Interview with Merlin Marr-Johnson, Director of Salazar Resources (TSX-V: SRL).
We really like this business model and we like Marr-Johnson. Both are smart. They have farmed out the first copper-gold asset, the El Domo Curipamba VMS discovery, and received a Royalty payment, ongoing management fees and can lease out their 3 drills. Plus they are fully carried for 25%. That takes them to c.$5M in the bank to continue exploring other portfolio assets. Salazar has 4 additional copper-gold assets and other licences in the hopper.
In addition, they have a zinc-exploration JV that contains two projects, Pijili and Santiago with Adventus (80%) funding all activities in the Alliance up to a construction decision on any project.
Geologist Fredy Salazar, ex-Newmont team leader in country, has been exploring and discovering major copper-gold assets in country for 20 years. Listen to Marr-Johnson’s numbers. He paints a very exciting picture. You have to work out if you like this model and if you think he can deliver it.
Ecuador is a country that major mining companies are rushing to because it is under explored but is already showing its potential for big, big projects. Salazar will continue to farm out some of the projects , but are very keen to 100% develop one or more of their own.
- Company Overview
- Background Story: What Interested Merlin to Get Involved?
- Team Experience and Ecuador – a Mining-Friendly Jurisdiction?
- Business Model and Creating Value: What Have They Done so far?
- Assets and Focus
- Managing Finances: Where are They Spending Money and Where Will They Look for More?
- VMS Deposits: What’s Special About Them?
- The Future: What are They Excited About for Next Year?
- Why Should You Invest in Salazar Resources?
Click here to watch the interview.
Matthew Gordon: Hi Merlin. You are involved with Salazar Resources, this Ecuadorian miner. I had a look, fascinated by the business model and that’s really what I want to talk to you about today. But let’s kick-off if you can give us a one minute summary of the business for people who are new to this, and then we’ll pick it up from there.
Merlin Marr-Johnson: Salazar Resources is an exploration company listed on the Venture Exchange in Toronto and Vancouver. It’s got a market cap around USD$15M and it is a prospect generator in some ways, it’s got an asset that its been fully carried on through to production, and its got its own portfolio that its looking to explore and develop.
Gordon: Right, we’re going to get into the model in a second, but maybe lets
start with how did you get involved? Who did you know in Ecuador to get
involved with this project?
Marr-Johnson: Arlington Asset Management bought a
stake in Salazar Resources last year, in the middle of 2018. I was invited down
on a site visit at the end of last year, I’m a geologist, I speak Spanish, and
I was potentially going to be asked on as a non-executive director. When we looked
at the company we were very impressed by the geology and by the team and the
model, what they didn’t have as much strength in was a capital markets
presence, and at that point they asked me to join as a director. So, I’m
actually an executive director of the company, responsible for Corporate
Gordon: Right, so Arlington Funds which are based here in London is the
Gordon: So, let’s talk about some things you mentioned there. So you met the
team, you had a look at the geology, so can we start with the team. Ecuador is
quite a nascent country for mining, is it not? What can you tell us about it?
Marr-Johnson: Just a little bit on Ecuador before we get onto the team, if
Gordon: Okay, let’s do that.
Merlin Marr-Johnson: Ecuador as you know, right on the
Andes, and the mineral deposits of the Andes are prolific; the Copper
production in Chile through Peru, and the geology doesn’t stop at the border,
it carries right through Ecuador and into Colombia. But over time there’s never
really been a development of a mining industry in Ecuador, principally because
the fiscal regime has been insufficiently attractive to get the miners in
there, and they’ve been really promoting the tourist agenda.
There was a
socialist government that came in, in 2010, that was very-very pro the
environment and pro tourism, they want to be the greenest economy in the world,
the problem was they couldn’t fund it. That socialist government over the
course of its 7-year administration turned Ecuador into a proto-mining economy;
they realised that to fund their deficit, to fund their budget they needed to
bring in foreign direct investment, and they needed to bring in export
earnings, and the only industry that was left for them to grow in was mining. The
ex-growth of agriculture, the ex-growth of tourism, the oil industry, and they
had this phenomenal geology but no mining industry. So they really started
reforming the mining code, they dropped the windfall tax which had been put in
earlier, and they did a review of all the mining codes across South America and
looked at the tax regimes, and then they brought Ecuador in line with that.
So, that’s an ongoing process, and
from that basis the country is opening up and yet it hasn’t had the exploration
that all the other countries have had, and that combination of the same
geological potential but without the advanced exploration, means if you want to
find Copper-Gold assets in the world anywhere now, you go to Ecuador.
Gordon: Do miners have to find a
different way of working in an environment like that? Is it going to be more
costly to work in an environment like that, or is there a dose of realism
within the mining code which is being constructed at the moment?
Marr-Johnson: I’d say there are three elements to that question. 1. Is that
all the miners are looking to come into Ecuador, everybody is looking for
Copper-Gold assets, so all of the majors are suddenly interested in Ecuador.
There’s competition for assets and there’s competition for ground, and there’s
competition for good people that know the country.
Gordon: But from meaningful companies, sizeable companies?
Marr-Johnson: Rio Tinto, BHP, Newcrest,
Anglo-American, all the big guys are in.
The other thing is, it is evolving
slowly, so you can’t just build the mining industry overnight. The government
regulations have changed, for example the mining cadastre, the mining
department closed in 2018 or maybe late 2017, and it’s not going to reopen
until Q3 next year.
Marr-Johnson: There was a flood of money that came
into Ecuador, they were just trying to work out how to handle it. People on the
explorational licencing were promising too much money in a four year term.
Their investment plans were unrealistic and it was viewed that perhaps some
companies were doing a land grab, and they weren’t going to follow through the
exploration expenditure. So now they’re just in regulation that we believe, so
that the mining companies that take out an explorational licence will have to
spend the money, and be accountable for it, and if you don’t spend a certain
proportion in the first year, you lose your licence.
Gordon: Which happens the world over.
Marr-Johnson: They’re tinkering, they’re changing
the mining code. So, just coming back to question, the three things. 1) All the
big guys are there. 2) Its an evolving industry. 3) That there will be winners
and losers in Ecuador. It’s one of those countries where because you don’t have
a history of large scale mining, or industrialised mining, there’s a lack of
awareness. There are communities that don’t want mining, or don’t know what
mining comes, and change is difficult to assimilate on any level in any
society, and in Ecuador its no different; you say, ‘We’re going to build the
mine’, and people say, ‘Is that going to affect me negatively?’ So you have to
go through this education process, and the winners will be the ones that can
manage their community relations properly.
Gordon: I think these are common problems, common threads through different
countries around the world, but I agree with you. Can we talk specifically
about what you think you’ve come into, like I’ve said, this is the exciting bit
for me; the model that you have employed, or the company has employed to move
forward excites me, I’ve seen this work elsewhere. Can you explain what you’ve
Marr-Johnson: Well, the reason why I got excited
about it, is that I’ve worked on the by-side for 5-years, and I worked as a
mining analyst for 6-years, and I run exploration companies. One of the things
which is a real differentiator in a company is, when you have an income stream
and when you’ve got an asset of significant value that de-risks the downside to
Gordon: Right, so what have you done?
Marr-Johnson: Salazar Resources made a discovery in
2008 called the Curipamba VMS deposit, it’s a volcanogenic mass of sulphide,
they drilled it out and they’ve farmed it out. They farmed it out to a partner
who is investing USD$25M to take it to a Feasibility Study by 2021, and then
they’re going to continue to fund it, all the way through to production. So,
Salazar Resources is carried on a 25% stake, all the way through to production.
Gordon: What does that mean in terms of dollars, what’s the income?
Marr-Johnson: The income up until it gets into
production is based on advanced Royalties, and a management fee of 10% on the
basis of a minimum of USD$3.5M a year. So, we’re talking hard numbers, USD$600,000
minimum a year income to the company. In addition to that, Salazar Resources
owns three drill rigs which it contracts out to the partnership, and to third
parties, and we anticipate about a USD$1M coming in from that, on an annual
Gordon: On top of your $600,000?
Marr-Johnson: On top of the USD$600,000.
Marr-Johnson: So, the base position is, we’ll be
income generating USD$1.6M, possibly up to USD$2M on an annual basis.
Gordon: For a small company, an exploration company, that allows you to do
Marr-Johnson: That allows us to fund on a discretionary basis our 100% owned
portfolio. We are an Ecuadorian team, the headquarters is in Quito, and we can
do extremely low-cost effective exploration in Ecuador for a small amount of
money. So, that USD$1.6M goes a long way, and I should add that we’ve got about
USD$3.7M in treasury anyway, which is a function of previous income, and sale
of some shares that we got as part of the farm-out deal.
Gordon: That’s interesting, that’s a very good start. So, you’ve got some 100%
owned portfolio assets, are there any which would take the lead there? Are you
focusing on one, or several at the same time? How do you intend to spend your
time and money?
Merlin Marr-Johnson: At the moment we’ve got four
licences which are 100% owned by us. I want to say, we’re not just stopping
there at that four. Before the Mining Cadastre closed we applied for five or
six permits beforehand, and we hope to get a couple of those through, they’re
in process. We’ve also done prospecting over the last couple of years, we want
to apply for another 10 to 12 licences afterwards. So, we know that we actually
want to grow our licence portfolio.
Now, in terms of where we want to put our money, and how we want to do it, it all slightly depends on how we can trade our cards, because if for example, we can do a farm-out on one licence area that comes with a cash payment upfront, and is fully carried, then we can use that money to invest into one of the other projects, so we can play things around. But if I was to pull out a priority asset I would focus on the Rumiñahui porphyry target, which is in the northern portion of Ecuador, and there’s a line of porphyry’s. It goes the SolGold Cascabel deposit, which as we know is a billion tonnes here or there at around 0.6% Copper equivalent. Then you travel 55Kms to an asset called Yurimaguas which is owned by Codelco, and that’s over USD$1Bn, and that’s at 0.8% Copper equivalent combined.
Then 22Kms on
from that is Rumiñahui which is the asset that Fredy Salazar has been looking
at for over 20-years. We’ve got the licences over that, and the preliminary
work that we’ve done on that indicates that it’s a porphyry, and that its
Gold-rich, and that it’s a large system.
Matthew Gordon: Okay, we’ll come onto that. I want to stay
on the, how do people make money bit, which is I think is why people watch
this. So, you’ve got a model you’ve employed which is identifying a target-rich
property, you farm it out, retain or you’re carried for…?
Merlin Marr-Johnson: 25%.
Gordon: 25% of that. You may get a lump sum cash amount for that, or not? But
you will get some income in the shape of management fees, perhaps leasing out
your drill rigs, and what was the other…?
Marr-Johnson: Advance Royalties, but that’s all within the USD$600,000.
Gordon: So replicating that model kind of keeps you ticking over and developing
more and more of your portfolio as you build this out.
Gordon: So you’re an incubator as such.
Merlin Marr-Johnson: We are an incubator but talking
about making money and where the share price could go to, or where it should be
for example, the Curipamba VMS that
we’ve farmed out is at the PFS stage. Earlier this year we produced a PEA that
gave an NPV of USD$288M on base case. So, our base case NPV was USD$288M and we
are 25% fully carried on that. Now, obviously there has to be a discount
applied to that because we’re a few years away from production, so what is the
right price for our 25%?
One way of looking at it is to look at the value of our partner, which is
pretty much a single asset company, and its earning into the Curipamba Project,
and they’ve got a market capitalisation of USD$75M, but they have to keep
funding the entire – they have to carry the whole thing. So, one could say that
our 25% should be at least USD$25M, if not more, because their 75 for 75%, and
our 25 to make the 100%.
valuation yardstick is a Royalty that was bought on that VMS project, 2% Royalty
was bought for USD$10M earlier this year, and I use a rule of thumb equity to Royalty
of around three times, which puts our 25% at a value of about USD$42M. So,
we’ve got these yardsticks, let’s call it more than 25 because we don’t have to
be diluted, and within USD$40M, so, let’s call it in the $30’s. Our current
market cap is $15-16m, so in a sense just on the value of the 25% stake you’re
looking at a 50% discount to fair value.
Gordon: Okay, I’ll buy that.
Marr-Johnson: So, a potential double on the share price right there. Then
you throw on top of that the fact that Ecuador is the hottest country globally
at the moment, because of the way the government is going, the fiscal terms,
and the geology. The fact that we are an exploration team with a really good
footprint of licences within Ecuador, and the fact that Fredy Salazar who is
head of the company is recognised and renowned as probably the best explorer in
Gordon: Yeah, I think there are people who will give you credit for that, and
some people who will see it in the opposite direction, because Ecuador is early
stages. So I think just to be fair in all of this I think you’ve got some great
things, and you’ve got some unknown things.
Marr-Johnson: Oh yes.
Gordon: Again, it comes back to this model for me, I’ve seen this work
extremely well elsewhere, and I like that you’re employing it, and you’ve
actually done Stage 1, you’ve got advance payment, and in terms of Royalty
you’re getting management fees, and you’re getting the rig fees, and you’ve got
this portfolio of assets where you can replicate, replicate, replicate. Accumulatively,
it could be very meaningful for you without necessarily needing to go and raise
significant cash or dilute shareholders. So, that’s the bit that interests me.
Fredy’s knowledge of country, he’s been in country I’ve read 20-odd years, and
has worked for…
Gordon: Newmont, so again it’s not amateur local stuff, this is a significant
global leadership player that he worked for and led the team for. So, I like
that his knowledge is extensive, I like the fact you’re picking up these
licences; the question is, when are you going to be able to start moving this
thing at a pace? You will have circa USD$5M available to you, can you break
that down for me a little bit more, I know you’ve kind of touched on it but
break that down for me, how do you create value? How do you take that USD$5M
and create significantly more value for shareholders?
Merlin Marr-Johnson: We’ve
got four licences that we are taking up the value curve through exploration,
three of those are in Ecuador, one is actually just over the border in Columbia.
Our plan for 2020 will be to drill 2 or 3 of those licences in Ecuador, we’ve
got a budget for 8,500m of drilling, and 3,500 of those will be at Rumiñahui.
We are waiting for water permits in all our licences, and that has actually
been a delay across Ecuador throughout 2019, and the Mines Ministry is on it. The
Head of the Water Board was blocking the issue of water permits for exploration
drilling, there’s been a change in the Water Board, the new Head of the Water
Board is someone with environmental and mining experience, he’s an engineer
within environmental credentials, and a mining engineering degree.
water permits are coming through more quickly. We expect to have our first
water permits through in Q1, which will enable us to start drilling. We
anticipate drilling Rumiñahui in the second half of the year.
Matthew Gordon: For how long, is it seasonal there?
Marr-Johnson: It’s not seasonal. We’ve budgeted a
meterage of 8,500m as a total plan for the year. What then will happen, it will
be slightly dependent on Copper prices and what we discover.
Gordon: And these are your own drills, so the cost must be relatively low,
Gordon: So, where are we with this $5m after you’ve done all of this? How much
have you spent?
Marr-Johnson: Our plan is around USD$2M, and its discretionary, so the smaller amount
of work is about USD$2.1M and it dials up to USD$3M depending on what we find.
Now, we don’t of course want to run the treasury down to below USD$2M, so we’ll
always tailor our expenditure carefully with what we can see in terms of the
Gordon: Are you having conversations now with companies about Rumiñahui? Or,
are you going to wait until you know a little bit more? And what’s your
expectations of what a deal could look like, what type of deals are you looking
for from whoever you’re going to be speaking to?
Marr-Johnson: Yes, yes, yes, all of the above. Because Ecuador is a country
of great interest to all the major mining companies, the eyes are on Ecuador
and people are looking for the next Cascabel. Fredy Salazar is well-known, and
if you are the exploration director for a major company one of the first things
you do when you come into a country like Ecuador is, you call up the team that
knows what’s going on. So, we get a lot of inbound from the guys saying, ‘Hey
Fredy, what are you up to?’ He’s well respected within industry, and critically
its not just him, so between him and his two colleagues, we’ve got three
geologists who between the three of them have made a lot of the discoveries in
Ecuador over the last 20-30 years.
Gordon: Anything we’ve heard of?
Marr-Johnson: Fruta del Norte, and the Lundin Gold asset. Success has many
fathers, he was involved in that, there are a number of other assets you might
not have of as well, and of course Curipamba which is the VMS project. You
mustn’t forget that Rio Tinto got started on a VMS, Agnico Eagle got started on
a VMS, Lundin Gold got started on a VMS, old Lundin Mining, these are…
Gordon: Explain to people why they possibly should look at VMS-type projects,
because we’re looking at a few, and its all down to the reporting what you can
and can’t report, but VMS projects tend to be a lot bigger than exchanges that
allow you to report. Tell us about what you know about the VMS structures in
Merlin Marr-Johnson: VMS is
globally, they tend to come in clusters, and so what happens is, you drill off
one of the pods, and that is really where you are restricted in your reporting,
because you will drill off a pod and it might be 2-3M/t of ore. It’s high-value
ore, but it’s still only 2-3M/t. In fact, if you look at it in the distribution
base, most are 2-3M/t.
Gordon: And it’s restricted why? Because in terms of the depth that you’re
allowed to report on?
Merlin Marr-Johnson: They are fossil black smokers on
an ocean floor, and they just form in a oner, it’s a unit, but there are
several of those in the cluster. Now the Curipamba one is we’ve got 9 M/t in
measured and indicated resources at 2% Copper, and 2.6g/t Gold. It’s 5% Copper
equivalent at surface, which means that the NPV is high, the capital is low,
the margins are great, and that’s where you make money on your VMS’s.
Now the other thing is, that if
you look at the discovery of VMS’s globally, they’re very dense and they appear
on gravity. So people do mag surveys and then they sometimes come back and do a
gravity survey, and if you look at the Iberian Pyrite Belt, Southern Spain and
Portugal, all the big discoveries are made by gravity. So Lundin got
going on Neves-Corvo, Rio Tinto, on Rio Tinto it’s the name of the deposit down
there, and we’ve just flown the geophysics at Curipamba, it’s a 9M/t core to
that deposit, it’s a much bigger licence area. Watch this space.
Gordon: Okay, so you’re excited by that, but what else are you thinking the end
of next year? You’re answering the question of, yes, yes, yes, talking to lots
of people, optionality, but what are you hoping for?
Merlin Marr-Johnson: The first stage is to get CEAs
with the right groups. The first met farm-out we did was with Aventis Mining
which was a start-up company, obviously now for something like Rumiñahui which
is potentially a very large porphyry target, you’d want to be going higher up
the food chain in terms of capability and size. So, we would want to have
signed a number of CEAs with majors, and potentially we want to do the first
phase of drilling by ourselves.
Now, if a major
comes in with an offer beforehand, which is sufficiently attractive in terms of
an equitable funded approach to the development, or the exploration of Rumiñahui,
we might consider it. We’re not drilling it until the second-half of the year,
so we’ve actually got some space to talk to some of the majors whether they
really are serious about striking up some kind of farm-out.
Gordon: I guess what investors would want a sense of is, your ability to
preserve cash, create value, and that means making sure you’re not spending
more money than you need to, whilst having these conversations, because its all
in the negotiation if you’ve got enough data to have that discussion.
Marr-Johnson: Yes. The amount of data we’ve got is relatively limited.
Gordon: That’s my point.
Marr-Johnson: We’ve got geological context, we’ve got outcrop, in one of the
riverbeds we’ve got 55m at 2.7g/t, it’s a great outcrop. We’ve got a lot of
Gold, we’ve got a lot of Copper, we’ve got a lot of context.
Gordon: Yes, but negotiations are done, effectively with more information.
Gordon: So that’s what I’m saying, I’m intrigued in how much you’re going to
spend. Will you have enough cash to get to the point you need to…
Gordon: …without diluting shareholders at any point soon?
Merlin Marr-Johnson: There are precedents of good at farm-outs in Ecuador on slightly more advanced assets. We also know that there are groups out there looking for relatively earlier stage joint venture programmes on areas of interest, and Rumiñahui certainly falls within that. It changes the tenure of the conversation, how advanced your asset is or not.
What I would say is that we’ve got the capital, the drill rigs, and the time to do our first 100% owned drilling programme on Rumiñahui. And I would just add in that, is that we always want to have a flagship asset that we control, and that we can take on 100%. We’ve got Los Osos which is a high-grade Copper-Gold project on a much smaller licence area, that we’ll be drilling on 100% basis. We’ve got a Macara project which is a Gold target, and of course if the mining cadastre opens in Q3, and we get some of the licences that we’ve applied for 2-years ago, then suddenly we’ve got more properties with which we can trade. And so if there’s a bit drill out on Rumiñahui that perhaps is not within our budget to fund, we’d be more willing to take it on.
Matthew Gordon: You said right at the beginning, you’re a
markets guy. I know you’re a geologist, you run companies, and you’ve been an
analyst, and so you’re a markets guy compared to the team that is currently
Gordon: So, is there expectation that you’re going to go and raise some capital?
Are you going to need to, or is this just about helping them construct better
deals with these farm-out opportunities?
Marr-Johnson: We’re not planning on raising capital, as we’ve got almost
USD$4M, we’ve got USD$1-USD$1.5M coming in, maybe up to USD$2M. At the end of
next year it depends on what our opportunity suite offers, and ideally we will
have structured a farm-out whereby we can continue to fund our main assets, and
we continue to earn money from our drill rigs, and we continue to earn income
from advanced Royalties and the management fee, we may not need to raise
capital. If we suddenly decide that the best use of shareholder funds would be
to drill an asset 100%, then of course we would consider it, but its not in the
Gordon: Okay. So, I’m excited, you’ve said you’re excited about the opportunity
here. We’ve done a lot of work on this before we came to speak to you today,
why do you think shareholders should be excited? So let’s talk about the
financial side of things, you’re a public company, $15m market cap,
inconsequential in the scheme of things, there’s lots of companies in
and around your level, why you guys?
Marr-Johnson: We’ve got two things, we’ve got risk protection, and we’ve got
upside potential. So, the risk protection is the income from the advanced Royalties,
the drill rigs, and the management fees, and the other side of the risk
protection is, the fact that we’ve got 25% stake in a fantastic asset that is
marching on the way to production, and our share is going to grow in value from
USD$35M to USD$100M, as a ballpark trajectory.
Gordon: Without necessarily needing to dilute?
Marr-Johnson: We don’t have to invest a single cent in that, that’s all
carried, we’re fully carried in that asset, and that’s Curipamba in the joint
venture, and that is an investment case on itself. Now in addition to that we
offer the sex and violence of exploration, the opportunity to have a
transformational discovery on any one of our four properties, and
knowing the interest that we’ve got in country, and from the majors that are in
country, we’ve got the opportunity to do that on a funded basis as well, if we
can get a farm-out.
Gordon: Interesting. So, to make sure I understand this, you’re saying with
Curipamba, with Rumiñahui potentially, and the others in your portfolio, from
those that covers your G&A, you’ve got income coming through, so no need to
Marr-Johnson: No need to dilute.
Matthew Gordon: Then on top of that, if one of these JV
partners hits it big with any of those assets, you’ve got that 25% free carry
there, that’s the big uplift. No one’s investing in this but G&A right?
This is what the big uplift could be, plus if I understand you correctly, if
you develop one of these 100% owned assets yourself, then potentially you’ve
got control of your own destiny there to a degree, well in the context of
Okay, I understand that, you’ve painted quite a nice
picture there for shareholders, and you’re putting a number on that, are you?
What does that look like? Without dilution, where do you think you can move to if
you were able to deliver this model?
Merlin Marr-Johnson: Well, lets just say that our
value in Curipamba is USD$30M today, and it should be at USD$50M at the end of next
year, end of 2020. That’s a trebling of the share price right there, doubling
or trebling that would be fantastic, at $0.16 to $0.17 cents depending on the
bid after the spread at the moment. So if you could get that up to $0.50 that’s
a tremendous result, and I think we could do that just on growing awareness of
what we’ve actually got, and the deal we’ve already done, and an asset that we’ve
Now, if we get a good drill hole
on any of the other projects, particularly if we open up Rumiñahui as a real
palfrey target, then things get much more exciting, if that’s not already
Gordon: Merlin, thank you very much, nice introduction. Let’s catch up in the
New Year, I want to get into some of the detail around the numbers, and your
plans for the year. But as the first passing that’s quite nice for some of our
viewers to be introduced to what is quite a small story now, but again, I do
like the model so I’m encouraged.
Company page: https://www.salazarresources.com/
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