiled material), is determined as 1.86g/t Au. Assayed grade of all material (including low-grade?) is 1.61g/t. The recovered grade of 0.67g/t Au implies a recovery of only 36%. The technical reports gloss over the poor recovery stating “the crushing and processing plant was never considered as a pilot plant so little emphasis is placed on plant recoveries”. For the sake of the NPV calculation, Crux Investor has used the PEA recovery rate, but it is noted that a significant amount of further de-risking work is required.

Economic Evaluation


An extremely simplistic cash flow model was generated assuming along-term gold price equal to the spot price on 8 September 2020 of US$1,930/oz Au.

At the rated capacity of 1.5Mtpa of the infrastructure acquired from Millenium the undiluted resources can sustain a life of mine (“LOM”) 6-years and 8-months, with an assumed start at full production on 1 January 2022. This valuation has also tested the impact of a dilution rate of 30%. The overall strip ratio has been guesstimated at 5.0 given the bulk sample of oxide material alone had a strip ratio of almost 3. Any dilution would reduce the amount of waste classified as stripping waste by the same amount.

With substantial sulphide material the overall metallurgical recovery was assumed 90% under commercial production conditions.

The operating cost has been assumed at US$4/t mined given the high degree of grade control required, selective mining and assuming a mining contractor responsible for the mining activities, excluding planning and supervision. The processing cost rates were taken as per inputs for the conceptual resources, but the site G&A at US$6M per annum. The haulage cost to the plant has been estimated at an industry-standard-rate of US$0.125/t/km one way. As at this stage the Beatons Creek would be the only operating assets it will have to carry the corporate overheads on its own. The cash proportion of these overheads amounted in the last two financial years on average to US$6.1M per annum.

With a mining contractor responsible for purchasing the equipment, the processing plant available and probably only needing refurbishment, capital expenditure is very limited and provisions of US$15M have been included for remaining studies and refurbishment of infrastructure. The closure and rehabilitation expenses have been guesstimated at US$5M.

The model includes the 2.0% royalty to IMC up to the higher of 12,000oz or A$20M. The Western Australian government is entitled to another 2.5% royalty.

The corporate income tax rate in Australia is 30%. Taxable income is based on EBITDA minus amortisation/depreciation of capital expenditure over the remaining life of mine with an inclusion rate of 30% on sustaining mine capex and 100% for mill capex. Of the mine capex 70% was included as part of cost of sales for tax purposes.

Tax losses may be utilised and carried forward indefinitely to off set against future assessable income provided a “continuity of ownership”(more than 50% of voting, dividend and capital rights) or a “same business” test is satisfied.

Investments in working capital have been ignored.


Figure 47.2_1 shows the forecast financial performance over the LOM for 2 scenarios: one without dilution and another with.

Table 4.7.2_1| Novo Resources Corporation | Forecast Financial Performance – Beatons Creek

The table above indicates that the operation will have a very high cashmargin of almost 53%, even at a dilution rate of 30%.

With very low capital expenditure requirements the amount of EBITDA available for distribution to shareholders is more than 61%, despite an effective income tax rate of almost 30% of EBITDA.

The Crux Investor analysis generates a theoretical NPV7.5 of US$253M

The NPV7.5 of US$253 million is many times the assumed remaining initial capital expenditure requirement, which is high compared to peer projects.

Table 4.7.2_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters for the scenario where there is 30% dilution of gold grade.

Table 4.7.2_2 | Novo Resources Corporation | Sensitivity of the NPV (in US$’million) to One
Percentage Point Changes

The table illustrates that a one percentage point change in the gold price (i.e. US$19.3/oz) increases the NPV7.5 by only 2.2%, again highlighting the very high margin earned at Base Case metal prices. The sensitivity to one percentage point changes in working cost (i.e. US$0.43/t treated) results in changes in NPV7.5 of 1.0%.

Unfortunately, promises of technical reports are going backwards, not forwards.

There are, however, reasons to believe that the resource at Beatons Creek is never coming out of the ground. Quoting the Crux Investor report from earlier this year, “in September 2015 when Novo announced a Resource of some 292,000 oz in near-surface oxides at its Beatons Creek project, it also stated that there was a plan to release a PEA within the next 2-months. This was a great start and an admirable goal. However, Exploration continued, expanding the envelope of known mineralisation, but the proposed PEA for Beatons Creek was not completed.

In 2017 the company announced that it would release a PFS during Q4 2017

Over 18-months later, in May 2017, the company announced that it would drill another 10,000 m and dig another 800 trenches to expand and upgrade near-surface mineral Resources at Beatons Creek. It also stated that it was “targeting completion of a Prefeasibility Study (PFS) for the Beatons Creek Gold project by fourth quarter of 2017.”

In 2018 the company announced that the project was the best in the region

Note that in 2017 it is the more advanced report that is promised- a Pre-Feasibility Study (PFS), which is considerably more detailed than the PEA, that was promised in 2015. What happened next is that Exploration continued, expanding the envelope of known mineralisation, but the proposed PFS was never published. At this point, technical credibility starts to be questioned.

In 2019 the company announced that an Options Study on the project would be published

Perhaps learning from this habit of over-promising, by the time the November 2018 Resource Update for Beatons Creek was published, the accompanying technical language had been toned down. No studies were promised, instead, an opinion was aired that management thought it was one of the best deposits in that part of the Pilbara.

Crux Investor believes that the Beatons Creek resource is never coming out of the ground

Fast forward to April 2019 when another Resource Update was announced for Beatons Creek, this time taking Indicated Resources to 457,000 oz and Inferred Resources to 446,000 oz. The accompanying language was circumspect, saying that the Resource “demonstrates the potential for conglomerate Gold deposits in the Pilbara”. In the same month, it was announced that an Options Study would be completed on Beatons Creek and Karratha combined, for delivery in Q3 2019.

Note that Option or Trade-Off Studies are usually carried out internally and are typically a precursor to a PEA, which in turn is quite a step back from the promise of a PFS 2-years earlier. What this means is that the project actually appears to be going backwards, not forwards.

All in all, although the NPV creates a positive number, the resource does not look as if it will ever come out of the ground.

Aurion Resources (AU) – The Next Abitibi Gold District is in Finland

Aurion Resources.
  • TSX-V: AU
  • Shares Outstanding: 83M
  • Share price C$1.62 (19.08.2020)
  • Market Cap: C$135M

Interview with Mark Santarossa, VP Corp. Development of Aurion Resources (TSX-V: AU)


Aurion Resources is a Canadian mineral exploration company listed on the CVE and the OTCQX Best Market. The central strategy is to acquire early-stage precious metals projects and advance them via ‘direct exploration,’ driven by its experienced management team and business/JV partnerships.

The focus for this gold explorer right now is on exploring its flagship Finland-based Risti and Launi Projects. The gold player also aims to advance JVs with Kinross Gold, B2 Gold, and Strategic Resources in Finland. It is an interesting, multifaceted gold mining story that is hoping to leverage the soaring gold price.

We Discuss:

  1. 2:24 – Company Overview
  2. 2:48 – Abitibi #2: Why Finland?
  3. 6:20 – Team Experience and Work in Finland
  4. 9:11 – Business Model
  5. 10:28 – Monetizing Relationships: JV Upside
  6. 11:44 – Money: Cash Position, Burn Rate, Raises
  7. 13:36 – Share Price Dropped and Hasn’t Recovered: Why?
  8. 16:11 – Significance of Matti Talikka: Vision VS Targets
  9. 18:39 – Road to Economic Success: Allocating $10M
  10. 20:51 – Share Structure: Large Institutional Holding
  11. 23:03 – Utilizing the Bull Markets?
  12. 24:37 – Post-COVID Normality: Getting Back on the Ground

CLICK HERE to watch the full interview.

Matthew Gordon: why don’t we kick off with that one-minute overview of what it is that you are.

Mark Santarossa: We’re a high-grade Gold exploration in Finland, in what’s known as the Central Lapland Greenstone Belt that is very prospective for Gold.

Matthew Gordon: There’s some pretty big names ploughing in. Why?

Mark Santarossa: Above other things, number 1, it’s a great place to work. The Fraser Institute has always ranked in the top 10 for mining investment. In 2019 it was number two. But aside from that, the geological opportunity is incredible. It’s a major Greenstone belt in the same scale as the Abitibi that most of us know of, hosting major Gold camps like Timmins and Kirkland Lake as well as Val D’or. And then, as well as Western Australia with the Coolgardie, Waroona or Southern Africa and Zimbabwe, Creighton.

The one major difference that you have in the Central Lapland Greenstone Belt is a lack of discoveries to date. If you think about the Abitibi or Western Africa, you’ve got hundreds of millions of ounces that have been discovered in those major Greenstone belts where you don’t have that yet in the Central Lapland Greenstone Belt. And why is that? You just don’t have 100 years of exploration history. Mining and exploration started in the Abitibi in Western Australia over 100 years ago. Exploration was in state hands up until about 1995 so you’ve only got a couple of decades. That’s why you haven’t had major discoveries.

To date, you’ve only got one big discovery and that’s Agnico’s Kittilä Mine and that’s really it. When you think about the opportunity, the chances of finding a big deposit are here where no one has actually looked for it yet. The geology is right. The structures are right. It’s exactly where you want to be when it comes to finding a major Gold deposit.

Matthew Gordon: Why do you get to make those sorts of comparisons? What is known about this district in Finland?

Mark Santarossa: What was been missed are a few things. Why you haven’t had major exploration? The state-run mining company did explore, they’re exploring for base metals. They actually made Gold discoveries but took all that information and filed it and archived it and it was left kind of untouched. That’s the first. Second, it’s the right age of rocks. We are talking rocks that are several, almost 2 billion years old, similar to the Abitibi, similar to Western Australia. We’re talking about the same age of rock, same types of rocks that you’ve got in both of them. Then you’ve got structural features as well, in particular, what we’ve locked up, we’ve locked up an 80km section of a 125km-long crustal-scale fault. That’s actually the equivalent of the entire Porcupine-destor fault or the entire Cadillac Lerner Lake deformation zone in Canada. So that’s why we feel that we’re onto something that looks very similar to what most of us Canadians know, is the Abitibi structure and geology are very similar. We know there is Gold there because the GTK, the state-run geological survey has actually already discovered Gold on that with numerous currencies that they had discovered on there, but never followed upon.

Matthew Gordon: Tell me a bit about the team. I noticed Matti Talikka has come on recently. I guess he didn’t drive you there so who was it?

Mark Santarossa: Interestingly enough, it was Mike Basher, who’s our founder and president and he’s continuing on. And it was his vision. It was his knowledge, he’s actually an incredible geologist and made several discoveries already around the world including co-discovered the Hammer down deposit. He saw these rocks in a similar setting to what has been seen in Timmins and in Kirkham Lake. He went to Finland and staked ground, bought some pieces of land, making small deals very quietly while no one was there. You had some small companies, but part of the issue why we don’t think that a lot of big Canadian exploration companies came in early on was mainly because 1, 1995 was your first chance to get in. Soon after you had reacted a collapsing kind of junior exploration and there was very little mining investment globally going on anywhere. And then you have the Canadian experience of North of the Arctic circle; you think of Nunavut and the Northwest Territories, and the challenge that is to get there. It’s very expensive, it’s usually fly-in, fly-out camps. It’s very expensive just to even set up a camp there never mind the exploration itself. What that probably did is put off Canadian explorers from going to Finland above the Arctic circle. Now that’s not the case because the Arctic circle in Finland is actually 20 degrees Celsius warmer on the average in January and that’s a function of the Gulf stream. We don’t have permafrost, we have paved roads right to the site, we have excellent access, so it allowed us to stake a lot of great lands. And that’s why you didn’t have any major discoveries for a long time up until now.

Some of our neighbours have had some great success, Rupert Resources, who have drilled a couple of great holes and discoveries right on our property boundary with our JV, B2Gold. We’ve made a discovery ourselves and a number of surface discoveries as well. And, of course, there’s, Agnico, who’s been very successful in our neck of the woods.

Matthew Gordon: Could you just talk about that business model for us? What is it you’re trying to be? And at what point do you take projects to, and what’s your game plan for the company?

Mark Santarossa: We have got JVs that we’ve got with some excellent partners: Kinross and B2Gold, and they’re moving those along, but we’ve also got 100% land that we’re doing all the work ourselves. We’re currently drilling we’ve been drilling on them since about 2017, late 2017. We’ve made one major discovery in our view on our property, but we think there’s a lot more to do. We’re still in the exploration phase, early exploration phase. As far as I’m concerned, we’ve made one discovery and we think our properties have a number of more discoveries on it, all within a small area. That is our task and our goal is to uncover as much as possible within a small enough area to show how big the opportunity is to one of the majors. Hopefully, at some point, we either sell to a major and create value to shareholders that way or if we have to, we will take it to the next level.

Matthew Gordon: Let’s talk about Kinross and B2: what’s happening on those particular assets? What’s the upside for you? And at what point do you start to monetise that relationship?

Mark Santarossa: On our B2Gold joint venture, they’re currently earning into about 70% of the property. We are free to carry on everything, B2Gold is spending money over that. They’ve already executed on the first 51%, and that will happen in August 2019. They spent USD$5M and issued a number of B2Gold shares, which we currently own. They’re now spending USD$10M over 2-years. So through 2020 and 2021, to earn up to 70% on their properties. They’re currently drilling, and they are they should have some assays out on some of those properties in the next weeks, or within a month.

The Kinross property, they’re also running to 70%, also free carry. There is no step there and indirectly in the 70% on that. And they’re currently drilling as well.

Matthew Gordon: How much money have you got today?

Mark Santarossa: We’ve got about USD$10M in the bank so we’re fairly well-funded still. Our burn rate, because of COVID, has actually slowed down a bit. We are starting to try to ramp that up a little bit. But we are drilling, we just had a rig just come back on-site and it’s targeting a new geophysical discovery or anomaly on our property, 6km of drilling that we’re going to be doing on our longest 6km-long trend connecting our Aamurusko discovery to another one of our surface discoveries. We’re going to joining along with that, and then we’ve got a second rig, hopefully coming in an early September to drill test one of our other targets on our 100%-owned property.

Matthew Gordon: Is there any more cashflow coming in or have you got to make this USD$10M last as long as you can? Do you need to go and raise some money anytime soon?

Mark Santarossa: The way we look at capital raising, we try to manage our money very well. So that’s why we don’t have 5 or 6 rigs turning at the same time. It can get very expensive and you haven’t made an easy, efficient discovery to drill or something that we can just drill easily and efficiently. We were just wasting money. There’s no money coming in from Kinross or B2Gold for the JVs. At this point, it’s just their exploration spend. The USD$10M will last us into 2021, but of course, we’re tactical; if there’s an opportunity to, if the exploration wants expansion, we may go look to the market and see if there’s capital available, but that’s all results-based.

Matthew Gordon: What happened at the beginning of this year? Where do you think your money has gone?

Mark Santarossa: We agree – we’ve lagged a bit. What happened earlier in the year was we drilled our second flagship. We have two flagship assets. The second flagship, we only got the exploration license early in 2019 and did all of our work there. It was the first 6 holes that we drilled on it while they were, as the geologists will call them a technical success, we hit a little bit of Gold, but it wasn’t what we had expected. I think it wasn’t what the market was expecting. I think that that’s the bigger thing. The market was expecting something more, given what we had on the surface and what we were recovering on the surface from samples there. So that was the major sell-off and I think the market really penalised us for that miss, but I think they also forgot when they took us down to that level that was actually a discount us to before our Gold discovery in 2017. It wiped out almost three years of our efforts.

Looking forward from that moment on, yes, we had COVID and things kind of slowed down. We do have a team on-site still there. They are Finnish consultants. They’re still working. They’ve been working throughout the entire COVID crisis. And so, we have been advancing, I think what the market has penalised us for was just being slow and slow with information and news. We have been in the past. Part of that was our primary target, Aamurusko, which is on our Risti property. We made our discoveries, acquired a helicopter, and it was just slow drilling, inefficient drilling so it just took time. We’re trying to change that by targeting prospects that are in flat areas that do not require a helicopter, which we have a number of. Our major discovery was made on the only hill on our property, but we are focused on getting news out faster, which should bring the shareholders back. Of all the complaints or any sort of a negative that we had, was we just weren’t newsy enough. We watched all of our peers, they just talked about increasing their drill program by 50% and their stock went up by 30%, that kind of thing. I think has been the lag on our part.

Matthew Gordon: What’s the significance of Matti Talikka coming in?

Mark Santarossa: Matti has been with us and he’s been on the board since 2015. He’s been kind of part of the team the entire time. The significance is Matti is, he is a Finnish national, while he lives in Canada, but he is a Finnish national and can travel back and forth freely. He is well known in the exploration world in Finland. He’s worked in Finland for a number of years, worked for Uber Tech, worked for Dragon mining, who we actually purchased our first property, back in 2015. He’s been around for a while. He’s well known there. He’s also very technical as well, but what it does is, it allows Mike to be the visionary that he is. Mike is the founder and the visionary, and this is his vision that he sees on what this property can be. This frees Mike up to do a lot of the exploration and targeting and really thinking about where he wants to point the drills and where we should be going. Matti will take a take on a lot of the administrative role, the more community relations role, the logistical role in-country. And of course, it also bodes very well in-country to have a Finnish leader of a company when you’re working in-country. It just works really well for the community.

Matthew Gordon: Do you want a visionary, or do you want someone that can hit targets?

Mark Santarossa: He has been hitting targets, but it was his vision that allowed us to move to Finland in the first place and to see that how big the opportunities are.

Matthew Gordon: How do you address that?

Mark Santarossa: We’ve got the team, and he took the shots that we thought were the best shots, the highest probability shots. But as you can expect, it was only 6 holes in a very small area that were drilling in, so it was not indicative of what the opportunity was. Even on that secondary property with some very interesting results in our last press release so we’re pretty excited about what that opportunity is as well. While we haven’t hit the home run on that property yet, we have hit Gold on almost all the holes that we drilled.

Matthew Gordon: How do you spend USD$10M in the best possible way to ensure that you create real value and excitement in the market?

Mark Santarossa: The USD$10M, again, the whole USD$10M isn’t going to this, but part of that USD$10M is going back to our flagship property, Risti, which is about 10km away. It’s drilling on the extension from our already known discovery, which is the Aamurusko prospect on Risti. It is drilling eastward from there along a structural target where we’ve done extensive work and that we know that there’s Gold on the structure. And then the second target that we’re drilling on is something that has historical drilling, about 130 holes that have all got ore grade, ore width, the deepest holes are 140m deep. Most of the holes are less than 100m and are structurally sound, geologically sound. We know there is Gold there because the Gold has been hit in the past. There are 130 holes already into it. So, we are targeting targets that we believe are very economic.

Matthew Gordon: In the sense that they are high grade things that you’re chasing.

Mark Santarossa: Very high-grade, very near surface, all starting at surface, as anyone would know, anything in the Abitibi goes kilometres deep so we’re literally just scratching the surface on our properties.

Matthew Gordon: Why wouldn’t you have started there rather than what you’ve obviously spent a little bit of money on towards the end of last year?

Mark Santarossa: Absolutely. And we believe that these are high-probability targets that we’re going after.

Matthew Gordon: Talk to me about the share structure, the corporate structure, it seems to be very institutional heavy for a company of your size. Why is that?

Mark Santarossa: Early on, we got involved with some of the big purchase manager institutions in Canada: RBC Global Asset Management and McKenzie, they’ve been strong holders and they have been very good followers of the name. I think what they see, like others, is that this is a major opportunity to get into a major Gold camp, an emerging major Gold camp, similar to something like the Abitibi, but they were 100-years ago now, we’re not going to take 100-years to prove up what we’ve got, but everyone would want to have their name associated with that kind of discovery and that kind of opportunity. And I think that’s why they came in as early as they have. Eric Sprott was really excited by some of our results last year, which is why he came in and he’s at above where the prices right now.

Matthew Gordon: What are you learning from them?

Mark Santarossa: From Kinross, Newmont, Goldcorp, who was also a shareholder, B2 wasn’t a shareholder, but they are a JV partner. They came in and saw what we saw. They have walked the ground. Early on, they walked around the solid borders in these incredible boulder fields with very high-grade ports vein sitting on the surface. They say that this is something they’ve never seen before in their history as being geologists. In all the projects they looked at they’ve never seen anything like this, on this scale and in this grade, sitting at surface, which is why they got involved and why they continue to be involved. Kinross has participated in every financing that we’ve done ever since they came in in 2017.

Matthew Gordon: Are you not tempted to go and get a bunch more money and scale this thing up, get things moving quicker?

Mark Santarossa: Everything is an innovative process for us. We don’t want to go and just raise capital for the sake of raising capital and diluting shareholders. I think what we want to do is, as mentioned, get onto a target that we know that we can continue to drill and accelerate. We’ll start with one rig and then if we have success with that one rig, then we’ll grow, and we’ll accelerate that drilling and we’ll look to raise capital to accelerate that drilling at that time. But it’s with success and not just raising capital for the sake of raising capital.

Matthew Gordon: Are you nervous at the moment that the market isn’t seeing what you were seeing?

Mark Santarossa: It is fixable. I’m not that nervous. I think this is partly on our shoulders and the slowness of news that we put out. I realised that, and that’s part of the reason why I’m picking up and they brought me in, was to be out there a bit more, tell the story a little bit more. The most important part is we need to be drilling. And of course, we’re doing that now. With drill results comes news and with the news comes more me talking more.

Matthew Gordon: Thanks for the catch-up. It’s a nice run-through of where you’re at. And we did speak a couple of months ago. We need to kind of see more, as you say, you need to get out there. Is the crew still back in Canada, or have you got people back in the field now?

Mark Santarossa: We’ve always had someone in the field, as far as we’ve had our Finnish contractors there. We’ve got a couple of excellent geologists that are leading the charge from there. We have regular calls just as updates. And so, our Canadian team is still working remotely. We are working to get them back there now.  That will also de-bottleneck a few things; with a smaller team of consultants that are contractors we have in-country, it slowed things down a little bit as well during this period, but we’d like to get our team back in there. We’re still not there yet, but we are operating. We do have a team working in-country.

Matthew Gordon: Thanks for the update.

Mark Santarossa: Absolutely. Thank you very much, Matt.

Company Website:

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Precipitate Gold (PRG) – Exciting Developer near Barrick’s Top-5 Global Gold Asset

Precipitate Gold Corp.
  • TSX-V: PRG
  • Shares Outstanding: 106M
  • Share price C$0.16 (04.06.2020)
  • Market Cap: C$16M

Interview with Jeffrey Wilson, President & CEO of Precipitate Gold Corp. (TSX-V:PRG)


Precipitate Gold is another gold mining story looking to take its place in the gold bull environment. Precipitate Gold is a gold developer that owns 3 gold assets in the Dominican Republic: the flagship Pueblo Grande gold project, the early-stage Ponton gold project and the parked Juan de Herrera gold project. What is the latest news?

The ground magnetics geophysical survey conducted at the Copey Hill epithermal gold target of the 100%-owned Ponton Project has reported highlight values of 53g/t gold and 17g/t gold. In general, this project could have some good geological potential. Ponton’s tenement measures 3,250 ha and it is excitingly situated just 35km east of Barrick’s ‘world-class’ Pueblo Viejo mine and 20km east of Pueblo Grande Project. Investors should note that Pueblo Viejo is the largest active gold mining operation in Latin America and is one of the top 5 global gold assets. One couldn’t really wish for better company. Things appear to be lining up nicely and the share price has been on the rise impressively. It is clear than Precipitate Gold is trying to leverage the under-explored, highly-prospective nature of Dominican geology to develop Ponton into a de-risked, district-scale gold resource before selling it to a mid-tier/major gold mining company.

Having reached an agreement with Barrick Gold this year, Precipitate Gold has sufficient capital to continue drilling at Ponton whilst developing the 9,863ha Pueblo Grande land package. Work includes selective surface geochemical sampling, systematic rock-clay alteration surveying (via portable spectral mineral analysers), geological mapping and, most importantly, an initial 2,500m of exploration drilling. Precipitate Gold has recently signed an agreement with gold giant Barrick Gold for Pueblo Grande: a $10M earn-in agreement for 70% interest.

Precipitate Gold has US$2.3M of cash to conduct its drill programme alongside Barrick at Pueblo Grande, while keeping Ponton as the second priority. Juan de Herrera still has regional licensing issues and sits on the back-burner.

We Discuss:

  1. 1:43 – Company Overview
  2. 3:09 – Mining in the Dominican Republic: Change of Government Beneficial to Companies?
  3. 7:27 – Progress & Potential: The Business Plan
  4. 12:38 – Financing it All: Options Available
  5. 13:44 – Progress with Pueblo Grande: Deal with Barrick Gold & Terms
  6. 18:55 – Ponton Project: Challenges and Progress
  7. 25:40 – Cash Position, Allocation and Debts
  8. 27:08 – Acquisition of Equipment: How are They Sharing with Barrick?
  9. 29:44 – Bull Market’s Impact on Timeline, Strategy, & Raises

CLICK HERE to watch the full interview.

Matthew Gordon: What have you been up to? 

Jeff Wilson: It’s been interesting times, and lots have been happening, not only for the company but certainly here in the market, and the Gold space has been a very exciting spring and summer.

Matthew Gordon: Your share price has doubled since we last saw you.

Jeff Wilson: We had a few news catalysts that came together late spring, and we’ve seen some nice trading volume and some nice movements here, but it’s a little bit of rising tide. We’ve also had some fairly progressive good news into the market and been rewarded for it, which is nice.

Matthew Gordon: Give us that 1-minute overview of what you have and then we’ll pick it up from there.

Jeff Wilson: We’re a junior exploration company focused in the Dominican Republic as a jurisdiction. We have got 3 key projects or assets all in the Dominican Republic at various stages of work, one of our first forays into the country was a project called Juan de Herrera, which is adjacent to an existing resource held by a company called Gold Quest. We’ve done a couple of drill programs there, delineating the number of targets, many of which are drill ready. We’ve parked that over the last couple of years due to some circumstances with respect to politics. We then shifted over to the central part of the country where there’s much more mining activity. It’s a little bit more mining-friendly and we picked up 2 key projects in that part of the country:  Pueblo Grande & ponton. Pueblo Grande is very strategically located; adjacent to one of the largest mining operations in the world run by Barrick. Ponton was a very interesting, early-stage but quite significant untested project about 25km away. Those are the main 3 properties that make up our property portfolio and we’re looking forward to seeing work on all 3 of those projects between now and year-end.

Matthew Gordon: How have things been since the new government stepped in?

Jeff Wilson: Things have been quite positive. We did have some stalls with the previous government. Nothing major as far as we are concerned. There were some hang-ups with certain projects. But our experience was we were able to get our permits and do our work, get the necessary green license needed. But this change in government has shifted to a much more business-friendly economy, and in turn, pro-mining mandate. Obviously, with what’s happening with COVID in the economic downturn that creates in a very tourist-centric economy like the Dominican Republic we’re seeing much more of a push towards the upside and the potential economic benefits of mining. We’re hearing a lot of that commentary from the new inbound president and the government so that’s been very positive for us.

Matthew Gordon: You must be pleased, but imagine not as pleased as Gold Quest on the Juan de Herrera project,

Jeff Wilson: Correct. As some people may know, Gold Quest and their Juan de Herrera project is a several million-ounce resource project at a Prefeasibility stage. It’s got lots of exploration potential and was one of the catalysts for our entry into the country back in 2012. It’s been hung up on some politics and really a permitting or a license to get through into exploitation from exploration, that’s been a long-drawn-out process under the previous regime. There were some issues related to the outgoing president that it just seemed to sit on his desk, and I think with the change in politics, as you say, I think this shines a very positive light for Herrera and hopefully getting that that license that it needs to move this project through development and any forward movement there will benefit us as well.

Matthew Gordon: What are the economics looking like for you if the project gets going? When do your shareholders get some benefit?

Jeff Wilson: Again, it is a great unknown in terms of when a license would be granted by the government. There are lots of shuffling, as you can imagine, with respect to cabinet appointments and new ministers and that kind of thing. We’re going to have a little bit of a transition period here compounded by what’s happening in the COVID world that we’re still living in so I’m not under the impression that something’s going to happen tomorrow. I think in due course there will be some positivity. That would allow Gold Quest to move that project into Environmental Impact Studies and marching down the path towards a proper Feasibility Study deposit.

The positive impact on that for us does not only do they have a significant existing resource; they have a lot of exploration targets within their property package as well. We’re sitting immediately adjacent to them, right up against their claim boundary for about a 40km strike. In the same geological terrain, many of their existing exploration targets butt-up against our claim boundary and seemed to coincide with some areas where we’d identified some significant mineralisation as well, whether geochemistry or drill results of our own. You’ve got this potential of this underexplored exploration potential throughout the belt. I think for anybody to go in and want to really push hard on exploration to try to find Gold in an area, you want to know that the guys that have already found it can be successful in extracting it; that paves the way for investors to be more comfortable, for our company to be more comfortable and Gold Quest similarly, in continuing to invest in the exploration upside and identifying more known mineralisation.

Matthew Gordon: What are you relying on now happening?

Jeff Wilson: We’ve got an extensive amount of data. We were there operating fairly actively again. The market wasn’t great so there were some fits and starts with respect to access to capital etc. But we were there from 2012 and quite active up until 2016-2017, so we’ve got an extensive number of targets. We’ve done an extensive amount of soil and rock sampling, geochemistry, geophysics and delineated a number of targets. In fact, we’ve got drill permits for multiple target areas within our land package.

 Gold Quest, when they put the brakes on, they had just received about USD$23 24M equity investment from Agnico Eagle whose mandate with that investment was the exploration upside. They believed that Gold Quest had a nice deposit in a nice attractive possible mining operation, but the exploration potential within the district was really what attracted them. I think that’s validation. I think when a mid-tier major comes in and invests in the exploration upside, it’s a validation of the potential to find more in this belt and district.

We feel as if our land package is as prospective as many of the targets that Gold Quest delineated, yet our market cap is significantly lower. We don’t have the anchor or the foundation of several million-ounce deposits in place, but we think there’s lots of potential in this belt and really, it’s a matter of getting the social comfort and the licensing comfort to justify investing back into the exploration of this district.

We’ve got multiple, very advanced targets that we’ve delineated through several stages of work and are keen to, at the right time, to deploy our crews back into the field and try to bring these targets to a drilling stage very promptly. Again, many of them are permitted already.

Matthew Gordon: Have a conversation with Gold Quest?

Jeff Wilson: Yes. There’s been a lot of talk about that since 2012 frankly when we entered into the fray and picked up the ground adjacent to them. One little sidebar to that is the Dominican Republic had a policy under the previous government about a certain number of hectares that any company could own so we were often asked: why were you able to get this very strategic land package immediately adjacent to a brand-new discovery? The reason was that they were maxed-out on their landholding, so we were able to slide in ahead of the crowd and pick up a pretty extensive land package in the same geological terrain. So yes, there’s been a lot of talk about the potential coming together or consolidation of that land package, and we’ll see.

Matthew Gordon: Is this something you would want?

Jeff Wilson: It would have to be in the best interests of shareholders. For us currently, there’s lots of upside for us to add value within our own land package. We really only drilled 2 targets, maybe a total of 25 drill holes, something like that, so there’s still a lot of work to be done on our ground to really delineate and get a better understanding of what we have. Doing something like that today might be a bit premature. But anything’s possible, I suppose.

Matthew Gordon: Do you know what your plan is yet?

Jeff Wilson: Right now, the best path forward for that land package is to advance some of these targets, get some of the primary targets within our land package better tested, get a better handle on what we have. With respect to – what you’re insinuating here – to a consolidation. I think it may be the kind of thing wherein the current Gold environment Gold Quest has a fairly attractive Prefeasibility-staged asset in a jurisdiction that has suddenly become a little more attractive or de-risked to some extent in the eyes of the bigger industry. You may start to see some mid-tiers or maybe even some majors starting to look at what Gold Quest has, look at the surrounding ground in the land package. Maybe that’s where the consolidation could come. Something like that might make more sense.

Matthew Gordon: Where are you going to get the money to do further work on it from?

Jeff Wilson: Up to this point we haven’t really raised money or sought money because, for the last few years, it’s kind of been passive and been sitting on the sidelines. The money that we have in the treasury and the money we raised was largely for Ponton, but this emergence of Juan de Herrera and the upside of Romero we saw coming because we knew that the presidential election was coming and that going to be a change and we were monitoring the polls. What we’d like to do if we’re going to start to contemplate getting back and getting active there again, it’s a big land package, lots of targets so it will require a little bit of cash. We would go back and revisit some of those targets, revisit some of that prior data, which was quite impressive, and maybe start to shine up the potential of that project, perhaps look to do financing specific to what that budget or those needs might be.

Matthew Gordon: Can we talk about Pueblo Grande? How much money have they spent so far, and have they spoken to you about it?

Jeff Wilson: It has moved on. I don’t have a number for you in terms of what they’ve spent so far. I will admit right off the bat, they were affected a little bit by COVID restrictions in terms of boots on the ground and doing work. Because the exploration of Pueblo Grande was outside of the mining operation at Pueblo Viejo, which is their operation right next door. They were able to continue mining at Pueblo Viejo under very strict policies but getting boots on the ground on our project was delayed a little bit. That’s since been relaxed. They can get going again. We’ve been informed by Barrick, and in fact, we put a news release this effect a couple of months ago, is that they had started data evaluation and revisiting some of the geochemical and geophysical work that had been done. They were going to initiate some of their own ground surveying. My understanding is they are currently altering some of the drill permit applications. We had drill permits for it ourselves. They’re maybe going to drill it a little bit differently than we had initially planned so they’re altering and dealing with the government and altering some of the permits. The message from them is they expect to do a minimum of 2,500m of drilling at the primary target where we were focused, which is the Lithocap zone, between now and year-end.

Under the terms of the agreement, they have to provide us copies of any approved budgets, work programs and quarterly reports of any work that’s been done. The question always arises once you do a deal with a major, you’re never going to get any news flow. You’re never going to know what’s going on. In this case, we’ve got a fairly good handle on keeping ourselves informed and therefore being able to keep our investors informed. We expect some things to come between now and year-end. If that drill program gets conducted, we should have results by the end of the year.

Matthew Gordon: Are you going to cut them any slack, given that Covid has happened? Do the terms change?

Jeff Wilson: We cut them a little slack in the final stages of negotiating of the deal because COVID was upon us at that time, and the initial deal put their feet to the fire pretty quickly to spend in year 1. We agreed to push that out, instead of USD$1M in year 1, we made it USD$2M in the first 2-years in order to compensate for the fact that the whole COVID thing was a bit of an unknown. I think they’ve been given a reasonable amount of slack and we would expect them to uphold the terms the deal.

Matthew Gordon: Within the 6-year time frame, can they opt out at any point? Are there any kind of punitive charges for them doing that?

Jeff Wilson: A couple of quick things: one is they have to spend a minimum of USD$1M regardless if they want to cancel the deal tomorrow. The way that that manifests itself is if whatever they have not spent to get to USD$1M, they pay us in lieu of cash. Let’s say they spent USD$500,000. They kill the deal. They write us a cheque for USD$500,000 and walk away. After the first USD$1M, they have the right to walk away at any point in time. What we like about this deal is that it really is an all or nothing on that 70%. There’s no spend USD$3M, get to 51% and then take the hammer and delay in this instance. It’s spent the USD$10M over 6-years to earn 70%. They must deliver Prefeasibility otherwise they get nothing. For those who don’t know, it’s no small task to spend USD$10M in the Dominican Republic, when you have a central operation right next door, you have people, equipment, you’re not shipping things in from other places. It’s a big spend to spend USD$10M in the DR, and to deliver Prefeasibility in 6-years, so I don’t see a lot of room for them to delay. Again, we feel as if we have got, not their feet to the fire, but it’s a deal that keeps them on track. If at some point it doesn’t deliver for them, we will get it back 100%.

Matthew Gordon: What was happening at Ponton?

Jeff Wilson: It’s actually come together quite nicely since we last spoke. That was a project that initially when we did the deal with Barrick, they had inquired about including Ponton in the Greater Pueblo Grande earning agreement because it’s only about 25km away from Pueblo Grande and Barrick’s Pueblo Viejo mining operation, in the same geology. We elected to keep it. My technical team, my Vice President exploration, Michael Moore, really liked the project in spite of the fact that we hadn’t really done a lot of work with it ourselves. We inherited a data set from the previous operators that we hadn’t spent a lot of time looking at because were very focused on the big prize next to Barrick. When were force with do we want to keep this or make it part of the Barrick deal, we dug a little deeper and recognised that there’s a really compelling geochemical target here: there is Gold in soil anomaly that’s never been drilled? It is peripheral to a fairly interesting, what appears to be a Gold-Copper porphyry. All of this speaks to what could be a pretty compelling epithermal system.

We kept it ourselves and when we did the deal with Barrick, we got a USD$400,000 injection of capital from Barrick in the form of a private placement so we were nicely cashed up with USD$2.5M or so in the till at that time. We set out to better understand this project and some of the prior work.

We inherited some geochemical anomalies on the property package, but our first phase of work was to go in send crews in, which were able to do because of our existing tenure in the Dominican Republic, in spite of the COVID restrictions. We had a good network of in-country geological expertise and field crews that we’re able to send locals into the project, again a little bit later than we had initially expected because of early restrictions. We basically collected soils over that Copey Hill Zone within the property and we expanded that anomaly. There was already a fairly sizable 1km by 0.5km Gold anomaly in soils. We expanded that out to the north and northwest and tightened up the spacing. Where prior operators had collected soils every 50m, we collected soil samples every 25m to really get a better density and understand the concentrations. That has returned some nice Geochem in soils, but also along the way we collected some fairly compelling rock samples as well. We were collecting many high-grade rock samples: 7 g/t, 17g/t, 53g/t Gold in rock samples all within a fairly consistent and concentrated area within the Copy Hill.

Now, just as a bit of a sidebar, the Dominican Republic in our experience hasn’t delivered a lot of that kind of surface mineralisation. A lot of the projects in the targets that we’ve delineated, just based on the country’s geology has been a little bit more benign and you get these subtle anomalies. But in this case, to get these high-grade numbers was quite unusual.

The next phase of work that we are finalising now is to run ground magnetics over that. Again, it’s the same sequence of work that we conducted at other projects that have been successful. We will get the Geochem, get an idea where there’s Gold at the surface and then run ground magnetics or ground geophysics over that to see if you get some indication of what the geophysical signature might be. And we’re hoping to have those geophysical results in the coming weeks, which will give us an additional layer of data that we will utilise for drill targets.

Matthew Gordon: What do you hope to know at the end? What do you want to be able to go to the market and say about Ponton?

Jeff Wilson: If you were to ask my geologist, even 6-months ago, when we shifted gears from Pueblo Grande to Ponton, I think his words were, ‘If you put a gun to my head, I could drill this project tomorrow.’ It’s compelling enough. It’s a fairly straightforward model. In fact, one of my geologists on the board, Quinton Hennigh, said early on in this project when some of this geochemical data came up, he said, ‘This is a walk-up drill target. You don’t have to over-science this; this is pretty straightforward stuff. We have a very concise and simple geochemical anomaly and model, but what we like to do and we’ve done this in the past with Juan de Herrera, with target delineation and with Pueblo Grande, we add layers of data that help us vector so that we know where within a broader anomaly where we actually want to put a drill hole. For us, we see the characteristics of an epithermal Gold system here early on, and if the geophysics pan out and we get some magnetic lows coincidental with these rock samples and high-grade concentrations of Gold, that will be that second layer of data that vectors us to where we might set up a drill rig.

The goal here is to get this drill-ready in the coming months, sometime in the next couple of months seems realistic to me. It will be a compilation of geochemical results, geophysical or magnetic results and some mapping, just understand the geology. We layer those 3 together and start to plot up a drill plan.

Matthew Gordon: When will you next need to come back to market and raise some capital?

Jeff Wilson: We are in a fortunate position. I’d like to give ourselves credit for it; we own all of our projects 100%, so we don’t have any underlying option payments where we’ve got a dole out hundreds of thousands of dollars every 6-12-months. Along with that, we don’t have any work commitments where you’ve got to spend USD$500,000 in year 1. The projects are owned by 100%. Holding costs are minimal in the DR so our treasury is fully discretionary, and we can spend this money as we see fit. Right now, we’re focusing the majority of our efforts towards a drill play for Ponton in the months ahead.

We’re currently sitting on a little over USD$2M, that could get us through a couple of phases of drilling at Ponton, and/or some drilling at Juan de Herrera if we decide to do that. Although, as I said earlier, I think the better plan would be to raise capital specifically for that, so our drill costs are quite low in the Dominican Republic. We purchased drill rigs earlier this year, in January.

Matthew Gordon: You talked previously about 50% acquisition costs and maintenance shared with Gold Quest. Is that still the case?

Jeff Wilson: Yes. We acquired those out of receivership for pennies on the dollar. We got what equates to about USD$800,000 worth of drilling equipment for USD$80. We split that cost with Gold Quest on a 50/50 basis and formed a little Dominican subsidiary to hold those assets. We’ve got full access to, if you were to piece it all back together because it’s in parts, 1 fully operational rig right now, we’ve got it all spit-shined and ready to go and then a couple of others that can be updated if we needed to if, at any point in time, we both want to be drilling at the same time. Up until now and maybe in the near term anyway, Gold Quest is not doing any drilling. They’ve been fairly passive while we await this license. We expect to have, essentially, full access to the drill and are hoping to deploy that, get it turning at Ponton in the months ahead.

Matthew Gordon: How do you work that? How do you guys sort that out?

Jeff Wilson: We’ve got some mechanisms in there. One of the key issues is that there are multiple drill rigs so if/when, say Gold Quest wants to ramp up and get 3 drills turning on at Romero while we want to get 1-2 at Ponton or somewhere else, there’s a capacity to, essentially, it’s a bit of a cash call and we would inject a little bit of capital to get these things up and running and go from there. We’ve got some mechanisms in the way that we’ve set up the deal with respect to costs. Essentially, if you’re using the drill rigs, you’re paying for in terms of the personnel and that sort of thing. You pay for your own costs, but we expect there to be fairly significant cost savings. We’ve also got some high-level guys in-country, a drill crew headed up by a Canadian foreman who lives in-country, and so we get the good people, we get the equipment and we can do this at a fraction of the drilling cost of what it would have cost us to contract out and do the same work. It’s the same drill rigs we’ve used, and Gold Quest has used for years, so we know it very well and it’s the right equipment for these projects

Matthew Gordon: What it’s doing at the moment with Gold are you not tempted to go to market and just raise a little bit more money?

Jeff Wilson: It’s a conversation that we’ve had internally for a few weeks. As you and I have talked about previously, the amount of money that was coming into the system over the last several months was staggering quite frankly, and I think when you see a market like that your first response is, this isn’t going to last, and then it continued to last and more and more money came in. Some of the dialogue I’ve had with some of the banking guys that I deal with is, we’re starting to see some generalist money, so you can’t help but think to yourself, should we put our hand up here and make a case for getting a little bit of capital into the treasury – strike while the iron’s hot.

We felt, however, and I do feel, and I always have that certainly raising money when the money’s there makes all the sense in the world, and I don’t dispute that ever. But I’ve always taken the view that we like to, or I like to, raise money at a time where we’ve got a very clear and focused rationale for it. And in the last couple of months, we were working on relatively inexpensive low-level work to get Ponton ready. As things start to unfold there and as Juan de Herrera starts to see some daylight, which happened in July and August, I think that creates an opportunity to say, maybe there’s an opportunity here to revisit some of those targets at Juan de Herrera, that’s going to require a little added capital that we didn’t already have in the treasury and didn’t have budgeted. This now is the rationale for it. I think people want to see that if you’re going to raise money, it’s not just to top up the treasury. It’s with a specific purpose that can bring about a return on investment for those investors. I’m going to raise money, here’s how I’m going to deploy it. And here’s the timeline for us to find out if we’re heroes or zeros based on the results of that work.

Matthew Gordon: Did you have those sorts of conversations internally?

Jeff Wilson: Certainly. And again, we wouldn’t be where we are with regards to our landholding at Juan de Herrera adjacent to Romero if we didn’t believe 3-months ago, 6-months ago 12-months ago, that the political environment was going to work favourably in that things were going to work in favour of that permit. If that was to us a complete dead Issue, we would have abandoned the ground. But we’ve always believed that the Dominican government understood the importance of mining and was going to recognise the importance of Romero and the economic benefit that it could bring.

We saw this development coming. I didn’t see this coming in the Gold market or the Gold price. I don’t know how many people saw that per se, but we saw that the landscape in the Dominican Republic was going to improve and we could see that there would be the potential to spend more money on more targets and be more active on multiple fronts. We definitely had those conversations in the summer when things were really rocking and rolling. I think that our strategy was – let’s advance a couple of these targets. The Ponton target – let’s get it to drill ready. Let’s get the final layers of work pulled together so that we’re going out and saying this is where we’re going to drill, this and how we’re going to drill. This is going to require these many metres, these many holes, similar to Juan de Herrera.

I think we’re very close now to starting to revisit some of the previous work that we’ve done there, perhaps reintroduce people, because I think a lot of people have bought Precipitate in the last couple of years solely for Pueblo Grande and are not particularly aware of the prior work that we’ve done at Juan de Herrera. If we’re able to reintroduce some of those anomalies, those targets, the prior drill results, people will recognise that in the right Gold and right political environment in the DR, which I think we’re in right now, there’s a justification for a fairly sizable budget of that project. We’re definitely thinking about that. But again, right now we’re trying to play out our strategy and bring these things to a point where hopefully we get a little bit more value. That’s a great unknown in the market and it could go the other way anytime soon. But if we lay out some of the fundamentals on a couple of projects and target areas perhaps that’s the opportune time to strike and raise the capital.

Matthew Gordon: Jeff, thank you very much for that. It seems to work elsewhere, stay in touch.

Jeff Wilson: I really appreciate the opportunity, Matt. Thanks again.

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Endeavour Silver (EDR, EXK) – Silver Comeback Story?

Endeavour Silver.
  • Shares Outstanding: 154.93M
  • Share price C$4.55 (28.09.2020)
  • Market Cap: C$704.916M

Interview with Bradford Cooke, CEO of Endeavour Silver (TSX: EDR, NYSE: EXK)

It has been a very difficult few years for silver explorers, silver developers and silver producers. Endeavour Silver is one such silver mining company that has suffered. However, the recent buzz generated by a soaring silver price has driven value into Endeavour Silver’s stock for the first time since 2017. Is this just a story that has been riding the wave of silver price discovery, or is there more to like about it?

Endeavour Silver is a mid-tier silver producer with assets in Mexico; specifically, 3 high-grade, underground silver-gold mines in Mexico: Guanacevi, Bolanitos, El Compas. Endeavour Silver also owns 2 development projects, Terronera, El Cubo, and a variety of silver exploration tenements: in Mexico, Parral, Lourdes and Guadalupe y Calvo, and in Chile, Cerro Marquez, Aida and Paloma.

Endeavour Silver wants to be a silver turnaround story. They have produced a lot of cash in the past and if they can extend life of mines for their underground projects and get lucky with the drill bit in Chile this could indeed be a story which starts to meet its promise. A long way to go between now and then, and will be interesting to following. The latest numbers to come out of Terronera in a PFS are very impressive: with a base case silver price of $15.97/oz silver and $1,419/oz gold, an 30% IRR and an NPV(5%) of $137M over an initial 10-year mine life. Could this latest potential source of silver production create even more value for shareholders?

We Discuss:

  1. 1:24 – Company Overview
  2. 2:38 – Rocky Road of Development: Challenges and Decision Making
  3. 5:08 – Mining in Mexico: Delays and Problems
  4. 7:22 – Turnaround Efforts + Silver Price + COVID-19 = Nightmare Situation?
  5. 18:08 – Terronera Project: PFS Numbers, Plans, and Potential
  6. 24:12 – Addressing Insider Selling: Company VS Market
  7. 26:54 – Outlook on Silver Price
  8. 30:16 – Hindsight and Lessons Learned: Why Did Cost Cutting Take so Long?

CLICK HERE to watch the full interview.

Matthew Gordon: Why don’t we kick off and give a 1-minute overview of the business, then we’ll pick it up from there.

Brad Cooke: Endeavour Silver Corp, founded in 2003, we bought our first mine in early 2004 in Mexico. We discovered a model of purchasing small, high-grade underground vein mines in historic mining districts in Mexico that had closed for lack of ore or money or both, and by bringing the money, the expertise to make new discoveries and fast-track a new mine we were able to build a company. That’s the history of Endeavour since 2004. 

Matthew Gordon: The underground mining in Mexico – what’s been going on? What have the problems been for you?

Brad Cooke: Let’s talk about the good times because our 3 operating mines: El Compas, Guancevi, Bolanitos, are all in historic districts, all high grade and until the last couple of years they were actually highly profitable. We pulled USD$160M out free cash flow out of Guancevi from 2005 to around 2016. We pulled over USD$200M of free cash flow out of Bolanitos from 2009 in 2018, but for almost identical reasons, both of those mines fell on hard times because the discoveries we made in the very early years that allowed us to restart those mines, they were originally shallow and thick and rich and over time they became deep, narrow and low grade. Of course, that was in an environment of falling metal prices; 7-year bear market. It was just bad timing. We went from being a low-cost producer to a high-cost producer in the last couple of years. We did launch, over a year ago a complete operating turnaround at all 3 operations. We completed that operating turnaround at Guanacevi in the first quarter and it’s back in the money since that time. We’re within less than a quarter of completing the operational turnaround in Bolanitos, returning the mines to good health and lower costs have been job number 1 in recent years.

Matthew Gordon: Are you going to be able to continue to reduce costs? Are you going to be able to extend the life of these mines?

Brad Cooke: Actually, the solution solves both problems. Solution-wise, going back to our roots of finding new virgin ore bodies with low surfaces in historic districts. Rebuilding the production profile and the grade profile, that’s how you drive the cost down by effectively pushing the reset button by helping the ore bodies.

Matthew Gordon: Why is it taking so long to start that process?

Brad Cooke: We had some discoveries from 5-years ago and were pushing to get them permitted, but especially this administration, which is now 2-years old, really drag their feet and we had to go through that transition from the previous government to the current government in 2018, which really caused delays, so our whole development cycle at Guanacevi was put behind by 1-year and that’s really what caused us grief. We were never going to shut the mine down, so we took the operating loss, just trying to develop these new mines and get out of the old mines, but that was completed in the first quarter of this year.

Matthew Gordon: Are you struggling with this new government?

Brad Cooke: The transition 2-years ago into this new government, given they are a far-left socialist party, was not a smooth ride. Now we’re hit with COVID, the government departments are sort of operating and it’s really just the squeaky wheel gets the grease, we’ve had to really increase our participation with the government to get things done,

Matthew Gordon: What does that mean?

Brad Cooke: That means that we have our people in government offices regularly, instead of sporadically, trying to move our file from the bottom of the pile to the top. If you make enough noise you get to the top of the pile. Historically, in Mexico, it might have involved money, but of course, none of us foreigners do that. It’s not like gringo is showing up at the government office. We have our own people, or 99% Mexican, that’s how you get things done – put on a local hat.

Matthew Gordon: The Silver price increased to level which is beyond your wildest dreams given the last few years and then Covid hits production- – fallen ounces, bit of a nightmare scenario, really, isn’t it?

Brad Cooke: Actually, the turnarounds that we initiated last year have been very successful. We’ve seen in the second quarter, which was a COVID quarter, 8 of 13 weeks in the second quarter we were shut down by government mandate – zero production for 8 out of 13-weeks, and yet we are able to come out of the quarter with all 3 mines showing free cash flow – that’s the operating turnaround. Of course, the price run – it did drift from $14 to $17, $18 in the second quarter. It really didn’t take off till July, it helped but it wasn’t the huge sale it is now.

Matthew Gordon: You had an operating loss of USD$13.2M. Net loss of USD$19.2M, it’s not all rosy but you’re trying to say it’s getting better?

Brad Cooke: Yes, we took most of our slumps in the first quarter.

Matthew Gordon: What were the sorts of things you are having to write down and why?

Brad Cooke: I’d have to go back to our financials but they’re just a bunch of little stuff, our biggest costs in Q2 were actually care and maintenance to stand still. We had to send our people home on base wage. We put USD$5M in a pile and burned it in April and May.

Matthew Gordon: That’s tough to do, but everyone is okay?

Brad Cooke: Everybody’s fine. Actually, we’ve been remarkably good at stopping COVID of the gates. We’ve only had a handful of cases and most of them were caught at the gates and turned away. The biggest drag on our performance right now due to COVID is actually the approximately 60 people who remain at home because we consider them high risk; either age or pre-existing conditions so to be safe we’ve kept them on the payroll and sent them home. Because we’re missing a portion of our workforce, that’s remarkable actually, what the rest of our employees are accomplishing – our productivity has tripled.

Matthew Gordon: Moving from low cost to high cost and then back down to low. Is that a model which you intend to continue as part of any organic growth plans or any other kind of growth activity?

Brad Cooke: Currently, our organic growth profile, which is, I think, sector best, which includes 2 projects: Terronera, in Jalisco State and Parral in Chihuahua State. These are the same style of high-grade underground vein mines, but to break out of that model and ensure not years, but hopefully decades for the future for the company, we do need to get into something more world-class. That’s the role of our portfolio of prospects that we’re proposing to drill at Chile. We have 3 world-class prospects in Northern Chile, and we’ll be drilling our high sulphuration Gold project, Paloma in the 4th quarter of this year. That’s an attempt to break the mould.

Matthew Gordon: But what is happening with the underground component?

Brad Cooke: The plan is to both reduce costs and extend mine life through the discovery and development of new ore bodies in these historic districts. Last year was the perfect model of that. At Guanacevi we acquired some adjacent land, we were able to put that into production through ore bodies. We’ve discovered a third. They are now carrying all of the production at Guanacevi, and instead of having a 1-2-year outlook all of a sudden, we’ve got a 5-year outlook and growing. It’s all shallower, thicker and richer ore. If you look at the cost profile, it’s also come tumbling down. Our consolidated cost guidance this year was $17.50/oz Silver. None of the Gold credit, All-in Sustaining basis. That basically started the year at $20 and we are targeting finishing the year at $15. We’ve already accomplished $15 in the 2nd quarter.

Matthew Gordon: How do you change the way that you operate going forward in terms of developing these organically? How can you give confidence to the market?

Brad Cooke: With the development of these new ore bodies, shallower and thicker, we’re able to go back to long-haul mining which is a lower unit cost method of mining. It’s like a bulk underground mining method compared to cut and fill. Of course, when you are mining 15-year-old or bodies like we were at Buenos V, we were going down 700m vertically at depth, and they’re running 1-2m instead of 3-5m – that makes all the difference in the world to your costs. Getting out of those ore bodies, basically admitting that even at current prices they were just not working, was key to our future. Thankfully we were successful in finding new ore bodies that are shallower, thicker and richer. They finally got through the permitting and development phase and they’re now carrying the mine for years to come.

Matthew Gordon: Why didn’t you get move forward with this exploration phase sooner? What would you put it down to?

Brad Cooke: We model our expenditures every year based on cashflow. In a 7-year bear market of falling prices, you have falling cashflow. There’s no question that was an element in our planning. We also ran into government delays in permitting the new ore bodies and had operating losses to get through that permitting. We don’t have that type of delay at Bolanitos, which is following the turnaround at Buenos by about 3 quarters. This is the final quarter where we expect the turnaround to be a subtraction. And we did actually generate free cash flow from Bolanitos, thanks to the development of 2 new ore bodies at Bolanitos. It is the same story as the bulk mining – getting out of the original discoveries, which we pretty much mined out and into some new shallower, thicker and richer discoveries that not only extend mine life but drive costs down.

Matthew Gordon: You’ve got a USD$600M market cap today. Do you think it’s a fair reflection of where you’re at today?

Brad Cooke: I mentioned our organic growth profile, and if you want to look for value, you don’t need to look any further than Terronera, Parall. We don’t assign any value to Parall, but Terronera, we published in July some updated economics to build than mine. It’ll be our largest lowest-cost mine when it’s up and running. At USD$18 Silver and $1,800 Gold, I think the net present value is in the USD$220M range with an IRR up in the 40s. It’s a prolifically profitable deposit at much lower prices than these prices, and we’re trying to fast-track this best we can.

The impact of Terronera alone, we’re on track to do about 6Moz Silver equivalent this year. The only equivalent being Gold. Terronera will come on at 6Moz, which will effectively double our production, halve our costs. The cost profile in the study that we released in July showed cash cost, none of the Gold credit, at 0. Gold basically carries the operation. Silver is free. Even on an All in Sustaining basis, with Royalties, taxes, the life of mine capital and exploration, head office costs, the life of mine All-in Sustaining Costs for Terronera are just over USD$2/oz Silver produced – it’s a real game-changer for us.

Matthew Gordon: Do you think people have got long enough memories to remember when you were running the mines efficiently?

Brad Cooke: We are refreshing their memories because Buenos V has come back into the money. Bolanitos is coming back into the money. As I said, we went from low cost to high cost, and now, just at the time when metal prices are going up, our costs are coming down – it’s a perfect storm for our cashflow.

Matthew Gordon: How much longer can those 3 mines continue to contribute towards cashflow for you?

Brad Cooke: At Guanacevi, I mentioned the discovery of 3 new ore bodies, and they’re going to carry us. Right now, we’re running a 5-year model, but there are lots of places to continue drilling to extend the mind life. At Bolanitos, we’ve been running a 1-year license. We started there in 2007-2008 and we continue to run a 1-year reserve Life and approximately a 1-year resource life. We see enough opportunities that we think we can keep that going for 5-years.

Matthew Gordon: What do you think you’re really going to be able to get those costs down to? How much contribution are you expecting from them either individually or as a whole?

Brad Cooke: Bolanitos is already there on a cash basis. Their cash costs were in the very low single digits, All-In cost USD$20 in the second quarter and the difference was we’re in a development phase on the new ore bodies and we’ll be through that by the end of this quarter.

Matthew Gordon: Let’s talk about Terronera.

Brad Cooke: It’s okay. 5 is pretty exciting. At the average life of mine will be a diluted grade.  

Matthew Gordon: The payback is in under 3 years. What next?

Brad Cooke: We’ve announced the commencement of Feasibility Study and we’re within a week of granting the lead engineer on the Feasibility Study. We will be able to do a press release this week. I will go straight then to selecting the PCM contractors and there’s a couple of long-lead items we’d love to get started on. I can’t give any guarantees. If you want to de-risk a project, that’s the main purpose of the Feasibility Study. The other way to de-risk it is to get started on things that normally run over, time over budget, such as a 2km long main haulage way. You can only put in 2 shifts a day into the haulage way so the earlier you start the better. Clearing off the top of the plant site, we need to clear 200,000 cubic meters off the top of a hill, effectively flatten the top of a hill and that’s the material that goes to the toe of tailings facility -getting a head start on that. The construction camp – we’re not ready to start construction. And while we’re in the feasibility phase, if we can get properly permitted and built in the next 9-months, then as soon as the Feasibility is done we hit the ground running. These are things that we will get started.

Matthew Gordon: The best thing is for you to mine this – you’re the guys to do it?

Brad Cooke: I think so. Mining our sweet spot. These are the types of ore bodies we’ve found and built mines on for 16-years. Terronera just happens to be bigger and better than the others.

Matthew Gordon: Is it not a bit exhausting trying to chase the dream?

Brad Cooke: We are still trying to make money. The short answer is no, but I do have a long list of things I want to do and I’m not going to be here forever. I won’t go very far when I move along. If I move away from the CEO role it will probably be up to the chairman’s role, but nothing in the short term.

Matthew Gordon: Talk to me about some of these other potential exploration targets.

Brad Cooke: We started drilling Terronera 2-years ago to focus on economic evaluation and we just restarted drilling at Terronera last month. I think there’s a whole new chapter to be written in terms of resource upside there as we start testing new veins. The second project in our development pipeline is the Parral project in southern Chihuahua. We stopped drilling there last year, again it was just budget constraints in the bear market. We’d love to get started and that will be in the plans this year. But if we can get started again there next year on infill and step-out drilling, we could take easily a 40Moz resource to 60-80Moz. It is still very much an advanced exploration project where we could create value very quickly through the drill bit. Then stepping out from that, the whole concept of being in Chile for the last 8-years was to break the mould of small, high-grade underground vein mines. It is hard to grow a business when these things are constrained in size, and for us to become a major in the Silver space and with decades of my life we need these big chunky world-class deposits, and you can’t buy them. They’re just impossible to buy in the Silver space. We lived off of finding ore bodies; every mine we’ve ever built was a discovery we made, we never did anybody else’s ore body. The whole concept of 3 world-class assets in Chile is, let’s go see if we can find one for ourselves.

Cerro Marquez, which has turned into actually a porphyry Copper-Gold play, and it’s a big system: 6km by 8km footprint. It is an entire volcanic caldera, and we’ve done enough systematic work to get the Copper majors really turned on. We’re in the phase of signing up CAs and doing due diligence and trying to bring on a partner for that one.

Paloma, which is our 5Moz Gold high-sulfonation epithermal target, also in the far north of Chile, we will drill that ourselves this year. Again, it’s a big target: 2-3km. A portion of a volcanic caldera. And some great targets. I won’t go into the glorious geological detail except to say that everything you want to see on the surface at Paloma, we see. We’ve got bullseye targets to drill.

The third one which isn’t quite ready for drilling, we’re waiting for the permit – Aida – it is in the Bolivia/Argentina border. It is in the three corners area Chile, and it’s more of a classic Bolivian-style, bulk tonnage, Silver, Lead, Zinc deposit. Think Chinchillas and Pirquitas in Argentina. It’s called the Puna operation that Silver Standard has.

Matthew Gordon: What do you make of some of the insider selling that’s been going on?  

Brad Cooke: I was anticipating that question, and the short answer is no. We’ve had some long-suffering shareholders and employees, especially employees who haven’t seen an option in money for 7-years. When they asked if they could exercise options, I said, go for it. We haven’t seen this kind of a run for a long time and the money went to the kitty.

Matthew Gordon: What do you mean, it went into the kitty?

Brad Cooke: They exercised options, so the cash went into the treasury of the company and the employees finally got a reward for all the years of hard work.

Matthew Gordon: But you can understand some of the frustration in the market when they see that sort of thing?

Brad Cooke: I would beg for understanding. We’ve all come through a bear market. The shareholders are way in the money. We had 4x run on our stock in the last 6-months. Nobody can complain about the performance of the stock, and to be honest the performance of management; we hung in there as best we could, we positioned the company for growth and now we’re ready to reap the rewards.

Matthew Gordon: How much do you put down to your ability and planning to have positioned for growth?

Brad Cooke: We were shopping during the bear market. We acquired Parral for USD$6M. We acquired Compass for USD$6.5M. We staked the 3 prospects in Chile in the heart of the bear market. This goes right to the heart of our business model: getting in cheaply, doing value-added work, developing targets, drilling them in the case of Mexico. Building on a fast track, new mines and growing our business. When the bear market hit we obviously had to pull it our horns on that model and be a little bit more patient, but we’re back in that upcycle again. This is not a cycle that is going to end this year. I think we are very well-positioned thanks to our work in the bear market, to be a sector leader of for growth. Look at 6Moz this year, 12Moz when Terronera is built. 16Moz when Parral is built. We’re talking about superior growth and superior costs. When you look at the cost profile, the existing mines falling, Terronera will cut the consolidated costs in half, and then Parral, which wasn’t formally announced as a producer until 1990. Our vision is to simply bring it back on at 4Moz, with costs at around USD$10 all in, again, all accretive to both production and profitability.

Matthew Gordon: What is your outlook on Silver? How do you prepare yourself for when it turns away?

Brad Cooke: I think there are some inconvenient truths about Silver: one of the most inconvenient truths about Silver is after a 7-year bear market, new mines supply approximately balances manufacturing or fabrication demand. When investors come knocking for Silver, as they have in the last year, there is none. That’s a really inconvenient truth.

What has to happen, the Silver price has to rise to equilibrate the market. Still, you’re pulling new-mined supply out of the ground. You can’t do that in months and it’s not the primary Silver producers who are the difference makers; we may help to supply price of Silver at the margin, but the bulk of Silver supply comes from the Copper, Lead, Zinc and Gold producers as a by-product. They typically hedge it forward up to a year, sometimes 2 or more. That’s Silver has already sold, and you can’t just build a Copper mine here. You’re talking about a 10-year cycle for most mines.

Silver is that special metal that has a history as money and then people forget its money, it developed in the last 100-years industrial uses, which dominate now the demand for Silver, which means that Silver disappears. It isn’t held around necks or fingers or faces. Most Silver is consumed in industrial applications. Then there’s this emerging new green rule, and Silver is truly a green metal. You can’t have solar photovoltaic power without Silver. You can’t have electric vehicles without Silver. It’s not that they use a lot of Silver, but then my cell phone, which was one of the gadgets that drove the revolution in Silver price. This is a quarter gram of Silver in here -that is certainly not enough Silver to affect the price of the gadget but there’s no question there are enough gadgets to affect the price of Silver since the year 2000. That was the last wave of demand growth.

Now we’re coming into a Green Revolution, and it’ll be the current wave: the solar photovoltaic, the electric vehicle demand. If you look at the 10-year forecast for EVs and the fact that each EV is up to 2oz Silver, just on all the electronic circuitry, it is not enough to recycle but most definitely enough for EV’s forecast to have a dramatic impact on the price of Silver.

Last year, 55Moz went into conventional cars last year just for their electronic circuitry. Never mind TVs, just all cars. If you believe the 10-year forecast for EVs, that number has to treble just for automobiles, where’s the 100Moz going to come from?

Matthew Gordon: Do you wish you’d kept your finger on the pulse with regards to costs, having seen how easy it was for you to reduce the costs recently?

Brad Cooke:  We went through some management changes in 2016-17, at about the same time we were getting frustrated on permitting. In hindsight, if we were able to avoid those management changes, we wouldn’t have had such delays.

Matthew Gordon: want to know what you’ve learned and are you going to be able to keep those costs low going forward?

Brad Cooke: I think our group has been very good at managing the cost profile. Our productivity did fall during the bear market and it’s rising in the last year and a half. It’s all about people – every business at the end of the day is a people business. When we lost a couple of key people in 2016, it did impact us and we weren’t anticipating that, but we came out of it, we survived. We’ve got a great team and they’re doing everything we’ve asked them to do.

Matthew Gordon: As to what’s going on, you seem to be focused on 4 things: keeping costs low, organic growth from what you’ve got there, extending the life of mines where you can, and then this expansion into Chile. Thanks Brad.

Brad Cooke: Thank you. We are coming into a very exciting period.

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Salazar Resources (SRL) – Ecuador Upside as Drilling Starts

Salazar Resources Ltd
  • TSX-V: SRL
  • Shares Outstanding: 127M
  • Share price C$0.21 (15.06.2020)
  • Market Cap: C$27M

Interview with Merlin Marr-Johnson, Exec. VP, Corp. Secretary of Salazar Resources (TSX-V:SRL)

Salazar Resources is a TSX-V listed exploration, project-generated company. It is an Ecuadorian company. Very Ecuadorian; the entire team is based in Ecuador, and Freddy Salazar is one of Ecuador’s leading geologists. They have 6 projects, 3 of which are fully carried by Adventus and 3 of which are 100% their own exploration licenses that they are drilling. They are hunting big Gold and Copper targets in Ecuador.

The Salazar team has been involved with many discoveries in Ecuador, including Curipamba (Adventus Mining and Salazar Resources), Fruta Del Norte (Lundin Gold), the Mozo deposit, Cangrejos (Lumina Gold) Rio Blanco (Junefield Mineral Resources and Hunnan Gold), and Gaby (ENAMI). Salazar Resources aspires to be Ecuador’s leading project generator with the right partners at the right time making the company self-funding.

Salazar Resources has an agreement with Adventus on the Curipamba VMS discovery, whereby Adventus can earn 75% of the project by funding exploration and development expenditures of US$25 million before October 2022. A feasibility study is expected to be completed during 2021, after which Adventus is required to fund 100% of the development and construction expenditures to commercial production. In addition, Salazar Resources has a funded exploration alliance with Adventus on two other projects, Pijili and Santiago, within a defined Area of Interest. Salazar Resources is advancing its 100% owned Rumiñahui, Macara, and Los Osos projects with the aim of making Ecuador’s next significant copper-gold discovery.

We Discuss:

  1. 0:53 – Company Overview
  2. 2:44 – Project with Adventus Mining: Process, Upside, & Timeline
  3. 5:36 – Red Flags: Water Permits, Mining in Ecuador, Social Licenses
  4. 10:24 – Adventus’ $35M Raise: Allocation of Funds
  5. 12:13 – Salazar’s Projects: Business Plan & Model Going Forward
  6. 21:17 – Re-Opening of the Mining Cadastre
  7. 23:17 – Barriers & Solutions; Ecuador’s Anti-Mining Stance
  8. 26:30 – Loosening the Tight Share Register

CLICK HERE to watch the full interview.

Matthew Gordon: We’ll give people new to the storyline one-minute overview and then we’ll pick it up from there.

Merlin Marr-Johnson: I’m the Executive Vice President of an exploration company called Salazar Resources, a TSX-V company, market cap USD$35M.  We’re an exploration company really focused on creating value and positive change through discovery in Ecuador.  It’s an Ecuadorian company by heritage, we’ve got a team of probably the best, Ecuadorian explorers with an extraordinary track record of discovery.  We’ve found, probably, seven out of the ten most advanced projects in Ecuador.  Not all in Salazar resources but one of those we have made the discovery within Salazar Resources it’s called the Curipamba deposit, it’s a highly valuable VMS project that we’ve worked up from grassroots discovery, through to a resource status and we’ve farmed that out and we now have a carried interest, all the way through to production.  25% interest on an asset which is worth USD$300M – USD$400M metal price.  Our carried stake on that is close to USD$100M and USD$70M – USD$100M versus our market capitalisation of 35, so essentially what we offer as a company is a de-risked approach to exploration in Ecuador.  We’ve got the best team; we’ve got a great understanding of Ecuador and you’ve got full exposure to the upside on the 100% owned exploration portfolio that we have in this company.

Matthew Gordon: When can you sort of expect to see some sort of upside benefit to that particular component?

Merlin Marr-Johnson: You say we’re not in control of it, but we’re still very much involved throughout the process.  It’s our team on the ground, we earn management fees from doing the work, our ecological team, our social team and, in fact, what we’ve seen in Ecuador is that you have to get the social side of the business absolutely right.  You can destroy value by getting it wrong and it’s not just being an Ecuadorian that makes the difference, it’s actually really knowing what to do and how to handle it.  The project is in Bolivar State which is the most anti-mining province within Ecuador and there have been many companies that have failed to manage to operate in Bolivar Province. 

Several companies in the past have actually tried to get in, been kicked out by the locals and Salazar, through Freddie Salazar and his kind of genius touch for this, has managed to, not only, work but actually succeed in-country.  So, one of the key things of working with Adventus is that we’re really driving the social programme as well and we’ve got the ecological team as well and we earn the management fees from that.  We probably get … well we get about USD$600,000 a year of income from Adventus and that project is at the … it’s going into the feasibility stage; we’re doing some in-fill drilling now.  We’re doing about 6,000m of in-fill drilling and we’re also doing about 10,000m of expansion drilling around the edges of the existing resource on the border project area.

Matthew Gordon: Have they got enough money to develop this thing out?  How do you benefit?  The upside is really in developing this asset so, where are they?

Merlin Marr-Johnson:  They’ve just raised CAD$35M, so, they’re well cashed up and the plan was to complete the feasibility study in 2021. We’ve had a six-month delay because of coronavirus and water permits.   That’s now pushed out into the middle of 2022, but the plan very much is to march this towards production.  Within 2-years we should have a completed feasibility study on this and a mining permit and at that point, you’ll really start to see the full value accruing through to Salazar.

Matthew Gordon: You mentioned water permits, one and two doing business in Ecuador.  Should I be worried about either of those?

Merlin Marr-Johnson: Business in Ecuador, absolutely not.  Progress is being made.  The government have completely committed to developing the mining industry.  It needs to as a financial imperative.  To fund its Social Infrastructure Programme, to fund its budget deficit it needs to continue the progress that’s been made in recent years.  Every signal that the government makes is about supporting that, about the mining industry being a core part of the economy. I would say don’t worry about that, although I should also say that there’s a presidential election coming up in the second week of February next year.  Now, why that is not a real risk is because the mining sector in Ecuador is now apolitical.  It’s such a crucial part of the economy and the government is so committed to receiving foreign direct investment, foreign exchange earnings, job creation and tax revenue from the mining sector, that whether you are radical left-wing, centrist or right-wing, you’d actually need the mining sector to pay for all of this.

Matthew Gordon: Tell me why I should not be concerned because Freddie’s got it all under control on that front.

Merlin Marr-Johnson:  Social licence operators is an on-going thing.  You can’t not look after it for six months’ or weeks’ or a year.  It’s an on-going process.  It really helps that we are Ecuadorian.  Salazar Resources is incredibly well respected within Ecuador.  Adventus Mining has brought in Nobis Group as a shareholder and they are a well-respected business conglomerate, so, at every level, Salazar Resources and Adventus are not just doing the right things but being seen to do the right things.  There’s a funny anecdote that there’s a nationwide anti-mining organisation within Ecuador, championing, trying to stop mining across Ecuador and their representative in Curipamba where we have been for the last 13-years, spent two years trying to drum up local resistance to the mining idea and he had to leave after two years because he couldn’t get any traction with the locals.  I mean, I could easily go into detail about the football teams, about all the local initiatives but really I think it’s a key thing to realise that we’re absolutely focused on making sure that the social licence is no impediment to the development and the economic progress of Curipamba or any of our other projects.

Matthew Gordon: You look at the recent Rio Tinto story, which is out in the press, are you aware of that?

Merlin Marr-Johnson:  I am, yes. 

Matthew Gordon: I do get concerned that companies do have the social licence to operate and if they don’t, I think it could be problematic.

Merlin Marr-Johnson: I think it’s very easy to have your social licence or your community, your CSR programme as a box ticking exercise.  To feel, oh this is the … there’s the movement towards enhanced ESG, we’ve got to be warm and fuzzy and let’s go and hug a tree and hold hands with the protestor and, therefore, everything will be all right.  In a sense, those are soft issues, but it feels very different for Salazar Resources.  Remember that this is an Ecuadorian company, it’s from an Ecuadorian heritage and this isn’t just an exercise in cosmetic, it’s not a cosmetic programme, this is their people.  One of the reasons Curipamba was found, was because our chief geologist was from the local community and had always wondered what the geology was.  This is in their backyard, so, there’s a hard edge to the economic rationale behind having your social licence to operate that we fully understand.  But more than that, it’s actually part of our DNA and our culture.

Matthew Gordon: CAD$35M raised. What are they going to be doing with that?  How much drilling are we talking about?

Merlin Marr-Johnson:  There has been a 5/6-month delay.  We’re just about to go back into Curipamba and be drilling.  We’re looking at about 16,000m of drilling there on Curipamba.  What I haven’t mentioned is that we’ve also farmed out two Porphyry exploration projects to them.  We are carried 20% on those all the way through to a construction decision.  So, a drill out of a Porphyry ten of millions of dollars and several years of studies, we don’t have to invest a cent, but we actually get paid for that.  We get a management fee for doing their geology and they’re using our rigs, so we generate earnings from the drilling.  We’ve already put out announcements that on one of those, Pijilli, drilling is underway. 

We’ve intercepted sulphides, we’ve intercepted the right kinds of geology, assays haven’t come out yet and the plan there is to do a 7,000m programme first and, obviously, one hopes that that would lead into a second programme.  For the sake of arguments, double that, you’ve got 14,000m there and you’ve got 16,000m at Curipamba, looking at a 30,000m programme, and then Santiago which is the third project which is another large Porphyry target that we carried on, that will be drilled in 2021.

Matthew Gordon: How are you going to advance those projects?

Merlin Marr-Johnson: It’s probably worth saying that we’ve got … at the end of June, we had CAD$2.8M in the bank, we earn USD$600,000 as a minimum from management fees and advanced royalties from Curipamba alone.  We get additional management fees from the other projects Pijilli and Santiago and there’s this question where I get quite a lot of questions from shareholders about the drilling revenue.  We’ve got this subsidiary and this drill that’s 100% owned, we’ve got three drill rigs, is that going to generate a million dollars, two million dollars on an annual basis?  This year we’ve had to invest a bit more than we wanted, in terms of the kind of refitting it so this year it’ll be a wash, the money that we earn from the drilling contract in this year will payback for the investments, but next year it could be generating a million or so, in terms of earnings to the company. 

So, that’s kind of the financial situation that we’ve got enough money to do kind of, the full programme that we’ve got for the next months which is drilling at Los Osos, geophysics at Macara and ongoing mapping and sampling at Rumiñahui.  Now, why is Los Osos interesting and when are we going to start?  Los Osos is a licence that was picked up by our Chief Geologist and he was the main geologist behind the Cangrejos discovery, which is 70Moz of Gold sitting in an open pit just to the north of our Los Osos licence area.  So, he did all the mapping, he did all the sampling, he drilled the first 22 drill holes and, actually, he felt that the highest grade area was to the south-west and, in fact, we’ve got some historic drilling just to the east of our licence which Newmont drilled and they’ve put in a 156m which returned 2.6g/t Gold and 0.2% Copper. 

Then just to the north of us, Challenger Exploration reported 146m at 1.5g/t Gold.  We know that there’s almost kind of like a feeder structure, there’s a high-grade grain going from the north-east of our licence area radiating through our licence area and we’ve got a very strong Gold and Copper anomaly that we’ll be testing with hydrothermal breccias. Our guys have been all over it, we’ve sampled it, mapped it, been underground at some of the artisanal workings, we’re very excited about this drilling programme. Then in the south of the area, we’ve got a slightly metamorphosed, slightly weaker signs of mineralisation so Copper, Gold, Porphyry we’re putting some holes in that. 

The plan is to do a 5,000m drill programme on Los Osos, dividing into two phases.  First of all, the first five holes, review what we’ve got and then push on with the second and we hope to be announcing that imminently in the sense of the detailed drill plans and the start of the mobilisation of the drill rig, we’re not there yet but all of our rigs are busy with Adventus.  We are actually trying to locate … well, we have located a drill rig, it’s just a question of mobilisation date that we’ll be able to announce.

Matthew Gordon: Remind me about the model going forward here. 

Merlin Marr-Johnson:  We’ve got a pipeline of other projects and, in fact, in Ecuador, the reason why the world is interested in the reason why BHP, Newcrest, Lundin Gold, Fortescue, you name it, they’re all rushing into Ecuador it’s because this is the one place in the world where you can find tier-one global assets at the surface and we have done that.  We have identified a Porphyry which is sitting at the surface, it’s got Gold mineralisation in the upper zones which have been worked by artisanal then you come down into the Porphyry and you’ve got a superb anomaly over a kilometre long and we applied for that ground a couple of years ago and it was uncontested, no-one else applied for it. 

The government is currently processing 77 historic applications, and this is one of those and a couple of others.  One, funnily enough, in conjunction with Adventus so their portfolio, with us, will grow from three to four and ours will grow at least from three to four projects, including this Porphyry, so.  The government has said they want to get those processed before the election which is in early February.  We hope it’s going to come through before the end of the year and our portfolio will expand.  Our strategy is to review the four that we’ve got, work them up the curve a bit through low-cost geochemistry and geophysics, possibly phase one drilling and smart geology and then farm out two or three or four of those so that we can preserve treasury, maintain carried interests.  But in this market what we really want to do is we want to take our best project and drive it on a 100% basis further up the curve. 

Matthew Gordon: Do you know what the best project is going to be?

Merlin Marr-Johnson: No.

Matthew Gordon: Right.  They’re all so good.

Merlin Marr-Johnson:  They are all good, and the reason we like them so, Los Osos that we’re just about to drill, we’ve commissioned the team so where can we get 100m of 1g/t or 50m at 2g/t and they said Los Osos is where we can do that with the greatest certainty.  That’s where we with the lowest risk project.  And that’s great, but, Cangrejos to the north 70Moz, it is a sub-one gram ore body and we’d like a plus 2g/t ore body so, does Osos have the grade, we’re going to find out soon enough with the drilling.  I mean even if we get 100m at one gram, it will still be a fantastic result.

In the south, Macara, the VMS target, it’s got a beautiful Gold cap on it and the analogue is just over the border in Peru and that has 7Moz at 3g/t sitting in Oxide at the surface.  We’ve got these two beautiful anomalies with up to ten grams in soil and 30g in rock chip and we’re just about to go through a geophysical programme which will highlight the potential or we hope it will highlight the potential for buried Sulphide bodies, which again, the analogue in Peru is they’ve got 300Mt at 1% Copper 1g Gold. So, that is a superb target.  Now we’ve applied for the ground around our licence area so if we can expand it, that would be great, and that’s one of the 77 licence areas that we hope the government will release before the end of the year.  So, I certainly wouldn’t like to do a deal on that before we’ve drilled it because I think that that’s a tremendous package or project. 

Then up in the north, in elephant country where you’ve got Llurimagua which is a billion tonnes at 0.9% Copper equivalent, and you’ve got SolGold with their 3.6Bt pushing 4Bt 0.5%.  We’ve got the Rumiñahui project, Freddie Salazar has been tracking this project for 20-years, he really likes it, it’s at a very early stage of analysis.  We hope to get it to the point where we can drill or generate drill targets in 2021 but we’re not sure yet, that might be suitable for farming out, who knows.  Then of course the new Porphyry project that we hope to be bringing in.  Remember, this is generated at zero costs pretty much by us.  It’s a direct application to the government.

Matthew Gordon: How are things on the ground at the moment?

Merlin Marr-Johnson: The Mining Cadastre is expected to open, as I’ve said, by the end of this year.  We can’t guarantee that it’s going to happen.  The Minister of Mines or the Vice Minister of mines, Fernando L Benalcázar, held the position for a couple of years and then there was a change in the Energy Minister, and he stepped away for about 6-months last year.  He came back in again when there was another change in personnel and he has committed to, Fernando L Benalcázar has committed to making sure that those 77 licences are being processed by the government, they get issued before the end of his current term which is going to be at the end of January.  So, he’s also signalled that those licences will get processed before the end of this year.  We had also heard that they were going to be ready by September, October. 

A couple of our guys in our team used to head up the Mines Department on a kind of technical level, like a civil service level, they were Directors of the Mining Department and their protégés are now the current heads of Mining Cadastre so we speak to them on a regular basis.  We know that the government is sorting through those 77 permits asking everybody, are you committed, do you still want to apply for those licences that you wanted to apply for, and they’ve almost finished that process.  We hope that we get those licences through in the next couple of months.  It would be great.  I think the country needs it.  But if it’s during January, then it’s during January.

Matthew Gordon: These water permits at Macara and Rumiñahui, have you heard of any issues around those?

Merlin Marr-Johnson:   Water permits in Ecuador is kind of an emotive and a complicated matter.  In fact, water is one of the emotive things and the chief opponent to mining in the country who has said that if he gets into power, he’s running for president and he’s got a very slim chance of winning, he has said if he gets into power he will ban all mining and he changed his name from Carlos to Yaku which means, in the local Quechua language, it means water.  He’s saying water, not mining.  He doesn’t have a very large support base, but it is an emotive thing in Ecuador.  In fact, last year the head of the Water Board put a political appointment who was very linked into this kind of, anti-mining group.  Then we had this ironic situation in the middle of last year where Fruta del Nore one of the great developments in the country which was going to generate so much benefit for the country was actually being blocked by the lack of a water permit. 

What happened was the government took this underhand, they replaced the political appointment for the Water Board with a mining engineer and suddenly lots of water permits were processed.  Then, the next step of streamlining the water permit issuance was to merge the Water Board with the Environmental Agency, that has taken place.  Coronavirus hit, you’ve got elections coming, so actually now in those two departments, people aren’t sure what’s happening.  After a huge amount of progress last year, there’s actually a little bit of a delay this year and you have to get a … in your environmental clearance, you have to show that you’re not going to pollute the watercourse and you also need to get a permit to extract water. 

Now, what we have got through our areas is we have got the sign-off and the certificate of non-affectation so we’ve got the environmental clearance to do the drilling programmes under the Scout Drilling Permit Law in Santiago, Pijilli, Los Osos; we haven’t applied yet for Macara and we haven’t applied yet for Rumiñahui.  What we don’t have yet in some places, is the ability to extract water from exactly where we are using it so in some places we have to track water in and this is what … this is the workaround that several other exploration companies are doing in Ecuador at the moment.

Matthew Gordon: The trucking solution. why haven’t you applied at Macara or Rumiñahui yet?

Merlin Marr-Johnson: Because at Macara we are doing the geophysics first, we want to find out where we want to drill and how many holes to do, and at Rumiñahui we haven’t got drill targets yet, so, we’re still on the pre-drill phase there.

Matthew Gordon: Share register.  How does that situation improve and what are you looking to do to help people access your shares?

Merlin Marr-Johnson:  It is tight, we’ve got 25% held by the Salazar family and probably another 6% or 7% held by directors and employees.  The Arlington Group picked up 10% to 15% and placed out some large blocks of shares, so there’s probably another 20% to 25% there so you’re talking about 55% which is very tightly held with the Arlington Group out of London and a few funds and directors and management, and the rest is retail.  The company’s been listed since 2007 so there is a long history of retail involvement.  I think the liquidity will improve on two things, one is when we start putting out regular news flow on our own projects and the market capitalisation closer reflects the value that we have in the 25% stake in Curipamba. 

Because, at the moment let’s say that stake’s worth USD$60M or USD$70M today, our market cap is 35 so people will still think, well why would I sell it at a discount to the carried stake and you’ve also got all this exploration in for free as well.  If we can put out some regular news flow through drilling which we hope to be doing over the next 3-4-months, I think that will help.  The other thing is I’ve just come off the Precious Metals Summit, the Beaver Creek Virtual Conference, and we’ve heard several times from US investors that they’re struggling to buy shares so we’re looking into an OTCQX, sorry OTCQB listing.  We looked at it last year, it didn’t feel as if the time was right.  We’ve pretty much got buy-in from the directors and so we’re pushing ahead with that and once we’ve got a formal timetable of when this might happen, I’ll be able to put out the news release.

Matthew Gordon: Thanks for the update.  Since we started talking to you, the share price has practically doubled, you’ve got a way to go and I agree with you, if you can start actually putting out your own results on your own projects.

Merlin Marr-Johnson: Great, thanks very much.

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