- TSX-V: SRL
- Shares Outstanding: 126.48M
- Share price CA$0.21 (21.01.2020)
- Market Cap: CA$26.56M
I am concerned, when interviewing a CEO, if they are unable to clearly articulate their business plan. Call it an elevator pitch, call it a sales pitch, call it what you like, but if you, as a CEO, cannot tell me in less than 2 minutes what separates your business from the crowd and how I am going to make money, you’ve lost me; big red flag planted firmly in the ground and I am onto the next opportunity.
My other bugbear is when I think I am being misled or the CEO is avoiding answering the question directly. Very few people are smart enough to hide the childlike tells. The furtive look, the eyes searching into the distance hoping to find inspiration to be magically plucked from the air and the awkward squirming in their seat. Non-verbal communication and reading body language in all walks of life is important and accounts for so much of how people see you.
Sometimes it can be fun to set a trap for the CEO: ask a difficult question to which I already know the answer and see how the CEO responds. If it is a mistruth or even a small misdirection, I now know I cannot trust this individual to report properly. Another big, and in this case, terminal red flag.
We tend to begin our diligence from a standpoint that places the burden of proof on CEOs: we will not be giving you our money. It is their job to tell me why I am wrong and why I should. I’m looking for faults in their argument. It doesn’t take much, and I’m off. It’s my money. There are thousands of ways and places I can invest it, so why take a risk?
That brings me to Salazar Resources.
Salazar Resources, an Ecuadorian exploration company, has appointed Merlin Marr-Johnson as Director. A mercurially fabulous name! I’m already intrigued. We spoke to him. Mr. Marr-Johnson is British, very British, and demonstrably intelligent. We set about our task of finding reasons not to invest.
The first thing Marr-Johnson talks about is their business plan. They are gold-copper project developers in Ecuador and Colombia. They have just farmed out their first gold-copper-zinc asset, the El Domo Curipamba VMS (Volcanogenic Massive Sulfide) ore deposit discovery. The PEA conducted at the site shows an economically viable resource.
So, here is the clever bit. Salazar received a royalty payment, courtesy of an ongoing partnership with Adventus Mining Corporation. Adventus has the option to acquire 75% interest in the project by funding initial costs of US$25M over five years; they must provide 100% of the development and construction expenditures up to commercial production after the completion of a PFS (scheduled to be conducted in 2021). Salazar Resources earns US$250,000 per year in advance royalty payments up to a limit of US$1.5M. As operator, Salazar receives an additional 10% management fee (on some expenditures), standing at a minimum US$350,000 annually. Salazar also has the option to lease out 3 of their drills and is fully carried through at 25% with no additional capital outlay needed. Salazar Resources currently has c.$5M in the bank and with this additional reoccurring income and low overhead, Marr-Johnson believes that their exploration programme for this year is fully funded. Marr-Johnson takes time to apply a formula for investors to consider how to value the deal with Adventus. It’s reasonable and not wildly out of line with our numbers. So far, so good. I’m still listening.
Salazar has four other 100% interest options; three are in the form of Ecuadorian gold/ copper/VMS assets with exploration licences: Rumiñahui, a 2,910 hectare exploration licence that hosts gold/copper porphyry targets; Macara Mina, a 1,807 hectare exploration licence that hosts VMS targets; and Los Osos, a 229 hectare exploration licence that features a system of gold/silver veins, combined with hydrothermal breccias and mineralised gold/copper porphyries. Salazar Resources also holds 100% interest in a drill company, Perforaciones Andesdrill S.A, that owns three diamond drill rigs.
Each asset is at a different stage of exploration or development, and each asset has had differing levels of mapping, soil geochemistry and rock-chip sampling conducted. However, when he spoke to us, Marr-Johnson provided some reasons for confidence. Salazar, in the shape of CEO and ex-Newmont in-country team leader, Fredy Salazar, has a ‘proven track record of discovery in Ecuador.’ In addition, the mining jurisdiction of Ecuador is seen by some to have a huge degree of untapped potential. The major mining companies have flooded into Ecuador in recent years, so there is clearly truth in Johnson’s claims regarding the unexplored nature of the geology. Ecuador could have a lot to offer for investors looking to invest in a region in its mining infancy.
We like the gold/copper/VMS side of the story, but the options keep on coming. Their joint venture with Adventus Mining Corporation was originally intended as a zinc exploration alliance. Adventus Mining was offered a stake in zinc-rich assets but instead opted for two different copper-gold (with some silver veins) sites: Santiago and Pijili. Adventus possesses 80% ownership but is required to fund all activities until a construction decision is made on any project.
So, what does this mean for investors?
Salazar Resources is funded for 2020: no dilution anytime soon. We like the look of their cookie-cutter approach to developing their portfolio of assets with minimal cash burn. If they can continue to replicate the Curipamba farm-out model, the numbers start to look very attractive. There is scale to this project. Marr-Johnson was keen to point out that Salazar does want to develop some of their own projects too.
A robust and, more importantly, refreshingly honest appraisal from Marr-Johnson. So far, no red flags, but this is mining. We are waiting for news on the water permit before we get too carried away, but if that comes, Salazar Resources is something that we can see ourselves investing in.
If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.
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