Jervois Mining (ASX: JRV) – Cobalt Has Been “CRUSHED.” Now What?

The Jervois Mining Limited company logo
Jervois Mining Ltd.
  • ASX: JRV
  • Shares Outstanding: 642M
  • Share price A$0.19 (14.05.2020)
  • Market Cap: A$122M

Have a watch of our recent interview with Bryce Crocker, CEO of Jervois Mining (ASX: JRV).

Jervois Mining is an ASX-listed mining company with a focus on cobalt, but with significant exposure to nickel and copper. Jervois Mining has assets in Uganda, Australia, and the United States (the main focus).

Crocker was incredibly honest during our interview. He is clearly aware that COVID-19 has thrown a spanner in the works of the EV revolution, especially on a consumer level: will they even be able to buy cars after this crisis is over?

The EV market is already relatively small (2M) compared to conventional gasoline vehicles (100M), but Crocker thinks that the position of his cobalt assets, in America rather than the unstable DRC, could be highly advantageous. Will the U.S. government see cobalt as a strategic commodity? This has been touted before, but it remains to be seen. Will green energy and, therefore, cobalt, win the day?

We Discuss:

  1. Company Overview
  2. Grim Outlook for EV Revolution: Predictions Post-COVID-19
  3. Jervois Mining: Survival Tactics Involving the US
  4. Green Mining to Prevail: Hope for EVs
  5. BFS Completion Timeline
  6. Negotiating Deals at Present or Waiting for the Pandemic to Pass?
  7. US & Cobalt: Outcomes of Nationalisation
  8. Contributing Value to Jervois Mining: What Takes the Cake?
  9. Plans for Non-Core Assets: The Future
  10. On Listing in the 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.

The Jervois Mining Limited company logo

Jervois Mining (ASX: JRV) – Thought that was always the plan (yeah) (Transcript)

The Jervois Mining Limited company logo
Jervois Mining Ltd.
  • ASX: JRV
  • Shares Outstanding: 642M
  • Share price A$0.19 (14.05.2020)
  • Market Cap: A$122M

Interview with Bryce Crocker, CEO of Jervois Mining (ASX: JRV).

Jervois Mining is an ASX-listed mining company with a focus on cobalt, but with significant exposure to nickel and copper. Jervois Mining has assets in Uganda, Australia, and the United States (the main focus).

The company is hoping to benefit from the much-discussed and much-distressed EV revolution by producing raw battery materials. COVID-19 appears to have put a real spanner in the works of the EV thematic, though Crocker suggests the US government is viewing cobalt as a strategic commodity, and Jervois Mining could benefit.

Crocker paints a “profoundly negative” picture of the impact of COVID-19 on EV global supply chains. COVID-19 hasn’t just compressed cobalt demand, “it has DECIMATED it”. China was down c.80% in Q1/20 and the West is down 40%-50% in Q2/20. Some companies are losing as much as “US$100M per day.” There is no positive scenario near-term. Crocker expects a massive “dislocation” of the supply chain across 2020, and says people aren’t expecting it.

How does Jervois Mining plan on taking advantage? Do its hopes lie in the hands of the US government? Government subsidies for EV manufacturers are starting to flow back in, but they have been crushed because their export markets are off; this is particularly true of China. It’s also very difficult to be bullish when it comes to aerospace right now. Who knows when the airline industry could recover? There is a lot of uncertainty right now.

Crocker claims cobalt is a unique commodity, with 75% of cobalt coming out of the unstable Democratic Republic of Congo. The supply chain looks incredibly fragile as it is, and COVID-19 has worsened problems. The major mines in the DRC are still operating. Some borders are still open, but the border with South Africa is closed, and the border with Zambia is an “unmitigated disaster,” with queues stretching as far as the eye can see. The cobalt mines are stockpiling aggressively, and a lot of the highly-technical major projects are being canceled because of key minds being repatriated. The outlook for cobalt is very binary as to what is going to happen in the DRC. Crocker expects to see COVID-19 peak in the region in the first few weeks of June. Cobalt investors will need to keep their eyes peeled. The impact could be “profound.” COVID-19 is going nowhere in the short term, and the DRC already has logistical issues: the cost of trucking copper and cobalt out of the country is US$300/t.

Crocker is actually very happy with Jervois Mining’s own position in a stable jurisdiction with a “half-built” cobalt project. He has always claimed the US is the most strategic market in the world for cobalt, and claims the country is fast catching up China. The US has no domestic cobalt mines, and Crocker thinks it is timely for Jervois to be at the forefront of this.

Cobalt has always been of geopolitical importance to the US, and now it is even more so. Crocker expects green mining to prevail as the US government tries to create jobs in 2020. Crocker remains coy on the government’s plans for possible nationalisation, but claims cobalt is “up there” because of its importance to aerospace and critical industries.

Crocker expects the BFS by the end of the year. It’s nearly finished, there are just a few things to sort on the offtake side (metallurgical test work). Travel restrictions have caused delays. Jervois Mining has c. US$7M cash to see the company to midway through 2021. Away from Jervois Mining’s core Idaho assets, Jervois has been clear it wants a partner to form a JV for the Nico Young nickel-cobalt project in Australia. The rest of the projects will have their day in the sun, but right now there is an emphasis on keeping a tight balance sheet. This seems sensible. A Tanzanian acquisition is also on the cards.

We Discuss:

  1. Company Overview
  2. Grim Outlook for EV Revolution: Predictions Post-COVID-19
  3. Jervois Mining: Survival Tactics Involving the US
  4. Green Mining to Prevail: Hope for EVs
  5. BFS Completion Timeline
  6. Negotiating Deals at Present or Waiting for the Pandemic to Pass?
  7. US & Cobalt: Outcomes of Nationalisation
  8. Contributing Value to Jervois Mining: What Takes the Cake?
  9. Plans for Non-Core Assets: The Future
  10. On Listing in the US

CLICK HERE to watch the full interview.

Matthew Gordon: Hey Bryce, how are you doing, Sir?

Bryce Crocker: Matthew,I’m well. How are you?

Matthew Gordon:  Not too bad. Not too bad. Surviving. What’s that bike in back? I meant to ask you. What’s that bike in the background? You look like a serious road bike kind of a guy.

Bryce Crocker: That bike is a specialised brand; a bit of free advertising, but it is a lot more technically advanced and capable than its jockey.

Matthew Gordon: Blimey. That seat looks terrifying. That’s the thing I would say to you, not sure I could cope. Right, why don’t we kick off with a one-minute overview of Jervois mining then I will pick it up from there?

Bryce Crocker: Yes, thanks. We are ASX-listed and we are excited to be a creating battery raw materials company, a producing battery raw materials company. We are focused on security of supply chains, supporting the rest of the industry which has clearly become more topical in recent weeks and months with the unfortunate arrival of COVID and the impact on global supply chains.

So, we are a group of executives who came from larger mining companies, and I guess, what I wanted to cover today is that we don’t typically talk about the commodity; but I did want to talk about Cobalt because it is very interesting, and if you look across all of investor presentations, you will see nothing in Cobalt and nothing in any of our statements, but it is an area where collectively as a team, we do have a lot of background. We do look at what we have as a competitive advantage, and it is. It is fascinating what has happened.

Matthew Gordon: I think we both want to talk about the same thing actually, because we talked to you previously about the company and where you are at, and we will get on to that but I wanted to talk to you specifically about what you think is happening, because of COVID-19, how you think it is going to affect buying behaviour, investment in the EV thematic, which obviously you play into with your Cobalt. What do you think the impact is going to be on all of that?

Bryce Crocker: Profoundly negative. Profoundly negative. Anyone who gets up and says otherwise doesn’t understand the physical dynamics of what is happening in the market and hasn’t really thought around what the implications are. I think Cobalt, it is interesting for a couple of reasons; I mean demand, it is not weakening – it is getting crushed. Completely decimated. I’ve never seen anything like it. You have got China orders, probably down 80% in Q1/20. All of the Western order makers: 40, 50% in Q2/20. Most of the big oil producers losing USD$100M per day, per day. And so you have had, from a supply chain perspective, you have had this massive disruption and we are just really at the start. And I think this is where this is interesting, if you look at what is going to play out over the next 3 to 6-months. We are really at the start of this process because COVID-19 from a supply perspective has really just started. We have got customers who aren’t buying or can’t buy because they are locked in their homes. Manufacturing facilities that are shut. So, if I am a steel mill, and I am getting ferronickel, ferrochrome, ferro cobalt – all of these deliveries, I don’t want that. That’s getting pushed back to the traders who are pushing back to the producers, and this shock is getting pushed through the system and is going to take time to flow through.

 But if you look at what is happening to end demand on Cobalt, I mean, electric vehicles, there’s no positive scenario in the near term as to what is happening for EVs, clearly. Orders are being crushed. But as you look forwards, I do think that the Chinese are trying to come back on. Their biggest challenge, from what I understand, is that really their export markets are off. They are trying to turn their economy back on, get those order flows to try to start again. They are obviously, again, it is the incentivisations, the government prioritisations for electric vehicles, that’s flooding back in.

But any way you look at it, electric vehicles, the numbers are fluid but it is going to be a significant, significant reduction. Even over last year, and we are talking growth rates that have gone. So that’s the bad news on EVs. But is that a structural, permanent shift? I can’t talk about that. I don’t believe so, but it is going to create a massive dislocation in the supply chain across 2020 that people weren’t expecting.

 So that’s on the electric vehicle side, which is obviously Cobalt Chemicals, Cobalt metals – aerospace: it’s pretty hard to be positive on aerospace right now. I would suggest that this is 30% to 40% down. Oil and gas – it is pretty difficult to be positive on oil and gas type exploration drilling, so cobalt gasses etc.

So, demand is bad, but I think, taking away from that, Cobalt is kind of unique because you have three quarters coming out of one country that is highly unstable so, we all hope that Africa, including the Congo, gets through COVID. We are sitting in a part of the world where we are relatively very fortunate. There are some other parts of the world that don’t have the health infrastructure. The majority have immunocompromised complications because of HIV which don’t have the efficiency of the governance, perhaps, that we are able to rely on in the West. We are all hoping that Africa holds together as a continent, particularly the DRC because there is no safety net in the DRC if something goes wrong. But clearly, with three quarters of the Cobalt coming out of the DRC, for context, it is twice the size of OPEC on the oil market, so, it kind of matters.

In terms of what we are seeing and hearing on the DRC, the major mines are still operating. Some of the smaller ones: KiPOI*, Isoko, Kisavari are shut. But the big mines, the Katanga’s, TENKE’s etc, they are continuing to operate. The border currently is back open, obviously you have two borders to get the product out of the DRC: you have got to get through Zambia then you have got to get across from Zambia to South Africa. South Africa is shut, so the port of Durban is shut. There is material coming out to the east, through Dar es Salaam, material is coming out from Mombasa, traders are using alternate exit routes.

For the trucking, I mean, if you have ever been to the DRC, the border with Zambia is an unmitigated disaster at the best of times: just queues stretching as far as the eye can see and a lot further. So that is obviously there now. You do have Sulphur and Lime and consumables coming across. The mines in the DRC are stockpiling aggressively on the expectation that there could be some disruptions. Expats are gone. In a simplistic and broad statement, but a lot of expats with their families in South Africa, they didn’t want to be sitting in the DRC, so a lot of the critical technical expertise, major projects are being cancelled.

So, I think it really depends. So, the outlook for Cobalt is very, very binary to the situation in the DRC. They are behind us. The advise that I have seen is that the COVID-19 peak is coming; you are looking at June, week 1 June, week 2 June, in terms of when it is likely to genuinely flow through. Clearly, the potential market impact is profound. Cobalt, Metal Bulletin SG grade is trading at about, I think, around USD$14/lbs, USD$15/lbs, so that is inconsistent with demand getting completely destroyed. If you look at what has happened in the oil market, obviously, that shows what happens when demand disappears, which illustrates with the Cobalt market, there is this uncertainty there about what is going to happen in the DRC.

The Chinese refineries have inventory for now, but that inventory is not going to last multiple months. There’s material obviously sitting in Durban, which is waiting to get out, as and when the ports open again. But COVID-19 is also not going to go away. One of the greatest challenges of the DRC is logistics. It is one of the most painful places to get consumables in and to get a product out anywhere in the world. It will probably cost you USD$300/pt to get it out on the back of a truck; whether it is Copper, Cobalt hydroxide.

Zambia has installed a 14-day quarantine period, so if you are a truck driver, you come in from South Africa, you get a 14-day quarantine period upon entry to Zambia, you go into the DRC, you come back, you get another 14-day quarantine period. Trucking delays are probably up only 2 to 3-days currently. There is no shortage of guys wanting to drive the trucks, for now.

If South Africa, Zambia and particularly the DRC, they are different, there is potential for social unrest in the event of these big mine closures, clearly, to use the artisanal supplies as an example, people aren’t mining, you don’t get women and children mining artisanal Cobalt because they choose to do that versus open a corner stall selling clothes, they are doing that because it gives them the option to put food on the table. Many people are working at the big mines; they are big employers. The social implications of these sites shutting is profound. I don’t profess to have a crystal ball. I don’t know which way it is going to go but the potential market dislocation is obviously enormous.

What is highlighted in our conversations with other ERMs and other end-users, clearly the DRC has been there and people have been uncomfortable with certain aspects of the DRC, whether that is governance, whether that is the artisanal mining, for a long time, but now they are looking at the security of supply chains and realising that this really is a profound risk to their business. Being reliant on a critical component for electric vehicles, or for steel production from a part of Africa which is obviously a long, long way from you having the confidence that you are going to get the product that you need on time.

Matthew Gordon: Okay. That’s a fairly devastating picture you are painting with regards to, obviously, demand, which, as you say, you are not quite sure when that kind of comes back on because it is a kind of slightly dislocated logistic supply chain at the moment. So, if the Chinese come on earlier than the rest of the world, we are sort of playing catch up there. I know that you were talking about Cobalt in the DRC because Cobalt is a big part of the DRC economy. Can I just ask, before we get onto you, what do you think it is going to mean for the other battery commodities: the Nickels of this world, the Lithium, the graphites, et cetera. Are they as disrupted as Cobalt?

Bryce Crocker: No commodity has 3/4 of supply coming from one country. Clearly, Indonesia is incredibly important for the Nickel market, and clearly other countries are important for Lithium. I don’t pretend to know as much about the Lithium market, but from what I see, there was an expectation that Lithium was in over-supply before this began, so that kind of implies that Lithium is in for some challenges.

Lithium ion batteries, the components are subject to discrete market forces. Nickel is going to be a core component of the battery, moving forward. Everyone wants a car that is going to go a long way and gets there quickly. That’s obviously a big part in what is going in with the success of electric vehicles because everyone wants to get there quickly and get there fast and gets there safely, hence the significance of Cobalt. If Cobalt was easy to engineer out, we wouldn’t be having this discussion. There have been a lot of smarter people than I am, looking at this for a long time, but as of today, it hasn’t been possible to engineer out in a way that provides the same performance et cetera, as an 8.11 or one of the high-Nickel NCA chemistries, Panasonic, Tesla’s…

Matthew Gordon: Okay. Well, I guess the whole EV market is going to be dependent on the lowest common denominator coming through, and you are suggesting that is Cobalt, because of the dynamics in the DRC. So, let’s get back to you; what are you going to do about that? How is that going to affect your business? Because we have been reading about your and talking about your Idaho business. There has been lots of conversations about conversations that you have been having in the US with US funders. Is that your route out of this?

Bryce Crocker: Well, if you gave me a choice of, in this type of environment, what mining project would you like to have? I would take a Cobalt project in the United States with moderate capital, that is half-built. That is, as opposed to other alternatives that I could have on my plate, that is not bad. I think that I’ve always said that the United States is the most strategic market in the world for Cobalt, period. Because of the importance to aerospace, because of the importance to the steel industry and increasingly, because of the importance of electrification. The US automakers have been behind those in China but they are catching up fast, or they are planning to catch up quickly. I think that being in the United States, the United States has no domestic Cobalt mining, it is all imported, so, for us to be at the forefront of that is obviously, it’s timely and I think it does provide an opportunity.

If you look, Cobalt was always geopolitically important to the United States, now you are in a situation where anything you can do to create economic growth and jobs in the second half of 2020 and into 2021 in the US is going to be enormously important. I mean, we are all seeing the news out of the States. We are all seeing the levels of unemployment rising at quite terrifying rates.

We are already getting traction with what we want to do. Now, I think there is an opportunity to really have a profound impact and build a mine during a period when the US and Idaho is looking to create economic growth once we come out of this situation.

Matthew Gordon: It sounds logical, but it is also enhanced, I guess, by this wave of nationalism which is spreading across the US; US first. We have also read about the support that you are getting for this. You say that this is timely. This is absolutely timely for you. You have recently submitted some RPFs, is that right?

Bryce Crocker: So, this is in terms of our debt financing process. We are working the site pool with potential lenders. We will be finalising the bankable Feasibility Study for Idaho shortly to provide that to the banks on an NDA level, so they get an updated financial model. We did provide indicative term sheets in January. We have made a decision at that time not to make a final appointment. We want to progress the PFS and get to the position where we can really differentiate between the options that are available.

This is an asset which, there has obviously been USD$100M which has been spent so it is a part-way constructed mine in a great jurisdiction. Clearly, I mean, the capital markets, I spoke a little about what has happened in terms of industry on the supply chains. Capital markets, again, they have lots of volatility, but equally, lots of liquidity getting pumped into the system, I guess. USD$10Tn between fiscal injections in the US and monetary easing, certainly that is having an impact in terms of debt capital markets remaining open and banks willing to lend. And clearly you will have seen an impact in terms of what’s happened to the Dow in terms of the last 30 days or so,

So, I think as we move forward, we have moderated the timeframe because we didn’t think it was the right time to be pushing someone to go through credit right now, just given the uncertainty. I mean, we are optimistic on the future. I am in transparent in that I think demand right now is crushed but I don’t expect that to last indefinitely. I do expect there are also going to be pushes that come out of this, if you like, like COVID-19, that are difficult to judge now. I think everyone in the city is getting to like having clean air with oil use being down by 30M to 40M barrels per day. People are going to Venice and seeing jellyfish – it is things like that. But I think that it is difficult to judge what the environmental flow-through will be in our governments when they come back on and revitalise the industry, are they really going to want to revitalise industry and reallocate their capital towards ICEE production rather than taking the opportunity to use it as, essentially, a step change on the EV side.

Matthew Gordon: Right, just tell me a little about the types of institutions that were submitting bids? Because if you look at people like BlackRock, I mean, that’s the one that people are talking about, they are segueing away from coal, they are segueing away from oil, and they are moving into and investing into cleaner and greener opportunities. So, are you seeing more of that? Or is it just the usual players?

Bryce Crocker: No, I think that ESG is a big deal. I mean, I know there is a debate between you and the companies you speak with. What does COVID-19 mean for ESG? Is it on the backseat for a period? My personal view is that I don’t think it will. I think that ESG is here; it is an important part of investing. It is in the matrix of any decision-making. Also, the electrification of vehicles is something that is fundamentally important, and I think that it is going to be a criterion, if we had a coal mine up in this part Idaho, we would be having very different discussions. We would be having discussions with many of the lenders, the commercial banks aren’t in the business of funding coal mines, and equally on the equities side, a lot of investors are also, I think looking at ESG. If you want to invest in Cobalt, you have either got to go to the DRC, which is very difficult within an ESG type framework, or a lot of the other projects are large capital, long lead time, high technical risk in varied jurisdictions, not without exception, but as a general rule, some of the better projects are located in more challenging jurisdictions than the developed world.

So, again, this is where Idaho is nice; I mean, it is small. You know, I like small, I like low-risk. It’s a good way to start a business.

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.

The Jervois Mining Limited company logo

China Gold Int (TSX: CGG) – Gold And Copper On A Grand Scale

A photo of a silhouette hand picking out a gold Chinese ring.
China Gold International Resources Corp.
  • TSX: EQX
  • Shares Outstanding: 113.5M
  • Share price C$12.6 (21.02.2020)
  • Market Cap: C$1.43B

We recently sat down for an intriguing interview with Jerry Xie, Executive Vice President and Corporate Secretary of China Gold International Resources Corp. (TSX: CGG, HKSE: 2099).

Investors may want to read one of our most recent gold-related articles, or even watch a different gold interview.

Gold had a good year and an especially positive 2H/19. However, China Gold Int. had a negative correlation on its share price throughout 2019. The company operates two producing gold mines that form a low-grade, bulk-tonnage gold operation with a copper by-product. The operational statistics look good on paper, so why this share price tail-off? We discuss:

  1. The Decline In Share Price: Why?
  2. The Gold Market Outlook For 2020
  3. How China Gold Int. Plans To Get The Share Price Back Up

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.

A photo of a silhouette hand picking out a gold Chinese ring.

Salazar Resources (TSX-V: SRL) – Cause We’ve All Been Painted by Numbers (Transcript)

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.

Interview highlights:

  • 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.

Matthew 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?

Merlin 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 Development.

Matthew Gordon: Right, so Arlington Funds which are based here in London is the introductory point.

Merlin Marr-Johnson: Yes.

Matthew 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?

Merlin Marr-Johnson: Just a little bit on Ecuador before we get onto the team, if that’s okay?

Matthew 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.

Matthew 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?

Merlin 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.

Matthew Gordon: But from meaningful companies, sizeable companies?

Merlin 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.

Matthew Gordon: Why?

Merlin 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.

Matthew Gordon: Which happens the world over.

Merlin 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.

Matthew 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 done.

Merlin 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 your investment.

Matthew Gordon: Right, so what have you done?

Merlin 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.

Matthew Gordon: What does that mean in terms of dollars, what’s the income?

Merlin 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 basis.

Matthew Gordon: On top of your $600,000?

Merlin Marr-Johnson: On top of the USD$600,000.

Matthew Gordon: Interesting.

Merlin Marr-Johnson: So, the base position is, we’ll be income generating USD$1.6M, possibly up to USD$2M on an annual basis.

Matthew Gordon: For a small company, an exploration company, that allows you to do what?

Merlin 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.

Matthew 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%.

Matthew 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…?

Merlin Marr-Johnson: Advance Royalties, but that’s all within the USD$600,000.

Matthew Gordon: So replicating that model kind of keeps you ticking over and developing more and more of your portfolio as you build this out.

Merlin Marr-Johnson: Yes.

Matthew 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%.  

Another 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.

Matthew Gordon: Okay, I’ll buy that.

Merlin 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 Ecuador.

Matthew 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.

Merlin Marr-Johnson: Oh yes.

Matthew 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.

So, Fredy’s knowledge of country, he’s been in country I’ve read 20-odd years, and has worked for…

Merlin Marr-Johnson: Newmont.

Matthew 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.

So, the 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?

Merlin 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.

Matthew Gordon: And these are your own drills, so the cost must be relatively low, presumably.

Merlin Marr-Johnson: Yes.

Matthew Gordon: So, where are we with this $5m after you’ve done all of this? How much have you spent?

Merlin 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 deal flow.

Matthew 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?

Merlin 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.

Matthew Gordon: Anything we’ve heard of?

Merlin 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…

Matthew 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 Ecuador.

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.

Matthew 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.

Matthew 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.

Matthew 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.

Merlin Marr-Johnson: Yes. The amount of data we’ve got is relatively limited.

Matthew Gordon: That’s my point.

Merlin 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.

Matthew Gordon: Yes, but negotiations are done, effectively with more information.

Merlin Marr-Johnson: Yes.

Matthew 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…

Merlin Marr-Johnson: Yes.

Matthew 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 there.

Merlin Marr-Johnson: Yes.

Matthew 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?

Merlin 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 plan.

Matthew 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?

Merlin 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. 

Matthew Gordon: Without necessarily needing to dilute?

Merlin 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.

Matthew 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 dilute.

Merlin 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 mining.

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 already got.

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 exciting enough.

Matthew 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.

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The Next New Copper Producer in the United States : Excelsior Mining

  • TSE: MIN
  • Shares Outstanding: 238.66M
  • Share price CA$1.18 (15.01.2020)
  • Market Cap: CA$281.62M

Why invest in Copper?

Copper demand is growing. Its main use is electric wires and as we consume more electricity we will need more and more Copper. Total electricity consumption in projected to grow by 60% in the next 20 years.(1) Besides growing energy consumption, we need more Copper because renewables (solar & wind) are extremely Copper intensive. EV’s also require more copper than traditional combustion engine vehicles.

But the main story in Copper is the supply side. In the last commodity cycle the Copper industry spent over USD$100Bn exploring and has almost nothing to show for it. Permitting is becoming more and more challenging and the average time to get from discovery to production is now +15 years (2). The average grade has also been falling steadily from c. 1.65% in 90’s to c. 0.9% today (3). The Project pipeline is even worse. Way worse. For the pipeline to become economical, Copper prices have to rise. With current prices, supply will drop by 3%-4% pa.

Short-term recession will change things and push the crunch further, but according to Wood MacKenzie we will see a 10Mt deficit before 2030 (3). Advances in Technology will make it more economical to mine low grades, but 10 years is a short time. I don’t think we will see peak Copper, but I feel confident enough to predict a bull market in Copper in 20’s. And I want to position myself for that bull market.

The Asset: Gunnison Arizona

Gunnison is a wonderful asset. It’s not a Tier 1 asset size-wise (4,500 Mlbs proven Reserves & 5,000Mlbs Measured & Indicated Resources), but it has ridiculously low production costs and low capital intensity. Based on Excelsior’s Feasibility Study (FS) it has AISC of USD$1.23$/lb making it one of the lowest cost Copper producers globally. Gunnison has a unique geology that allows in-situ leaching (ISR/ ISL) as the mining method. ISR uses leach solution to extract Copper directly from the ground via wells. It’s basically pumping Copper solution from the ground using wells. ISR mines tend to have extremely low operational costs combined with low initial CAPEX. Those familiar with Uranium know that the cheapest production in the world is ISR production (4). ISR has also been successfully used to “mine” Copper in Arizona.

Excelsior [is] extremely cheap on paper.

The mine will be built in 3 Stages. In Stage 1, 2 and 3, Gunnison will produce 25Mlbs, 75Mlbs and 125Mlbs of Copper pa respectively. Stage 1 is fully funded and on schedule. Production starts at Q4/19.

Funding was a combination of new shares, a Royalty and a Copper Stream (majority). Excelsior didn’t need to raise any debt. CAPEX for Stage 2 will be $146M and for Stage 3 $230M. Gunnison has an NVP of USD$807M with an IRR of 40% and a life-of-mine (LOM) of +20 years. Copper companies often prefer to use $3/lbs sand 5% discount rate in their assumptions. Excelsior uses a way more reasonable $2.75/lbs as Copper price and a 7.5% discount rate.

For a company with a market cap of US$195M these are robust numbers and make Excelsior extremely cheap on paper. In fact, looking at the corporate presentation (5) you will notice that at full production the project will be generating more EBITDA pa. than Excelsior’s market cap.

From Stage 1 to Stage 3

Back in the real-world, project level feasibility numbers do not necessarily equate to company economics. Gunnison also has two Royalties and an off-take agreement that are not taken fully into account in the Feasibility Study (FS).

I think that Stage 1 will look like this:

Stage 1
Low CaseMid CaseHigh Case
Production (Mlbs)252525
Copper (Cu) Price @ $2,75$2,00$2,50$3,00
Cu Price to Triple Flag$0,50$0,63$0,75
Tripple Flag Stream16,5%16,5%16,5%
Revenue (USD / M)$43,81$54,77$65,72
Greenstone Royalty %3%3%3%
Altius Royalty %1,625%1,625%1,625%
AIS Costs ($1,23/lb LOM) Stage1$1,45$1,45$1,45
SG&A Total$8,7$8,7$8,7
Other Costs$2,0$2,0$2,0
Taxes under Trump @ 20%$0,0$0,0$1,7
Taxes under Democrats @ 40%$0,0$0,0$3,5
Net Income (Trump)-$12,2-$1,7$7,0
Net Income (Democrats)-$12,2-$1,7$5,2
OCF under Trump-$2,2$8,3$17,0
OCF under Democrats-$2,2$8,3$15,2

LOM AISC is $1.23/lbs but in Stage 1 AISC will be higher even though they would use high-grading. Numbers might not look great but for me the key is that even with extremely depressed Copper prices Gunnison will be generating positive operating cash flows (OCF) in Stage 1.

Based on the ramp up plan, Excelsior wants to move to stage 2 in 3 years. This will require $146M. Out of this sum Excelsior might be able to fund ⅓ internally. This means they need another $100M. This would probably be debt.

With 7.5% interest rate they should be able to start generating a meaningful OCF in Stage 2. With $2.75$/lbs, I think USD$45-$54M could be in reached (USD$35-$40M with $2.5/lbs).

Stage 3 follows 3 years after stage 2 and requires USD$230M in CAPEX. If Excelsior can fund USD$100-$150M of this out of cash flow and pay the rest with debt, in 2025-2027 Excelsior would have a debt load of USD$200M and USD$106-$130M in OCF (USD$75-$100M in net profit) with $3/lbs of Copper.

Stage 1 Stage 2 Stage 3
Year 1 2 3 4 5 6 What If” Scenarios
Production (Mlbs)252525757575125125125125
Copper Price$2,50$2,50$2,50$2,50$2,75$2,75$2,50$3,00$4,00$5,00
Triple Flag Stream16,5%16,5%16,5%5,8%5,8%5,8%3,5%3,5%3,5%3,5%
Revenue (USD / M)$54,77$54,77$54,77$179,41$197,36$197,36$304,30$365,16$486,88$608,59
Greenstone Royalty %3%3%3%3%3%3%3%3%3%3%
Altius Royalty %1,625%1,625%1,625%1,50%1,50%1,50%1,50%1,50%1,50%1,50%
AIS Costs ($1,23/lbs LOM)$1,45$1,45$1,45$1,35$1,35$1,35$1,20$1,20$1,20$1,20
SG&A Total$8,7$8,7$8,7$16,0$16,0$16,0$25,5$25,5$25,5$25,5
Other Costs$2,0$2,0$2,0$5,0$5,0$5,0$6,0$6,0$6,0$6,0
Net Income (Trump)-$1,7-$1,7-$1,7$21,3$35,0$35,0$55,3$101,8$194,8$287,8
Net Income (Democrats)-$1,7-$1,7-$1,7$16,0$26,2$26,2$41,5$76,3$146,1$215,8
OCF under Trump$8,3$8,3$8,3$40,3$54,0$54,0$85,3$131,8$224,8$317,8
OCF under Democrats$8,3$8,3$8,3$35,0$45,2$45,2$71,5$106,3$176,1$245,8

What impresses me with this asset is that we don’t need to see a Copper bull market for Gunnison to make sense. But let’s say, just to amuse ourselves, that we will have a Copper rally and Copper goes to $5/lbs. Excelsior could be making close to USD$300M in profit.

And this is the thing with resource sector. There will be bull markets followed by long bear market. Mining is hyper-cyclical sector. I’m willing to say that we will see $4-$5/lbs of Copper in 20’s and when that happens I will be selling while the investing herd will be stampeding to buy the deficit story.

Management Strategy

Excelsior’s management has proven that they can build a mine.

I say “I don’t know” way too often to sound smart. But when evaluating management teams in mining “I don’t know” is more often than not the truth. There are terrible management teams, cheaters, liars and lifestyle companies. There are also good people who are just incompetent. There are also superstars like Ross Beaty. And then there are a lot of ordinary management teams.

Excelsior’s management has proven that they can build a mine. They also have operational experience (although not directly related to Copper ISR). I feel confident enough to say that they can run the operations at Gunnison successfully. The fact that Greenstone Resources, Altius Minerals and Triple Flag are also backing the project also leads me to believe this.

But to be able to know whether or not they are the right people in the right place, I’d need to know what happens next. They will ramp up the production to >100Mlbs in the next few years and that will be the main focus but then what? Thing is that after reading through MD&A’s, annuals, presentations and after listening to every interview the CEO Stephen Twyerould has given (and that I was able to find 2012-2019) I can’t tell you what their strategy is.

This is a rant in part but…if Excelsior pays 100% of its income in dividends, investors will think the management is competent. But if they are thinking of making themselves into a midcap Copper company with multiple producing assets then investors need to know what they are thinking and the roadmap to get there. M&A, exploration, no dividends, dividends as a fixed % of their profits, or maybe they are thinking of acquiring some nickel assets to make themselves a diversified miner. I get that this lack of strategy is the modus operandi in mining, but this lack of clarity makes it difficult for investors to make intelligent investment decisions.

Does Excelsior have a great management team that can successfully execute a growth plan from a single asset junior to a midcap? I don’t see any evidence for that. Besides a super-low-cost producer usually has to acquire higher-cost projects which will change the economics of the whole company.

I have reservations about the chairman of the Board Mark Moribato – namely whether his focus and contribution to Excelsior is sufficient. (6)

Besides being involved with Excelsior, he runs a merchant bank called King & Bay West Management Corp (K&B) and is also Director, CEO, chairman etc in multiple mining (and one jet) companies.

“King & Bay West provides administrative, management, regulatory, accounting, legal, corporate development and corporate communications services to the Company.”

In 2018 Excelsior paid $532K to K&B for: (7)

Alderon Iron Ore Corp. (Morabito is chairman) paid $532K to K&B for: (8)

Canada Jetlines Ltd. (Morabito is chairman) paid $887K to K&B for: (9)

Voleo (Morabito is chairman) paid to K&B for: (10)

There’s nothing wrong with these kinds of arrangements. Example in Excelsior’s case the Corporate Secretary works for K&B and K&B charges Excelsior for these and other services provided (the same person also works as a Secretary at K&B, Corporate Secretary at Xineoh Technologies Inc. and as an assistant Secretary Corporate in Canada Jetlines and Alderon Iron).

But I think that these kind of setups raise questions and make it hard for an owner to judge if they serve the company, especially when it seems that every company that Morabito is involved in buy services from his company.

Voleo (Morabito is the Chairman) is also an interesting story. Morabito was the CEO of Logan Resources, a gold explorer in 2017. According to his 20 Jan 2017 Proactive interview “the downside risk in Logan, at the current share price of 10 cents Canadian, is almost nothing and the upside is somewhat unlimited” (11).

Alas like with so many explorers’ things didn’t work out, so in 2019 Logan closed a business combination with Voleo (12) and is now “The first and best social stock trading app for investment clubs”, already with negative equity and a loss making business.

He also seems to have use his buddy Peter Grandich to promote his companies. This occurred at Silver Quest Resources, Alderon Resource, Crosshair Exploration, Excelsior Mining Corp and Santa Fe Metals Corp.

Example: Ridgemont Iron Ore Corp granted “monthly fee of US$2,000 and will grant 200,000 incentive stock options to Grandich”. Again, Morabito was the guy signing the papers. (13)

After listening to many of his interviews, he seems like a smart guy. But having reviewed Morabito’s track record, my concern is in making sure that the decisions he makes are in the interests of the shareholders. When it is not, he needs to be held accountable.

CEO Stephen Twyerould “moved Reliance Mining from junior explorer to producer in 3 years (Market cap $5M to $100M)” (14)

This refers to Beta Hunt, now owned by RNC. Based on what I gather (and if I’m wrong please correct me), Reliance bought the property in 2003 for AUS$11.7M. Reliance was acquired by Consolidated Minerals for AUS$76.5M in 2005.(15 & 16) Maybe the market cap went to $100M, but I have a problem in the way this is presented. I’m good with AUS$76.5M (which back then was USD$57.5M). Just keep it at that. By saying $100M I believe they purposefully gave the wrong impression, and I also feel it was misleading to using “USD$” instead of “AUS$”.


This year is pivotal for the company and what I expect to see is heavy insider buying. This has not happened…

Top holders include Greenstone Resources (47.7%), Triple Flag (5.8%) and Altius Minerals (1.2%). I respect these companies and when they come in, they do heavy technical DD. The fact that these entities are involved is a vote of confidence.

Management owns 4.4% but from what I can see this is largely due to options. After going through the insider trades from 2011-today, it’s mainly just insiders exercising options and selling some shares in the open market (though I must give credit to Morabito for buying lots of stock during 2012-2014). This year is pivotal for the company and what I expect to see is heavy insider buying. That has not happened as you can see: (17)

In a 2012 interview, “A few minutes with the CEO” (18), Twyerould said, “I mean to get this project into production in 2015”. That didn’t happen. This is not a problem in and of itself. Mining is a tricky business.

My problem is that the management gave themselves a large amount of options during that time (2010-2012). These options had expiration dates from 18th December 2014 through 31st December 2015, with strike prices from CAD$0.5 to CAD$0.73. In 2013 Excelsior Mining announced that it “will re-price 5,147,333 incentive stock options issued to Directors, officers, employees and consultants of the Company. The options were originally granted between October 2010 and February 2012 at prices ranging from CAD$0.50 to CAD$0.73. The new exercise price for these options will be CAD$0.30 per share.”. (19) In 2014 Excelsior Mining “intends to extend the term of a total of 5,829,667 stock options (the “Options”), which are currently scheduled to expire on 18th December 2014, 5th May 2015, and 14th October 2015. The Options were issued with an original term of five years and the term will be extended such that their new expiry date is 31st December 2018.” (20)

In my opinion the management (CEO) sold a promise to their owners “mine in production in 2015” (18) and gave themselves options that basically payoff if they achieved the goal. They didn’t. For shareholders this means dilution and lower IRR. For the management this means 50% lower exercise price and four years extension for their options. I’d say their IRR stays the same.

Everything I have described above is way too common practice in mining and the things I have pointed out about Excelsior are mild compared to some, but no less excusable. Investors must pay attention to the detail and be vocal. If the Management Team acts to protect their own interests and not those of the shareholders, they must be called out. Or investors can vote the Board off, or vote with their feet and walk out.

Bottom line

I think there’s an extremely strong fundamental case for Copper. In 20’s we will see a much higher Copper price which should lead to rising equity prices for Copper companies. When in 20’s you ask? I don’t know. But I can position myself for the long-term. There might be a recession before we see a meaningful bull market in Copper and it might take time, but it will come.

 Excelsior Mining is a great way for investors to position themselves for the long wait.

Hence, I want to have a pure-play, low-cost, low-debt and long life-of-mine (LOM) asset which is located in a great jurisdiction. Gunnison, in my opinion, is an asset that meets my criteria and no matter how I play with Excel, it is on the cheap side. I’d also love to have a great top-notch management team. That is my current concern. So is the lack of vision and clear and understandable strategy for the future. But even though I have pointed out the short-comings of the management team, I don’t think that they are necessarily all bad either.

I’m concerned that they cannot articulate what they plan to do. An average Management team can ruin a great asset with a bad strategy and execution. Luckily it will only take the next 4-7 years for them to ramp up the production, and that is something I can wholeheartedly support.

All in all, I see Excelsior Mining as a great way for investors to position themselves for the long wait.

I own shares in Excelsior Mining.

  1. IEA Energy, World Energy Outlook 2018
  2. World Bank, From Commodity Discovery to Production 2016
  3. Wood Mackenzie, Global Copper long-term outlook Q1 2017
  4. WNA, In Situ Leach Mining. KazatomProm 1H19 hand out page 16 shows how the lowest quartile of production is ISR.
  6. Excelsior Mining 2019 Annual General Meeting, Information Circular
  7. Excelsior Mining, Annual Report 2018
  8. Alderon Iron Ore Corp., Annual Report 2018
  9. Canada Jetlines Ltd., Annual Report 2018
  10. Voleo Trading Systems Inc., Consolidated Financial Statements YE March 31, 2019
  14., Excelsior Mining, Corporate Presentation
  18. “A Few Minutes with a CEO” interview, 19 april 2012
  19., Excelsior Announces Stock Option Repricing October 31, 2013
  20., Excelsior Provides Marketing Update and Extends Stock Options August 7, 2014

Sierra Metals (TSX: SMT) – Good Fundamentals, Main Shareholder Restricting Stock (Transcript)

Interview with Igor Gonzales, President and CEO of Sierra Metals (TSX:SMT).

The fundamentals of Sierra Metals are good and the company is effective, safe and robust. However their share price has been negatively affected by a significant shareholder, Arias Resources Capital, needing to off-load up to 30% of the shares. Arias controls 52% of the shares so liquidity was an issue previously. The market knows this and despite successful operations on the ground, the price is being held back. We try to find out how the company is resolving this issue. Let us know what you think about their response to this in the comments below.

Sierra Metals is a South America brownfield and greenfield focussed Silver, Copper, Lead and Zinc miner. $290M, NPV c. $500M. They have paid back a $34M of debt and $15M revolving credit back by restructuring their debt, currently at $59M. Revenues are $52M with $13M of operating cashflow, to fund their capital requirements and operating costs. 2019 is a year of heavily capital costs as they will be investing $83M.

Sierra Metals is one for new investors. Existing long-term shareholders should also feel that the share price will eventually be resolved with Arias. Short-term holders and traders may be be less satisfied, but they always are. We view this as an opportunity to get in cheap.

There is a new 43-101 due by end of the year and another in Q2/20. Lots of infill drilling. Brownfield and greenfield exploration is the foundation for their strategy going forward. A good track record of delivering improvements in operations and they are generating cash. Operating in two countries with good mining codes and taxes with a good infrastructure and in the right mining jurisdiction. There is a lot to like on the mining side.

Interview Highlights:

  • Overview of the Company
  • Projects in Peru & Mexico
  • Company Financials: Arias Resource Capital, a 52% Shareholder – How Quickly Do They Intend to Sell and Are There Any Regrets?
  • Why Invest in Sierra Metals? What’s in it For Investors?
  • Strategy & Risk Mitigation

Click here to watch the interview.

Matthew Gordon: We spoke back in May when you told us your story. We want to catch up and see how things are going. So, why don’t you kick off for people who’ve not heard this before with a one-minute summary and then we’ll get into some questions.

Igor Gonzales: Sierra Metals is a poly-metallic producer that operates in two jurisdictions, Mexico and Peru. We have two operations in Mexico, the Bolivar mine, which is a copper and gold Silver play, and the Cusi mine, which is a Silver play. It’s our smallest mine. And then in Peru, we have the Yauricocha mine, which produces all fine metals. We are now in a process of expanding our company.

Matthew Gordon: Tell us what’s going on in Peru?

Igor Gonzales: In Peru, given the fact that we have an older mine that has been operating for 70 years, we need to keep on top of the infrastructure upgrades. And therefore, we have five ongoing projects now in Yauricocha. The main project is the shaft upgrade, the Yauricocha shaft. This is a brand-new shaft that we’re building from scratch and we’re in the third year of construction and we have 1.5 years to go. However, we’re going to be implementing portions of the project as they become available. Then, we just completed the Yauricocha tunnel, which connects all the entire mine facilities with the processing facility, that’s now up and running and operating. Then we have all the ventilation upgrades that we’re doing, and that work is continuing as we speak. We also have the tailings dam, phase five upgrade. We obtained the permits and now we’re in full construction mode, which should finish the main dam for phase five sometime in September of this year. And then we also have a new mess hall and camp refurbishing project which is ongoing and will finish in the second quarter of next year.

Matthew Gordon: What’s happening in Mexico?

Igor Gonzales: We completed two expansion projects. One in the Bolivar mine, which initially was conceptualized to go from 3,000tpd to 3,600tpd. We then added some additional capital spend and now we have completed all the construction of that expansion and we are in the final phases of the ramp up, both the mine and the plant. And I’m happy to report that as of Q2 we have on average 3,700tpd per day, which is above the initial target and we continue to ramp up those 4,000t in Q3. We would like to take that ramp up to 4,250tpd in in the Q4 of this year. So that ramp up is going well. We achieved the intended initial capacity and then we continue to ramp as we go. Then on our next mine, the Cusi mine in Chihuahua. We increased its capacity from 600tpd to 1,200tpd. 100% increase in capacity. We have completed most of the construction. We still have a few things that we’re finishing up. But we’ve had struggled with the ramp up both at the mine and at the plant. However, we will continue to increase the throughput. We’re now approaching 1,000tpd so we’re getting closer to the 1,200tpd and we’re trying to get to 1,200tpd by the end of Q3 of this year so those are our two expansion programs.

Matthew Gordon: Let’s talk about your finances? When we talked previously you were talking about investing $83MIL into the company. You’ve got a market cap of $290M, NPV $500M. Those are good numbers, but you’ve got some debt as well, and you’re self-funding on the capital expansion program. So, can you run through some numbers for us, please?

Igor Gonzales: I will talk about the debt. We had a loan from a Banco Acredito Peru this year at the end of Q1 for $100M and that allowed us to pay a remaining $30M-$34M in the purchase that we did in Yauricocha, which was another loan that we had outstanding. And we also pay a revolving credit of $50M and we will have $30M of funds for additional expansions or we would like to give it. We have reconfigured our debt profile. Right now, our net debt is about $59M. Now, going to our performance for the Q2. We had revenue of about $52M and about $13M in operating cash flow, that allows us to still fund our capital requirements and all our operating costs. This is a year of heavy capital investment for us. We initially budgeted for $83M. We had a strike Yauricocha that forced us to defer some of the capital into 2020. However, we remain with the same projects. Also, we completed the capital spend in Bolívar and we are completing the capital spending in Cusi. So, it’s going to be a very fruitful year for us once we are done with all the capital investment.

Matthew Gordon: I feel that you know what you’re doing, your team knows what they’re doing. It’s a very well-run, safe and to use a word that you’ve used in your presentation, it’s a very ‘robust’ operation. But I’m not excited by it, and I want to know what am I missing. Because you’re producing cash flow. You’ve got revenue. You’re in production. All the right parts are there. What am I not seeing?

Igor Gonzales: I think we’re not also happy with the current share price, which think we’re undervalued.

Matthew Gordon: Why?

Igor Gonzales: We think that we don’t have enough float in the market, in our share. We have a main shareholder which holds 53%, Arias Resource Fund; he holds in two funds. He’s trying to resolve Fund 1, which he’s committed to do and I think that’s part of the equation here. And so, when this Fund 1 issue gets resolved. I think that the float is going to normal levels and then that’s going to help our share price.

Matthew Gordon: How much does Fund 1 own?

Igor Gonzales: Fund 1 owns roughly 30% and Fund 2 about 23%.

Matthew Gordon: So that’s a lot of shares to come into the marketplace, which is great for potential liquidity, but it’s also a problem for the Fund. How quickly does he need to sell these into the market?

Igor Gonzales: I don’t have that information because we don’t we don’t manage the Fund and Arias Resource Capital has that all that information.

Matthew Gordon: So, they are not are not obliged to tell you how they’re going to manage that into the marketplace?

Igor Gonzales: I know they’re doing some movements to try to resolve that. And they have invited third parties to review our operations and see if they can commit to packages. But that’s as far as I can I can tell.

Matthew Gordon: Because that’s going to be holding the stock back, because people know that’s coming.

Igor Gonzales: They’ve been inviting the parties to look at our operations. We’ve entertained their visits and so forth, so I think it’s a moving process.

Matthew Gordon: It’s a moving process, which is affecting your ability to create shareholder value today. All you can focus on is delivering on the mining side, the production, the announcements.

Igor Gonzales: Exactly. That for us is extremely important not to lose focus of what we are here to do, which is our long-term strategy. We need to continue to add value to our units and to create value for our shareholders, independent of who holds our shares. I think that focus needs to remain and we are doing that, we’re delivering on the expansions. We will do another expansion in Peru. We’re now doing all the permitting work. And so, we continue to drive our strategy forward to grow the company.

Matthew Gorodon: It must be like trying to do your job with one hand tied behind your back, because you’ve got a significant shareholder restricting your ability to create value for shareholders in the marketplace. So, you are having to focus on mining, which is which is good is what you’re good at. And I fully trust that you get at it from what I see. Do you regret doing that deal with Arias?

Igor Gonzales: No. Arias had the ownership of the shares for quite some time now. I entered the company after all the shares were in place, so I have to focus is on trying to grow the company myself and not be side tracked by the activities of the shareholders.

Matthew Gordon: It’s a kind of salutary lesson in terms of how share structures are set up and ownership structures are set up, because it can restrict a company’s ability to perform as it should. I would argue that on your fundamental numbers, your shares shouldn’t have done what they’ve done in the last year. They should be heading the opposite direction. So, what’s your message to shareholders on this topic?

Igor Gonzales: I think our main message to shareholders is we’re staying the course. We’re creating value. We’re showing the numbers, we’re reducing our costs, we’re increasing our production throughput and recoveries. And so, we have all the main elements that create value in a company and they are in place. So, we will continue to do that and remain focused on that aspect of this.

Matthew Gordon: What I’m about to say, I don’t think is of any comfort to your existing shareholders, but for new shareholders coming in, this is a very interesting proposition. And I don’t expect you to comment on that, you’ll get yourself into trouble.

Igor Gonzales: Once the metal prices recover, the potential for our shares to improve are quite significant.

Matthew Gordon: So, it’s a question of time? When Arias sorts out Fund 1 or one of their two funds, and gets these block sales away, then your arm will no longer be tied behind your back. You feel that the market should recognise what you have been doing, is that what you’re saying?

Igor Gonzales: Ibelieve so. I believe that once we have the right float then the market will start recognizing the value for Sierra as they should.

Matthew Gordon: Do you mind if we just talk about strategy? What’s your thinking in terms of building this business? I know you could say you’re mitigating jurisdictional risk because you’re in two countries. You’re underground mining. That’s what you know, that’s what you’re good at. And you’re obviously in production, which is all good. But what is it that you’ve set out to build? And what will this company look like in 12-24 months’ time?

Igor Gonzales: A fundamental element of our strategy is exploration, brownfield exploration for one. And then the second phase is greenfield exploration. We have been putting important Resources in both areas. We’ve been growing the Resource of all our three mines steadily over the last three years and we continue to do so. As a matter of fact, we will have two new 43-101’s for Bolivar and Yauricocha by year end in 2019. And another 43-101 in the second quarter of 2024 at the Cusi Mine. We continue to do brownfield infill drilling also, in all three mines, but in Bolivar and Yauricocha, besides the brownfield, we’re also doing some greenfield exploration close by the operation. In Yauricocha, we have high value targets for this year. We’re already drilling with two platforms and in Bolivar we’re also doing some near mine exploration, but these are brand new targets and we continue to expand our Resource. So, I think that’s one of the key elements for our growth is to find additional Resources, then turn those Resources into a reportable Resource, via 43-101’s and then conduct the expansions that we require accordingly. So, exploration for us is the fundamental foundation of our strategy.

Matthew Gordon: So those are things that you’re going to do. Build up the Resource and reportable Resource, but to what end? What’s the strategy? Not what’s the deliverables? You are going to drill holes to build a company of a Resource of what size and for what purpose? Are you going to mine it yourself?  Are you going to sell it? What’s the game here? What do investors need to know?

Igor Gonzales: Well, it will be hard for me to tell right now what we are going to find via the exploration. However, we’re open in doing joint ventures or bringing new partners if our exploration results deliver significant results. So, I think we keep ourselves so open. We keep analysing other properties, other projects that come by and we were open to growing the company also via that avenue which is associated with other enterprises.

Matthew Gordon: But you can’t say to what end? If someone said “What is Sierra Metals? What are they trying to be?” What what’s your answer?

Igor Gonzales: We would like to be a second quartile producer in terms of volume of production. And right now we’re in the third quartile and our target would be to be in the top of the second quartile and the top of the second quartile of production with all the other Silver producers.

Matthew Gordon: I think the fundamentals of your company are good, but I’m struggling to understand why I should be investing in your business. You talk about track record, robust performances, strong capitalization, low net leverage, robust liquidity. What do all these things mean? Why should I invest in your company and not the 50 other South American businesses doing the same thing?

Igor Gonzales: I think what we’ve got is a business that is generating cash. We’re operating in two countries that are very supportive to mining. We have all the Resources available to do our jobs in terms of contractors, people, services and legislation and tax stability. We also would like to point out that the potential of our properties is very significant given their location within the countries where we operate. In the case of the Yauricocha mine, it’s located in a major fault system where North and South you have very large deposits and so the likelihood of finding significant additional Resources is important. Likewise, in Mexico, in the Bolivar mine, we’re in a location where it’s a mining jurisdiction with a huge potential for growth. So that’s another part that is very appealing to our story. We’re not just in one mine and trying to develop one mine, and that’s it. I think we can grow these mines into something much bigger. We don’t have the results yet, but they all the geological information that we have to date indicates that we are in a very fertile zone. Our track record, if you analyse Sierra at 5 years ago and Sierra today, we increased our throughput and our production, our cash flow generation tremendously. 5 years ago, we were probably in Yauricocha around 2,000tpd. In Mexico, at 800tpd and today we’re at 4,000tpd. So, we’ve improved our capacity to generate cash via production in a significant way. So that’s our track record of creating value for our investors via the improvement. In the meantime, we also have generated the cash flow. We’ve been trying to manage our debt. We have a solid financial position. We have $40M cash as we speak. We have a $59M in debt. And as soon as we finish our expansion projects, our ability to generate cash is going to be even greater than what it is today. But the most important element of our business is the people. We have been able to attract talented and experienced people into our team. And we operate with three mines and the mines have their individual staff. But we also have a senior team at the corporate office that provides technical support to our operations in projects, in managing, in planning, and very soon in maintenance and asset management. So, with that oversight and support to our operations, we bring the experience at the head office that can be utilised in the different operations without interfering with their work, but reviewing their plans, improving our plans. I think that part of the business has been reinforced in such a way that we brought in very talented individuals in to our company.

Matthew Gordon: I buy a lot of that. These are good mining jurisdictions. We’ll see what the drilling reveals. Having $40M in the bank is fantastic. Having free cash flow is fantastic. But you’re still paralysed in a way, in that shareholders make money when your shares increase. Don’t you think that you need to get involved in a conversation with Arias Resources Capital. Rather than them just sending people through to diligence your mine. Shouldn’t you understand what is the process by which you are going to release this pressure on us, because it is pressure on your share price. At what point do you get involved and say we need to be part of the solution?

Igor Gonzales: We review this situation with the board on a regular basis, and we have a share buyback program, for one. We had an ATM in place or another. Arias Resource Capital is moving is trying to deliver on Fund 1 and they are trying to resolve that issue. And we’re all aware of that. In the meantime, we have to stay focused on what we’re doing. But we don’t have control of what Arias Resource Fund does with the shares.

Matthew Gordon: I appreciate you don’t run their fund, but I’m saying that they should, as a matter of courtesy and expediency, work with you to agree and resolve the way forward if they are to exit quickly.

Igor Gonzales: And we’re are co-operating, they’re bringing parties for review, etc. and we are cooperating with that. We have an active data room where they can go and see our company and they can analyse the potentiality of our business.

Matthew Gordon: I think that you’ve got a great company. I think you’ve got a great team. I really like the way you talk about your business. But I think there’s this pressure with Arias Resources Capital which needs to go away. But when it does, I would like to think that your shares will be given the chance to breathe again and maybe start moving in the right direction. Igor, thank you very much for your time today and your explanation. You’ve been very honest, as always. So, thank you.

Igor Gonzales: Thank you, Matthew.

Company page:

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.

Sierra Metals (TSX: SMT) – 121 London Mining Conference (Transcript)

CRUX visited the London 121 Mining Conference and spoke to Sierra Metal’s CEO Igor Gonzales. Hear what he had to say about his South American based Poly-Metallic mines – the Yauricocha Mine in Peru, and the Bolivar and Cusi Mines in Mexico.

Click here to watch the interview.

Matthew Gordon: Hello Igor, how are you?

Igor Gonzales: Hello Matthew, how are you today?

Matthew Gordon: Fantastic. Lovely to have you in London.

Igor Gonzales: Yes it is.

Matthew Gordon: Now, I always start off and I get people to do just a two three minute helicopter view of the business.

Igor Gonzales: Okay. Sierra Metals is a poly-metallic producer that has operations in two very well established mining jurisdictions which are Mexico and Peru. We have one… our largest mine in Peru which produces three types of concentrates. Lead, Copper and Zinc concentrates. It’s the  Yauricocha mine located at 4,700m  above sea level. Then we have two other mines in Mexico. One is the Bolivar mine in the state of Chihuahua. Bolivar is currently at around 3,600t per day in throughput and then we have the smaller mine which is the Cusi mine which is a silver mine essentially and now running around 1,200t per day.

Matthew Gordon: Okay and give us a sort of sense of the size, of the scale of the business

Igor Gonzales: Well we will generate an EBITDA this year in the order of $90M to $100M. Our revenue is in excess of $250M. And our debt is about, our total debt around $65M. And so we generate positive cash flow and we finance all of our capital requirements and with our own cash flow.

Matthew Gordon: Thank you very much for that. You’re obviously here in London. At the 121 Conference. Why are you here?

Igor Gonzales: Well we want to promote our company. we think that we are a growth story.  We’re a success story in terms of exploration results. Growing our reserves and resources, and putting those resources and reserves into operation. We’ve been growing our throughput steadily in the last three years. And so we will want to continue to do that. This year is the largest investment for us in terms of capital requirements. We will invest in the neighbourhood of $83M  just to grow our operations in both in Mexico and Peru.

Matthew Gordon: That’s self-funded?

Igor Gonzales: It self-funded, all funded from our cash flow. We think that’s a very attractive story for any investor because or where we have a solid base from which we’re growing our business which is where we’re growing our resources and reserves and then we’re growing our production plants. And therefore our unit costs will drop as a result of that. And our investors will benefit from that lower cost production.

Matthew Gordon: Okay. You’re listed on the TSX obviously

Igor Gonzales: We are listed in the TSX and then the New York Stock.

Matthew Gordon: New York Stock Exchange. Okay, so those markets at the moment seem quite illiquid. And a lot of companies are coming to London to other parts of Hong Kong other parts of the world looking for new access to new investors. What are you trying to do? Are you trying to get better liquidity because you’re unhappy with perhaps the market cap now. I mean what’s the goal for you?

Igor Gonzales: Yes we would like to have better liquidity. Our liquidity hasn’t been all that great. As we moved from Toronto to New York we improved our liquidity. However we were also looking for other areas where London could be one of them. But one of the issues we will face is that we have a major shareholder that holds 52% of the company. And he has that 52% divided into two soft fund.

Matthew Gordon: This New York fund?

Igor Gonzales: Yeah. Our fund. But one of the funds is due now. And so he will have to deal with that fund eventually and that will bring a lot of liquidity to our stock

Matthew Gordon: New shares into the market. Not new… Shares into the market. And so who are the other major shareholders at the moment?

Igor Gonzales: BlackRock and Ingalls And Snyder.

Matthew Gordon: That’s right. So are you… There’s quite a bit of your shares are taken up with major institutional money. Are you looking to drive interest from the retail market, High Net Worth family office type?

Igor Gonzales: Yes. That’s our target because we think there is a lot to gain from our story and our ability to generate cash and revenue and earnings per share.

Matthew Gordon: Again I think like a lot people you’d say you’re undervalued. And if you didn’t, you wouldn’t be doing your job. So let’s take that as read. What is the growth… What’s the growth actually going to be delivered by for these shareholders? You know your share price is what it is today. You are funding yourselves, self-funding. You’re growing, it’s a big growth story. People look at your presentation which I encourage them to do on your website. There’s a big growth story there. You’ve got three quite good assets. Where’s the upside going to come for new investors?

Igor Gonzales: I think the upside for new investors is based on our growth. our growth is quite steady and the other area where we bring a lot of value to our investors is the way we spend our capital. our capital spent it’s quite with very high ROI’s. And the reason we do that is because we do small increments in capacity to our plants. and we use local talent local engineering firms construction and labour. And therefore we’re very efficient in the use of capital because we’re in two well-known mining jurisdictions. We don’t need to go outside of Mexico or Peru to find the skill we need to grow and that makes the capital we use… it’s quite profitable in the sense that we get a great return on our investment and the for the expansion we’re doing in both Mexico and Peru.

Matthew Gordon: Okay. So in that case your AISC is what it is. How are you going to drive that down if you’re already very efficient? Is that something that you’re trying to do?

Igor Gonzales: As we increase our throughput. Ours are fixed costs which are our operating costs will start dropping round and our net cash flow will increase and that will drive the earnings per share.

Matthew Gordon: So it’s going to be coming from grades?

Igor Gonzales: Grades, higher throughput

Matthew Gordon: So if we look back at 2018, what would you have done differently?

Igor Gonzales: I think we would have done a similar story but faster if we could have.

Matthew Gordon: Yeah. Interesting. Okay. That’s your big learning from last year?

Igor Gonzales: Yes probably. So yeah. And we’ve been slowed down by permits for example. we would have probably applied to permits much earlier than we have and that’s a learning lesson from us where we could have done this faster. Had we applied for permits especially in Peru. Peru it a jurisdiction where there’s a lot of bureaucracy in the permits. And had we applied earlier and moved on those permits faster, we would be…

Matthew Gordon: You’d be there today. OK, so if I look at 2019. People always talk about catalysts and catalysts for growth. How do you balance running a company and all the risks associated with that and driving shareholder value, share price appreciation?

Igor Gonzales: I think we try to balance that by trying to meet our targets in being responsible in our spend. We try to apply the capital where we need it. We try to be very disciplined in our production and our results. and we show that quarter over quarter. and and by doing so then we will represent to any potential investor a solid story a responsible company that will look after the interests of their shareholders by respecting our budget in numbers by meeting our metal production by meeting our costs by meeting our capital requirements by respecting the all the framework that it’s required to operate in the two countries we operate. I think that’s how we show to our shareholders that we’re a responsible investor and someone you can trust and someone you can you can go there and and rely on what we’re saying. We deliver on what we say.

Matthew Gordon: Yeah I think it’s a very interesting story. It’s kind of slow steady growth as opposed to telling people they’re going to get multiple baggers.

Igor Gonzales: That’s right. And with that we have a track record that it’s very clearly proven.  We’ve been delivering on our commitments to the market in a very steady pace.

Matthew Gordon: Okay. And how are you going to manage these new investors coming in, how are you going to manage the stories to them that you’re telling?

Igor Gonzales: I think we’re going to manage them by and continue our path. Of delivering results continue our growth in a more dramatic way. If I could use that word because we were looking at larger expansions in the future. And once we’re in that position and then we can then look into M&A’s and the like. In other words a growth story altogether.

Matthew Gordon: Right well that’s what I want to come onto. But first let’s talk about the markets. You’re poly-metallic, which basically means you’re into lots of things: you’re gold silver copper lead zinc. I think that’s right. You kinda spread the risk but you’re also quite exposed to the commodity market generally at the moment because it’s pretty flat.

Igor Gonzales: Yes it is. It is but at the same time we’re exposed to precious metals and we’re exposed to base metals. And when one does better than the other then we have a natural hedge there. By proves in five different metals. unfortunately we don’t choose whether we could not be a poly-metallic producer because that’s the nature of our resources. But what we can do is we can gauge our production according to the needs of the market depending on the metal. I’ll give you a good example for that. Two of our mines the Yauricocha mine and the Bolivar mine are copper producers that we produce copper concentrate. And if, had the market, had the price of copper would go up we would have the flexibility to increase our throughput in terms of copper for example. And likewise in zinc or in lead, we have some flexibility in our production to try to meet the needs of the current metal market or the metal price for example there is a trend that zinc and silver will… might go up in the rest of the year then we can move into those directions if we need to.

Matthew Gordon: Right. But again you’ve got to be able to produce those efficiently. So how does a poly metallic company operate?

Igor Gonzales: The poly-metallic… What happens in our Yauricocha mine, the truly metallic, poly-metallic is that we have three mines in one. We have one mine that’s truly metallic has all the metal in it. The other some mine of Yauricocha has essentially copper. And then we have lead and zinc on the other one. So we can in our mine plan we can then gauge that according to our needs and put more emphasis in one versus the other. Without of course stepping out of the boundaries of our efficient cost structure.

Matthew Gordon: Right. So you’re spending a lot of time working on efficiency. And therefore margins.

Igor Gonzales: We are. For example putting a lot of emphasis in our planning team we have incorporated in our team very senior planners. Now we have a senior planning team in our corporate office that provides services to all three mines so that the mines do the short term plan and the senior team does the long range planning trying to obtain value from the different attributes that each mine has.

Matthew Gordon: You mentioned the word strategy a few minutes ago and part of that strategy is M&A or M&A potential. So you’re running three assets at the moment you’re optimising those continually, you’ve got a planning team working on that. How do you go about identifying new assets, a lot of competition and not a lot of good assets.

Igor Gonzales: Yes we usually get assets and this… We have this planning team that will go and evaluate these assets and compare to our assets. And of course estimate the potential of growth operating costs location geography infrastructure et cetera. And based on that we’ll say  yes or no to any potential possibility of M&A. We would like to stay in a jurisdiction that we know where we’re comfortable and how are we… We don’t discard other jurisdictions just because of their geography. But we are quite comfortable where we’re operating.

Matthew Gordon: Yeah well I think that’s smart. Yeah very very smart. So running a company is about managing risk every day. There’s always something that can go wrong.

Igor Gonzales: Yes.

Matthew Gordon: Okay. Are you frustrated by the market? Because that’s another layer of risk which you’re having to deal with.

Igor Gonzales: I am, we can not manage the market. We cannot manage the prices. We don’t have control of the prices but we do have control in our own cost structure our operating costs our capital efficiency our ability to deliver our production into the market so that’s what we have the control and that’s where we have to work in. We don’t have to worry so much about copper price because we don’t dictate the copper price. But we have to be as efficient as possible in our copper output per unit cost.

Matthew Gordon: And you think compared to your peers, you’re achieving that

Igor Gonzales: Yes we are. We’re competitive.

Matthew Gordon: Okay. So big question to finish with. Is mining still a relevant investment class?

Igor Gonzales: The world is going to continue to grow and there is many countries that still have not fully developed. and those countries will demand metals. For the long run.

Matthew Gordon: And you’ve got the right metals.

Igor Gonzales: And we have the right metals. We have the industrial metals and we have the precious metals. So as far as the grow the world grows we have I think in mining a reliable industry that can sustain that growth for both the industry and the humanity.

Matthew Gordon: What do you think the mining industry or even your company needs to do better to explain to new investors coming into this space with some spare cash. What do they need to do?

Igor Gonzales: Mining has been seen as an industry that is not friendly to the environment. What I can say to new investors is that mining can coexist with environment as a matter of fact we do that. There are farming areas right beside our mining operations today with the available technology. You can work hand-in-hand with the farming hand-in-hand with animal raising at hand-in-hand with other industries. Give you a prime example. All of the water that leaves our properties in Peru for example are all treated to water quality standards so the farms or the users down the road cannot complain and then we’re monitored by third parties by the authorities we get audited and everything else. So I think the technology has made mining a much more friendlier industry than it was in the past. Yes we do move earth from one place to the other but underground mines are friendlier than open pit mines for example in that sense. But nevertheless all the waste rock facilities now are monitored they have drainage they have water contention they have water and they have canals that divert water from entering into those facilities et cetera. So the technology is there. We have continuous monitoring of all of our effluent including the camp effluents and everything they all have to be treated.

Matthew Gordon: I think that’s a great point. Igor Gonzales thank you very much for coming and seeing us.

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Jervois Mining (ASX: JRV) – How Important is Cobalt to the Battery Revolution? (Transcript)

How much Cobalt, Nickel and Copper does the world need? We interviewed Bryce Crocker, CEO of Jervois Mining to get his take.

Click here to watch the interview.

Matthew Gordon: Now we saw you back in around 12th March, middle of March. You’d done, or just announcing the M2 story, but you’ve been quite busy since then.

Bryce Crocker: We have.

Matthew Gordon: Why don’t you start. Give us a two minute overview without getting into too much detail, about the recent news. And then we’re going to get in to it.

Bryce Crocker: Well I guess we’re looking at creating a platform that institutional investors can get exposure to battery raw materials. We’re big believers in thematic. We believe the investment alternatives that are open to institutional, and also retail investors, are substandard in terms of quality of the assets, and the quality of the management. And so we’re a group of largely ex-Glencore executives, who’ve come in Jervois and are looking to make a difference.

Matthew Gordon: Okay. So you’re focusing on Cobalt at the moment.

Bryce Crocker: Cobalt, Nickel, Copper because Cobalt obviously comes with both products generally.

Matthew Gordon: Fantastic. Just for people who don’t quite understand where you’ve been, and where you’ve come from. You mentioned Glencore there. Big name.

Bryce Crocker: They’re a large Cobalt producer. I guess I was part of the founding management team in Xstrata. Peter Johnson who’s our chairman. Peter ran WMC’s  Nickel business back in the days and then worked for Glencore for a long time sat on Glencore’s Executive Committee ran their global Nickel assets. So obviously Glencore have always been the largest Cobalt trader we’ve got a group of executives who’ve come out of that platform and now we’re looking to create as I said an investable alternative. We know Cobalt well We’ve obviously got a lot of history and the understanding the DRC to the extent one can understand that jurisdiction and but equally creating something that has decent assets non DRC sourced units which is increasingly.

Matthew Gordon: Why is that important?

Bryce Crocker: I think downstream users are increasingly concerned with the access and supply and the potential of that contaminates or is blended in with other way with regular unions

Matthew Gordon: When you say contaminate,  What’s the underlying issue here?

Bryce Crocker: The difficulty with Cobalt is tracking where units… It’s a complicated flow sheet it’s mined it’s concentrated. Usually it’s leached it’s refined and so it’s blended in a number of phases. And approximately in 2019 you probably had 30,000 tonnes of Cobalt in 120,000 ton market which came from artisanal sources which are essentially men women and children tens and tens of thousands hundreds of thousands in the case of last year. And that material is finding its way through the flow. The Cobalt chain particularly any units that flow through China and that creates challenges. When I was working with Xstrata Glencore we would provide guarantees to our customers to Intel, Dell. There were two limbs that we provided guarantees, on one was the non-conflict material which was obviously quite easy given we control Katanga and Rotunda in the southern part of the DRC well away from any conflict zones. So conflict Cobalt is somewhat of a misnomer but the artisanal issue is real. Nobody wants to have an iPhone or an electric vehicle with a battery that’s essentially represented by a significant component of children which had been working under terrible conditions unsafe conditions in mines underground in the DRC.

Matthew Gordon: It’s the child labour component that people are…

Bryce Crocker: The child labour is a significant social issue both in the DRC and also for Western consumers.

Matthew Gordon: I guess you’re touching upon also there in terms of tracking this there’s some sort of block chain component to it, or is it more basic than that?

Bryce Crocker: These initiatives underway. But I mean I’ve worked in Cobalt for a long time and I can tell you the trading is a complex industry. it’s a niche industry and it’s opaque industry and there’s going to be real value if we can… for those that can create an operating company. So we’re not promoters we’re not looking to kind of assemble an aggregated portfolio of assets and then move on we’re going to construct an operating company. And because we’re constructing an operating company there’s a real value for those downstream users to have sources of supply which don’t involve anything from the DRC at all.

Matthew Gordon: Fantastic. Okay. Let’s go back to the Glencore bit. You come from a big company big exposure big projects around the world and you come into the junior space. Okay so I imagine I’d like you to Tell me that’s a very different environment. I mean how has your thinking had to change for some parts of this or is it the same for all that.

Bryce Crocker: I think it. I mean I’m from the Xstrata side I saw as part of what we sold to Glencore in 2015 but I work closely with Glencore and the rest of the team is largely being Glencore. If you came from a different large Mining company I think would make more of a difference. Glencore is very obviously it’s an owner operated principal type business. obviously junior mining company is different in terms of the infrastructure and the level of support in the…the way we’re set up organisationally is certainly. But I think that we’re a group of like minded individuals who purposely left large companies not because we couldn’t stay employed with large companies but because we wanted to do something different and essentially create a mid-tier company and we’ve got the opportunity at this end of the market. If you look back when we founded Xstrata. The reason why we did that was because the people wanted an investment alternative they had more beta if you like. They’re just purely choosing between Rio, BHP and Anglo. And that was essentially the fund manager investment decision options that they had at the time in London here. And I think what we’re looking to do with Jervois again create something that’s got a management team that is at a different level of quality than typically exists in the junior mining sector. Not always but Obviously management of the junior mining sector is perhaps not as strong as it ought to be and particularly is really focused on getting into operations and creating an operating company. So to take something that was essentially capitalised at a very low level and then build that up over time.  That’s exciting. Building mines and commissioning mines operating mines. That’s… it’s a part of it.

Matthew Gordon: I guess it’s very exciting. You know you’re in control of your own destiny to some degree obviously there’s some variables outside which you can’t control but you’re making decisions here. But sticking on this. As I understand it you’ve acquired two companies since I’ve known you so you’re quite acquisitive. That’s pretty impressive.

Bryce Crocker: We’ve got a couple of shareholder votes to get through. But where I think we’re sitting there is there’s small steps but they’re setting up… they’re important steps to set up the platform of what we want to do.

Matthew Gordon: Okay. And I want to come on to your strategy because I like it. I think it’s a good strategy. I’m interested in the team’s experience but if I look at M&A, you going to require to raise some money for some of this. You know to get this going. I know you’re doing deals, we can talk about how you’ve optimised that and reduced shareholder dilution et cetera but again coming from the larger background, as you say fund managers they had a choice of three or four guys to go to and that’s the background you’ve come from in this junior space I mean have you had to create new relationships? Who are you talking to for funding?

Bryce Crocker: It’s very different. It’s very different. It’s been a learning process for me and then I’ve worked independently since we the management team sold to Glencore in 2013 on behalf of the rest of the Xstrata shareholders and I’ve enjoyed working at the smaller level. I mean obviously our background in association and we work a lot with private equity but equally I think at this end of the market there’s… you have to build up the retail following you need a balance between strategic investors or if you’re frame private equity as strategic. But retail is important. Liquidity is important. If I look at most companies that are sub 100 more market cap there’s an argument as to that their ability to succeed, the liquidity is limited and that kind of creates a lot of challenges for both your clients and institutional clients as well

Matthew Gordon: Well I imagine with the institutions you’re having different sorts of conversations. it’s like they need to see X market cap they need to see why revenue potential near-term revenue. So those are very different conversation. So but you’re getting in there, obviously working.

Bryce Crocker: Yeah so far I mean it’s been a difficult market but we’re excited. Both of these transactions set us up. And in terms of really making that transition to become a producer particularly the Cobalt merger.

Matthew Gordon: Yeah. Well let’s talk about okay. So when I spoke to you, you were telling me about M2Cobalt great asset another great asset, great exploration team. Tell me about ECobalt because I think… The thing I thought quite interesting about that you’ve got a neighbour that lives next door to it this year you might know. Is Glencore not an owner of Assets nearby?

Bryce Crocker: No… Glencore and Blackbird correct, they’ve got the old Miranda close site, correct.

Matthew Gordon: Got it. Okay. So tell us about this transaction.

Bryce Crocker: So I guess why we’re attracted to a Cobalt the Idaho Cobalt project is it has the ability to transition us to become a producer. Much more quickly than could otherwise have occurred. So Kabanga in Tanzania and Kilembe in Uganda, they are assets that are in negotiation with both the governments in their respective jurisdictions they’re exciting assets that shouldn’t naturally sit within companies Jervois size. So that’s why we’re chasing them. but equally if we’re awarded tenure by either government tomorrow realistically they’re three years from first production. So three years is obviously it’s a reasonable period of time in the eyes of capital markets. the attraction of Idaho is  it’s been significant investment at site. They are $100M in, the resource: The quality of the resource is high 0.6% Cobalt, 0.8% Copper. DRC type quality. Without being in the DRC. Small. Smaller than the DRC. That’s 5Mt of inferred resource not 50M or 250M but very high quality and very relatively low development risk. They’ve probably got… they’ve got a pathway for production. Once we finalise the definitive feasibility study when we take control. Once you start that box cut and open the portal you’re 12 months the first door on the mill and then the commissioning is almost instantaneous as opposed to a large metal… If you’ve got a large part metallurgical or hydrometallurgical facility you’ve got a three year commissioning period. Three year construction, three year commissioning very long dated very high risk. This… the CapEx is small.

Matthew Gordon: Why?

Bryce Crocker: It’s executable with a simple sulphide underground mine. The tonnage is… they published feasibility studies on 800T per day. Of which the mine and mill was around $50M at the time they’re increasing that now to 1,200T per day which is the capital is going to rise but not significantly. But these are the type of projects that companies our size should be doing. I don’t want to be a junior mining company, I’ve said it very clearly that where you’ve got a $50M market cap and you’ve got this project that requires half a billion dollars in equity it’s a waste of time. Who are you kidding. You can’t do that. All you can do is sell it.

Matthew Gordon: So tell me more about the deal. How do you structure that? You say “by taking control”, so what does that mean?

Bryce Crocker: So yes, there’s two transactions. There are plans of arrangements so there are no or at market mergers. Both the M2 merger, then the ECobalt merger, independent subsequent transactions. So the M2 circular goes out next week. So that’s essentially a prospectus on Jervois for all intents and purposes. it will contain the PEA on the Nico Young project in Australia. which is our foundation asset that goes out next week and the shareholder date for the M2 merger is 14th of June. There are plans and arrangements. We need sixty six and two thirds voting present for the M2 transaction we have over 50% lock up. High probability of that going through. High probability of both transactions going through but the lock up’s on M2 make it almost arithmetically certain.  The ECS transaction, because the transactions is separate, the circular for the ECS merger will go out immediately after the M2 shareholder vote. Once the positive votes received the ECS shareholder circular goes out and the shareholder date will be the third week of July. So after the third week of July the pro-forma based on current prices the pro-forma of market capitalisation in the group will be approximately $100M

Matthew Gordon: You’re up there. You’ve kind of leapfrogged up to where you got noticed

Bryce Crocker: Yeah I mean we’re not doing it just to get noticed. We’re not in the business of getting bigger. Just for the big… just to get bigger. But for the reasons that I outlined in terms of the asset it does transition us because we’re going to be in production far more quickly than we would have been otherwise. We’ve got a project that’s essentially halfway constructed that we’re going to finish. what it also means…I mean it always, we had a long debate, essentially myself and all of the board we’re all compensated on value per share. So we’re very focused on dilution very focused on how we manage the capital base. Essentially there was an opportunity. Sure, I don’t want to issue shares at 25 cents, I have a perception that that’s significantly undervalues Jervois. But also this was an opportunity where markets are weak, the opportunity for others to raise capital is constrained. And the relative under-performance of other stocks was obviously significant relative to where we were. So it created an opportunity for us to do a transaction on favourable terms and it also means for both M2Cobalt and ECobalt shareholders – they’re along for the ride, they’re part of the story that we’re now moving forward together we have a team that can deploy and can construct and commission finally the Idaho Cobalt project and I actually want to do it now while Cobalt markets are weak, because for all of our shareholders whether they’re currently Jervois, M2 or ECS shareholders we want to be in production when prices recover and prices will recover. That’s one thing to say.

Matthew Gordon: I think everyone’s a big buyer of the EV story, battery metals should be doing well, for some reason at the moment that’s a bit of a lull but it’s coming. I think that’s a story which is well told, you told it you know in various conversations that you’ve had. But I want to talk about, not necessarily about the deals that you’re doing, I want to talk about the deals that you’re going to be doing. So you’ve got a strategy here, your thesis is Cobalt Nickel and…

Bryce Crocker: Cobalt Nickel Copper.

Matthew Gordon: Copper. Of course. That’s your theme and you’re gonna stick with that’. you come from a background of big companies, want to build and mid-tier. You’re up to circa $600 US now potentially when these deals happen. what’s the future look like for you, what is the strategy? Are you going to continue an M&A strategy, are you going to be acquisitive?

Bryce Crocker: I’m a big believer in never boxing myself in especially not where cameras are rolling so I’m not going to say definitively I’m never going to do a transaction because then I’ll come back and do an activity level of X Larry. The audience can replay that. But equally. It’s not a scattergun approach because we want to build an operating company that has to be focused right now.

Matthew Gordon: On what?

Bryce Crocker: Focus on constructing operations and what we have now as part of the portfolio we’ve got essentially a development project in Idaho which needs to be built. we’re in discussions advanced discussions with as I said the governments in Tanzania and Uganda. So the way that we’re looking at from a portfolio perspective is Idaho is going to be core as part of what we do. East Africa is also important. will we not do another transaction? I think it would be… we’re looking at anything else very very carefully. I’m certainly being explicit now in institutions who I made here in London now that we won’t do DRC. up until now we’ve looked at assets in the DRC. We understand as much as one can the DRC and it’s a tough jurisdiction and for those reasons as well with the dealing, because we’re also running through our residual asset, core asset in Australia, The Nico Young project we’re looking for offtakers for that to partner. So that’s not an organisational focus for us, for capital perspective. We’re still managing  it, but we’re not allocating any capital and dealing with the AMS on that. It’s clear that having… having an entity that can provide raw materials that doesn’t have anything coming from the DRC is just…

Matthew Gordon: I get that, but the bit I want to understand is, you know, some companies create value by doing M&A constantly M&A just rolling up and they do drive share price that way, but they forget about the business. What you’re saying is we want to focus on the business. The value is going to be created through developing the three assets that we’ve got but you will look at other opportunities but your focus is on what you’ve got today.

Bryce Crocker: We’ve got our hands full organisationally with what we have. That’s not to say we wouldn’t look at other opportunities sometimes other opportunities come with teams such as the deal in Uganda with M2. We’ve got a team essentially that was already undertaking that exploration. So I’m a big believer in focus and not having a crap shoot and just going out and looking and kind of chasing assets and disparage geographies I think for juniors as well, or for small mining companies I mean obviously we’re heavily focused on Courtney DNA heavily focused on overhead on expenditure and it’s important to… if you really want to move forward projects you can’t do it sitting behind a desk you have to be out there and myself and the board are very hands on. It’s again a different type of culture I guess and our board meets monthly. I’m here in London with Peter Johnson and Simon kind. Now we’re heading back to Africa shortly. BRIAN KENNEDY My non-executive he’s been with me for seven or eight times to Africa since we joined 18 months ago. The board’s hands on we are really… it’s quite a different type. I guess when I look through and when we do these type of transactions with others you do see it level… And it’s fortunate for me the level of support I get from my board is very very different to many mining companies

Matthew Gordon: It’s interesting, the assets at the moment you know you’ve got I think Nico Young with a pre-feas due?

Bryce Crocker: Now. It comes out… the PEA comes out with the M2 circular. so the M2 circular is essentially, it’s a prospectus on Jervois for M2 shareholders, So that contains a 43-101 PEA.

Matthew Gordon: It’s in there OK, great

Bryce Crocker: So there’s a 500 page technical report and everybody’s going to look forward to that.

Matthew Gordon: We might have you summarise it, that might be the smartest thing to do. Okay. And then with Idaho that’s got a feasibility on the way, what’s the timing on that?

Bryce Crocker: We’re working through. Peter and I were there with our, some of our directors last week.  we’re working through and agreeing on what is going to be the work plan. finish the definitive feasibility study. So that when the shareholder vote yes goes through on the third week of July we’re ready to deploy essentially immediately. With regard to the drilling that’s required both to finalise metallurgical test work, improve the quality of the resource before mining.  And also just to really just we think optimise the DFS, the DFS significantly . That will be finished in March 2020. We’re already talking to finances on the debt side with the intention that we’ll construct immediately and then its 12 month runway As I said earlier. First all .

Matthew Gordon: Okay. And then Kilembe, obviously, exploration

Bryce Crocker: We’re making progress with both governments on prog. I mean our intel is very good.

Matthew Gordon: Progress on what?

Bryce Crocker: So if you take them in turn we’ve applied in Bangor in Tanzania. So get back is the best undeveloped Nickel sulphide deposit in the world by another 60Mt of sulphide resource at 4% Nickel equivalent. So it’s on a par with Thompson Manitoba Raglan voices by phenomenal asset. Obviously Tanzania has been through a difficult time politically or as it pertains to the mining industry. We’re talking to government. We’ve applied for what’s called a prospecting licence.

Matthew Gordon: All right. What’s that? And that just lets you continue what you’re doing?

Bryce Crocker: Essentially I mean obviously Glencore and Barrick spend $250M U.S. before the deposit was removed because they failed to develop it. So it’s called a prospecting licence but obviously there’s no prospecting that needs to be done. We just need to update the ESEA update the DFS and that’s a year process. Once we get tenure. we’re negotiating with the government there’s a couple of other parties who are also negotiating but we’re well-placed and the government also looks at us… they look at us credibly because they don’t see a junior mining company…

Matthew Gordon: When you say there’s a couple other parties there, what does that mean, on the same asset? are we bidding here or is it?

Bryce Crocker: That’s not a bidding process it’s a negotiation with the government as to how that money… how the project is best moved forward and you should have stewardship or ownership of that.

Matthew Gordon: And that’s I guess… And having worked in Africa myself for quite a few years, you’re gonna need to give them comfort or certainty and that’s got to come around your ability to finance moving this thing forward

Bryce Crocker: I think the government looks at us and this applies to Uganda as well. I mean if you look at the backgrounds of our boards collectively we raised I think $40Bn US in the mining industry so there’s probably only, aside from my co-founders at Xstrata, there’s a very small pool of people in mining who have done that

Matthew Gordon: True but there’s different circumstances. So you’re a new company. It’s your company your board’s company, shareholders’ company.

Bryce Crocker: But I think the credibility, the government they understand and we can raise the capital that there’s no… They look at us and they see that we have the technical ability to construct and operate mines. And they also I mean, ultimately it comes down to your track record. There’s plenty of junior to go through and say they can raise the capital.

Matthew Gordon: Well that’s the problem for these guys. This happens all too often people come and go “Yeah the money’s tight, it’s fine”, but it’s not, it’s a wing and a prayer. you think the conversations, you’ve been about to lend comfort.

Bryce Crocker: Yeah I think that they look at us and to be honest the financing isn’t…There are issues we’re working around with governments, ability to raise capital was not one of them.

Matthew Gordon: Great. Okay. Well that’s good news. What are the things that they ask you about? Just so, it’d be interesting to know.

Bryce Crocker: they want to under… Both countries want to understand What are you going to do from, how it’s going to be managed. They’re obviously looking at the way we’re building out the business and want to understand what they have as a priority which is understandable. I think there’s a greater focus now on environmental standards on social standards on the with community which places us in a good position because again we come from large mining companies. I’m a big believer in fit for purpose. So you don’t have to necessarily apply the same approach to capital intensity and de-risking in a junior mining company is what you do in a large mining company, you can kind of be more nimble and more agile, faster. But equally things like environmental standards safety standards they’re critical so that… the host governments they, I think, that’s where we have a competitive advantage over others. They do look at us and they look at how M2Cobalt has been operating in Uganda for example the kind of insight they were extremely well regarded. they’ve got a track history. They’ve been in the country as it pertains to Uganda protectorates. And we also through our history kind of know the asset and know the country quite well as well.

Matthew Gordon: That’s true, and what about from their side, of their side of the delivery. I mean what’s the mining code like in these countries? tax, royalties…

Bryce Crocker: Well Tanzania’s well publicised they’ve gone through some changes which have been complex. I mean we’re working through the government with those we’ve said that we believe we have a mechanism where we point whereby we will operate within their existing mining laws and that can be done. Uganda is very much open for business very positive very welcoming foreign investment into the mining sector and obviously Colombia. And the case CCL. See Cobalt refinery is a strategic asset for the country. I mean it when trial committee was operating it was 10% of the country’s GDP approximately.

Matthew Gordon: And You need some reminder of the terms again. You’re gonna be 100% owners of M2 and ECobalt?

Bryce Crocker: Correct. Their plans of arrangement. So essentially they become Jervois subsequent

Matthew Gordon: And you haven’t inherited any risks liabilities and all of that?

Bryce Crocker: Not that I… other over and above what was already in M2Cobalt and ECobalt. But obviously we had detailed due diligence on both

Matthew Gordon: Right. Let’s just recap for investors. Your plan here is to partner for Cobalt copper be a mid-tier. You’re at that phase at the moment where you’re having to have a conversation… no, you are having conversations about financing because you potentially are quite close to…

Bryce Crocker: My background’s in lending and you start conversations early. I mean I want to obviously get the most competitive source of finance and took in this for example Idaho.  And part of that involves making sure that the banks can do their due diligence. You’re not forced into alternative providers that many REITs.

Matthew Gordon: So people when they hear that they make assumptions around dilution. Okay. So…

Bryce Crocker: I think, I mean obviously at some point in time once the DFS is finalised we will be raising capital to, as part of an overall financing package.  To go into production but that’s of a very different base as to where we are now. At that point in time we’ve completed a definitive feasibility study. There’s a debt package in place that’s confirmed because equity is almost in the last path of tips. And I’m also very straightforward I mean people will sit here and I’ll talk, because I could not use equity I mean I could stream, I could use royalties.

Matthew Gordon: But it’s still dilutive…

Bryce Crocker: I’m a simple person and I… shareholders don’t buy our company for me to stream out Cobalt exposure. I think that’s rubbish. I’m not scared of equity and I think that we do it at the right time. Obviously where everyone associated with the company is highly motivated, personally motivated by the value for share. So we’ll finance in a measured and appropriate way. But also not introduce because… Idaho is part of our story it’s not the only story. I’m not going to gear off the company and introduce too much leverage by being afraid to issue equity. but these is the pool of capital that’s open for construction equity is large.

Matthew Gordon: That’s true. And so you’re trying to, again correct me if I’m wrong, you’re trying to move the company from a small player where perhaps it’s got more risk associated with it you know with lower market cap, the ability to raise capital et cetera to survive. You know wherever we are

Bryce Crocker: The company’s survived for a long time it has been on the ASX for 50 years. I just think that I mean we wouldn’t have assembled the board and the management team we had if we were looking to not build out a significant operating company.

Matthew Gordon: Well that’s what I’m getting to I think it strikes me through reading through the various material that is out there about you, you’ve got the mentality of a bigger company.

Bryce Crocker: Most junior mining companies they don’t want to do this because they don’t know.

Matthew Gordon: It’s about survival right?

Bryce Crocker: Well but it’s also this is hard work building mines and constructing operations that’s three or four years of your life you’re not getting back in a part of the world is not adjacent to where you live.  But we’ve got a team that none of us have retired. Everyone’s rolled up their sleeves and got go right on the board and we’re going to make it happen.

Matthew Gordon: Well yeah. Okay. That’s the insider’s view and from an investor’s point of view and again, I’m focused on retail high net worth family offices here, they don’t necessary want to sit around for three or four years with the shares not doing anything. So why don’t you leave it with: Where’s the value coming from. What are you doing and what do you want people to think about when they think about Jervois mining?

Bryce Crocker: Yeah I mean I guess we’re obviously highly focused on shareholder value and it’s not shareholder value just in four years time. I think if you look at what we’re doing we’re creating something because it’s we’re also conscious at the end of the market what’s required. So we are undertaking a drill program currently in Uganda for example. So the PEA which comes out in North America we have to circular as a PEA due to the inclusion of inferred resources. We made a conscious decision not to spend $5M drilling out the resource to measured and indicated to support a higher classification on 43-101 studies. those funds are being redirected to Uganda because as a junior mining companies infill drilling a lateral resource there’s no news flow there that’s going to get our share price going. Uganda is highly prospective it’s the DRC geology crosses the border it doesn’t stop obviously on the boarder and the rock samples that we’ve had published in and you can see the numbers and it’s extremely exciting and that’s where as a junior mining company if I’m going to spend money drilling that’s where I’m going to drill because that’s where I’m going to get in the section that’s going to put a rocket under the stock and do things for retail and do things for us and be able to give us more flexibility. That’s a better use of shareholder funds. If you’re in a $50Bn mining company we would’ve probably spend it elsewhere but it’s at this end of the market. We have to be cognisant of what works from a capital markets perspective but also spending it in the right way insofar as we’re not just drilling for the sake of drilling we’re not promoters we’re not… These aren’t how Mary is that it’s just kind of getting thrown out there hoping that something sticks. There’s… we’re excited by what East Africa represents and I guess from a capital markets perspective we’re trying to create something that’s got some developed world assets stable secure generating cash flow. But you’ve also got for the equity investor and for us as owners of the business that East African upside where if you get it right you can make 10 20 times money or money returns which is what you need. I mean obviously people don’t invest in a company like Jervois they want to invest in a low risk 5%-10% return on mining invest we are going to invest in BHP and Rio. We’re all doing this because we think we can do exceptionally well and generate money on money returns. And essentially the owners of the business alongside us think likewise.

Matthew Gordon: Yeah. And you’ve done it before.

Bryce Crocker: We did it at Xstrata, together with I guess the quality of the team we had at Xstrata was profound. One of the best management teams I think that’s been around the industry and I had the good fortune to kind of sit on the coattails of that and of the quality of the team we’re assembling at Jervois. It’s not everything. The guys we… no one’s , we’re not  alchemists but if you get the right people in place have the right philosophical approach then good things happen and that’s our strategy.

Matthew Gordon: That’s great. Great summary, lovely to catch up with you and see you. I know you’re jumping on a plane tonight but when you come through London do come and see us. Love to hear more about things as they develop

Bryce Crocker: It’s great to talk to you. Thanks for the opportunity.

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Golden Arrow Resources (TSX-V: GRG) – Leveraging the Price of Silver in Argentina and Chile (Transcript)

We interviewed David Terry, Director of Golden Arrow Resources (TSX-V: GRG), the Gold, Copper, Silver, Lead Producer and Explorer in Argentina and Chile with 4 assets.

David’s top reasons to invest:

  • Experts in exploration in Argentina.
  • This team has found 4 significant deposits over the last twenty five years.
  • Ability to finance the company.
  • Portfolio of 4 projects in Argentina and Chile
  • Have structured partner JV’s.

Click here to watch the interview.

Matthew Gordon: Hello David. How are you?

David Terry: I’m fine. Good morning.

Matthew Gordon: Fantastic, thanks for taking the time to talk to us. I know it’s early there. So David I thought we’d kind of kick off by introducing Golden Arrow to our audience over here in Europe. Perhaps you can start by telling us a little bit about yourself and your relevant experience.

David Terry: Well I’m one of the directors of the company and I’ve been with Golden Arrow since it was formed in 2004. Golden Arrow is an Exploration company has been mainly focused in Argentina over most of its life, although it’s just recently branched out into Chile and acquired two advanced stage projects in Chile. But  we’ve been fairly focused on Argentina for most of the company’s life. I’m a geologist by background, and so I’ve been involved in a lot of the property, review, acquisition, Exploration program, management and that sort of thing.

Matthew Gordon: Great. What were you doing before that? Where it have you worked?

David Terry: I started off my career working for several large mining companies. My first work actually as a student and then went on after university was with the old Consolidated Goldfields, which was a large company back in the day. Worldwide scope and I worked for the North American subsidiary of that. And I will work several other large companies including Kamenco, Hemlow Gold and finally Westmin Resources, more of a medium sized company acquired Boliden, the Swedish mining company, in the late nineties and worked for them for a while too before sort of starting to focus on on smaller companies.

Matthew Gordon: Right. You’ve been around the world, been around the block. And how has in which aspects of that is most relevant to what you’re doing at Golden Arrow Resources.

David Terry: Well it’s all a cumulative thing with when you’re when you’re a geologist focus on exploration. The more projects you work on and the more different areas, the more types of geology and mineralization you see. It all adds to your experience and helps making there hopefully the right decisions, when you’re working on a project.

Matthew Gordon: But you’re an explorer not necessarily a developer or producer?

David Terry: That’s correct. I focus on… I find the metals.

Matthew Gordon: Find the metals, good. Now tell us a little bit more about the team that you’re working with. Obviously you’ve got quite extensive team there. I mean who are the most active and relevant members of the team in terms of where you’re right now?

David Terry: Well Jo Grasso, the CEO and founder of the company, has been an entrepreneur, who’s been focused in Argentina for the whole time he’s been in the mining sector, more than 25 years now. And so he’s the is the founder and leader of the company and certainly one of the largest shareholders. We’ve got Brian McEwen, who’s the Vice President of exploration. Again very experienced mining professional running the exploration and he did a lot of the work on six years which is now part of the operations of bringing that along through all the different exploration and development stages Niko Cacos He’s a vice president with the company he’s been there since the beginning. After a lot of the administration and and business deals and that sort of thing. In the company, we’ve got Alf Hills on the board, who’s very experienced mining engineer. It’s been a big help since we’ve sort of transition from being solely an exploration company to having this production profile. And John Gammon and other very experienced geologist on the board. Lou Salley, a very well known legal Mining lawyer based out of Vancouver here. We’ve got a very well rounded and experienced team, and especially we’ve got an excellent staff in South America, based in Argentina.

Matthew Gordon: Yeah I guess that’s critical. Working in South America. South market generally it’s not easy unless you’ve got a local team with local expense. I mean before you can get into the projects themselves, can tell us a little bit about the Grosso Group as a whole. It’s a relatively new enterprise is it or has been around for a while?

David Terry:  Grosso Group has been around since the early 1990s and so it’s since it’s a management group that has several public companies within its portfolio. And and Golden Arrow is one of them and other one is Bluesky Uranium right now that’s quite active. Bluesky has discovered a Uranium Vanadium deposit also in Argentina.

Matthew Gordon: But tell me about the Grosso Group. They they have other companies in the group say what is their focus? I mean are they are they large enough to be able to focus on four different projects at the same time or is this project their number one focus?

David Terry: They Golden Arrow right now it’s been the flagship company, if you want to put it that way. But the idea with with the Group sort of set up is to share overhead costs between companies. Obviously there is some similarity between the boards and management of some of these these companies, but there’s also differences as well. And so it’s really a much more efficient way to run public exploration company.

Matthew Gordon: Yeah. But I guess with my investor hat on you also need to or you want to see focus. You want to know that the time, money and effort is being spent on the project that you’ve invested on.  It’s just interesting to understand the approach there.

David Terry: Yeah I mean for Gold Arrow. For instance, Brian McEwen, the VP of Exploration, on Golden Arrow is focused entirely on Golden Arrow. Joe Grasso is the CEO of Golden Arrow. He’s not the CEO of any other companies, and he sits on the board of several of the other companies in the Group.

Matthew Gordon: Okay so you’re saying the team on Golden Arrow is focused on the project, but the holding group as it were has a number of teams which work on individual basis.

David Terry: That’s right, yeah.

Matthew Gordon: And again so just on the whole Argentinean, Chile, South American component of this. It has been a difficult place to work. It can be a difficult place to work. So what are the components that you look out for? Your job is risk mitigation so who manages that process in country?

David Terry: Well we’ve got several people that work on that in country and we like… in Argentina for example, we work with the government of the day and obviously some may be easier to work with than others. Argentina itself is regulated into the mining industry provincially like Canada is. So you’re you’re often dealing with provincial governments and then also federal oversight and relationships that have to be built there as well. But that’s an ongoing process and I think we’ve worked very hard at establishing good relationships with all levels of stakeholders and governments in the areas that we work in and we put a lot of effort into that. And I think we’ve been quite successful in terms of working in Argentina. If you’re in the good mining jurisdiction, like good province for mining, then it’s actually a great place to work.

Matthew Gordon: That begs the question are you going to get province?

David Terry: Yeah well Jujuy is the province where put operations is in and I think our record there speaks for itself. We discovered the Chinchillas Silver Lead Zinc deposit in 2012, and started drilling it off and put out 2 Resource estimates, 2 PEA’s on the backs of those Resource estimates and then entered into a JV and then maybe I’m getting ahead of myself here, with us.

Matthew Gordon: Well. Let’s go into that because there’s two components your business.

David Terry: You know we made a decision to construct the mine Chinchillas in March of 2017 and and by the end of 2017, early 2018, we had a permit to construct a large open pit mine. And there’s not many places in the world where you could get a permit in that sort of time. We didn’t have to permit a new tailings facility or processing plant. We’re just building the mine site.

Matthew Gordon: By any standard that’s impressive. But tell us about that relationship with SSR. You’ve got a 25% stake. What does that mean? 25% of what? The equity but what else does that give you?

David Terry: It’s a participating interest, 25%, participating interest in Puna Zinc which is a holding company which owns 100% of the Chinchillas Silver Lead Zinc deposit that came for Gold Arrow that we discovered. And the Pirquitas mine/ mill complex in remaining mineral resources that Pirquitas. So it really combines the assets, formerly held by the two individual companies, into one entity and we own it 25% interest in it and SSR owns 25%.

Matthew Gordon: So what what stage is that?

David Terry: They are the operator. They’re the operator obviously they own 75%. They announced that the project had reached commercial production in December the 1st of 2018. And so we’re in really the first quarter, and approaching the end of the first quarter of commercial production on Chinchillas.

Matthew Gordon: Right. And what what could that mean for your organisation? Obviously commercial production means cash flowing, but in terms of… I don’t know what is the debt situation there? When is there going to be free cash flow? When do you actually get to see the upside?

David Terry: Well all of these are all very questions, and obviously, I can’t answer all of them right now. The situation… we owe… we’ve built up some debt with SSR that helped us fulfil our portion of the capital expenditures. Some of that came from cash that we had on hand and some of that came from earnings out of processing stockpile material, that the operation is doing ever since we formed a joint venture. So the commercial production was started in December. We’re into the first quarter right now of production. We’re trucking upwards of 3,600, 3,700, 3,800 tons per day between Chinchillas and Pirquitas. The forecast for 2019 is 6Moz-7Moz of Silver, in addition to Silver & Lead production, And the forecast cash cost of that production is $8-$10 per oz of Silver. And so in terms of answering your question, is when will we see the cash flow, well we’re going to see what we get what the books look at the end of the first quarter here and then go from there.

Matthew Gordon: I guess the plan like like all things like this he want to build out the Resource and make this a sizeable operation.

David Terry: It is a sizeable operation. I mean producing more than 8Moz  ounces of Silver equivalent on an annual basis, is a significant size Silver mine. It is one of the top producers.

Matthew Gordon: You always want more don’t you?

David Terry: And the Reserve is quite a significant Reserve, of more than 80Moz ounces of Silver equivalent. In addition to the Reserve, there is significant mineral resources which are not currently in the mineral Reserve. Some of those could potentially be added to the Reserve in the future, depending on metal prices or potentially further drilling and that sort of thing. And there’s other options for for expanding things in the future as well. In terms, of there’s already existing mineral Resources, higher grade mineral resources at for Pirquitas.  Underground Resources that the joint ventures evaluating, potentially bringing on stream at some point to supplement or from Pirquitas. We’re ramping, we’ve ramped up to 4,000 tonne of day sort of benchmark from trucking ore from Chinchillas / Pirquitas which is a distance of 45km by road. There’s excess capacity already in the mill. So that can be brought up to 5,000 tonnes a day.

Matthew Gordon: What does all this mean? David what does it what does all this mean for your investors? What’s the plan for it? Are you looking to run it for cash or are you looking to sell it? I mean how do you assure shareholders benefit?

David Terry: Well I mean obviously, if We decide to transact at some point in the future then you know that they’ll benefit from that in terms of having a company with a large amount of capital, whatever that is. But going forward in terms of our participating interest, the mine plan obviously calls for more production of 8Moz ounces of Silver on an annual basis, and depending on what the Silver price is, that could be a significant revenue generator. And if the Silver price performs well and and everything comes in on budget and on plan as it has so far with with Puna s operations then there’ll be some cash flow coming.

Matthew Gordon: And and do SSR have an option to take you out at some point, if certain hurdles are reached? What’s the relationship?

David Terry: Right now it’s just a participating interest. I mean obviously…

Matthew Gordon: There’s nothing built in?

David Terry: There’s no prearranged route for them to do that.

Matthew Gordon: What I’m hearing is you’re going to assess this as you go along and…

David Terry: We’re really just getting going on it.

Matthew Gordon: Right. Needed to deal with that because I needed to understand how that fits in with what I think you’re more excited about I guess is the exploration potential. You wanna tell us a little bit about that.

David Terry: Golden arrow has obviously been an exploration company up until recently, through most of its life exclusively, and we’ve assembled quite a large portfolio of five potential projects in Argentina, over the timeframe we’ve been in existence. And some of those are located next to large projects in some of the prime mineral belts in Argentina. But once we made that transition, with Puna operations and formed the joint venture and they became the operator, we started looking a bit further afield for opportunities to take advantage, I guess of the situation in the mining industry in general right now. With companies having a challenge raising money and access to capital and so forth. And so we acquired two options on two advanced stage projects in Chile that are in the same area North of Copiapó. Both have what would be all historic mineral Resources on them right now and we think that there’s good avenues on both of those to add significant value.

Matthew Gordon: Okay. So I mean I mean tell us a bit about those properties what what are you expecting them to be? Obviously you’ve got a team exploration team there and that’s their expertise. What do you what are you buying into? And what are you hoping to create with them?

David Terry: Well I’ll start off with Indiana. It’s a Gold Copper vein system, north of Copiapó. It’s got a whole array of Gold Copper veins with two primary orientations. It’s between two strands of the Atacama fault and had some work on in the past, some artisanal type mining. And a fair bit of exploration, fairly recent done by the group that we acquired the property from. And they’ve completed drilling, surface sampling, mapping, trenching and so forth. And had a Resource estimate completed on the property it was done 43-101 standards but historical resource. But it totals 600,000 ounces of Gold equivalent. With a little bit more value in that equipment equivalency calculation coming from Gold and Copper but more or less similar values. And that’s just really on one small part of the of the vein system. So we think that there’s potential for expansion of that, and we have to do a bit of work to confirm it. And bring it up to what we would consider to put out a Resource estimate. The property is also permitted for production. It has two ramps, which access the key parts of the vein system underground. And so it has the potential for some relatively near-term production and that this area has a lot of mining infrastructure in Copiapo., And there’s processing plants, and that sort of thing within easy driving distance. So we’re we’re really at the point right now where we’re putting together the information on it, into a 3D model. Of planning out how we would approach the exploration on it, and also evaluating potential for relatively near-term production.

Matthew Gordon: So I mean you’ve got to be really confident in that. You know, I’m looking at the terms here. $100,000 on payment on signing, $15M over the next four years and prior to the payment of the last $7M and MSA he’s got the option of retaining 25% of the project on a pro-rata basis. You’ve got to be fairly confident walking into a project like this to commit to $15M before knowing really what you’ve got. So is that the case? What’s lengthy this this confidence?

David Terry: Well we’ve done quite a bit of due diligence on it. Obviously we’ve got a great technical team down there working on it.  And house here and and you’re right it’s not a expensive property, and so this is a property that will have to be moved forward and in a rapid manner, in order to to justify…

Matthew Gordon: Where’s the where’s the money coming from?

David Terry: Where’s the money coming from? Well we’ve just raise some money.

Matthew Gordon: How much have as you’ve just raised?

David Terry: We’ve just raised the $4.7M.

Matthew Gordon: So just understanding it. So $15M over the next 48 months. How does that break down? Is that a quarterly or on your payment? How long basically does your $4.7M last.

David Terry: We’re just working on our budgets right now. So you know all the different pockets where there has to go. But yeah I mean we will… We’re working on the alternatives to fund this going forward. And they are annual payments.

Matthew Gordon: And their annual payments. Okay. So spread equitably presumably?

David Terry:  Well they’re back backloaded.

Matthew Gordon: OK. That’s Indiana. So that’s your best target. And then you’ve got Alantida as well?

David Terry: Yeah. Which is 35km 40km to the East of Indiana. It’s a bit of a different type of project. It’s larger in surface area. It contains a very large, relatively low-grade Copper Gold porphyry deposit that was discovered by InMet and drilled by InMet and further worked on by First Quantum. After the takeover of InMet. But the historical Resource, and again this is historical, not a 43-101 compliant Resource but it was completed by those large companies. Total 427Mt of 0.43% Copper Equivalent.

Matthew Gordon: So that’s a very different project?

David Terry: A different project but we acquired this basically because on the periphery of this large deposit which is which is fairly deep where it is there’s some near surface Gold copper scarring mineralization. And the eastern body of Scotland mineralization has got some drilling in it but the western one was actually not part of this property when in that first quantum where we’re working on it and we basically what we really sort of added to the picture here is we’ve consolidated land owned by three different parties and turn it in Kinross was one of those. And so we’ve consolidated this larger land position that incorporates the Gold upper rich garden area to the west which is exposed it surface has quite a large lateral extent and has had no really modern exploration that we’re aware of. There’s some historical workings in that sort of thing on it and And so that’s our initial focus on this property is this area that we can basically surface and and the graves that we’ve gotten from our due diligence sampling in that area shows that there’s quite widespread upper escarpment right.

Matthew Gordon: Okay. So you’ve got a bit of work to do there and it’s relatively early stage so it can. But just looking at the terms that you’re committing to another $6M over the next four years says twenty one billion bucks in both of those projects is the recent raise going to pay for the development of this asset as well. In terms of moving it to the next stage.

David Terry: Well initially it’ll start to help us with that but again and we’ve got to you know obviously bring in other capital to really advance this forward as we want to.

Matthew Gordon: Right. And what’s the timing on this with this taking a slight backseat or is this in terms that you’re waiting you’re…

David Terry: No we’re working you know sort of right now in our planning stages really on both there they’re very very close and we actually operate them out of the same camp.

Matthew Gordon: Okay. Yeah it’s quite close.

David Terry: Yeah. we’ve got the same team that can deploy to either one.

Matthew Gordon: In terms of your business plan per say for for driving this forward. You guys are still working on your budget. That’s what I’m hearing and you will work out how you apportion your time, well time is money, and money across the projects to advance things. Yeah.

David Terry: Yeah.

Matthew Gordon: That’s the idea. Okay great. You’ve also got another project Antofalla in Argentina. Is that is that something that’s on the ‘To Do list’ or is that just an option?

David Terry: It’s an option and again we, I guess that’s the only other option that we have right now. The other projects that we have are all owned 100%. And that’s the thing with Argentina, is the actual cost for keeping properties current, in terms of the fees or however you want to call it, is relatively low comparable to other jurisdictions.

Matthew Gordon: But there is an expectation from them that you will get on and start drilling, and start spending money, developing these things out?

David Terry: Basically the way it works there, is when you acquire these initial packages of land, you have to either have to downsize them over time, and continually work on them.

Matthew Gordon: Okay well maybe maybe that’s something which you can, that project Antofallo. You can tell us a little bit about you know as things progress.

David Terry: Well we acquired Antofalla, because it had geological similarities to Chinchillas. You know, it’s a dome complex of these young intrusive volcanic complexes coming up through through older sedimentary rocks. And and we just we saw a strong similarity there and so we’ve done a little bit of initial drilling. And we’re just deciding if we’re gonna continue on with that or or go some other route with that project.

Matthew Gordon: Yeah. So just just to help the our investors understand the process. Because exploration it’s high-risk, high-return but you’ve got to lift up a lot of rocks to find what you want? So what has attracted you to this area what are you looking to achieve? You’ve optioned, sorry you’ve more than optioned,  you’ve got 3 projects, 4 include producing Silver at Puna. What are you hoping to achieve? And what’s the process you’re engaged with to do that?

David Terry: Well our our goal is to find new deposits and make discoveries which are gonna be attractive to people who want to develop mines. And like larger mining companies. And you know we’ve done that with our deal with SSR. And with the projects that we’ve entered into agreements on, and obviously their options, and if we get a bit further down the road on number one of these, or any one of these, and they don’t meet up to our expectations, then we will we’ll move on. I mean that’s something that I feel quite strongly about, is you know you can’t get married to a project. You have to continually assess it on its merits. And so you know what I look for on a project is something that’s got significant size and it’s something that could be developed in the lower quartile of costs, for or for that category of deposits. Because if you’ve got something that’s relatively low-cost compared to other comparable projects or mines and then you’re gonna be able to weather through the ups and downs of the commodity cycle.

Matthew Gordon: And what is the indication? I mean you’ve said there’s a lot of other mines in the area. I mean what sort of quartile performance, cost curve performance, are they operating in the lowest somewhere in the middle.

David Terry: I think it’s all over the place. And when I said other mines, I mean you’re talking about an area Copiapo in Chile, there’s a lot of those that are advanced exploration projects.

Matthew Gordon: Understood but obviously, underground mining a a bit more expensive open pit. So it’s you know the economics are important to understand and as you say don’t get wedded to a project if it’s not going to work out. So I got it. But the other thing that you guys have to do is find the money to be able to do all of this, presumably to take it to a stage where you, either can go and raise more money, or you do an SSR type deal, where you bring in a partner right. So is that all part of your thinking?

David Terry: Yeah I mean obviously where we’re continually working on  financing the company, as most people in this business are, but you’ve always got to be open to all the alternatives, like whether it’s forming a joint venture or doing a corporate transaction, or a project transaction. Obviously all those things are always on the table for the right terms and the right situation.

Matthew Gordon: I guess again, I just I keep coming back to what investors need to understand about exploration mining. It’s can expensive and unrewarding, but it can also be extremely rewarding if you get it right. And I guess that’s what people are looking for.

David Terry: Part of the philosophy behind going and firing these option deals, and they are option deals that start off with the lower payments and escalate over time. So as I said before they’ve gotta live up to our expectations as we go forward and that’s you know all those deals are usually structured that way, so you have time to get your feet wet and do the work that you want to do to test out your theories, and see if you have the projects hold up. But you know both of those projects have have a lot of mineralization on them, and widespread mineralization, and both of them have the potential for further discoveries, right on those properties. And as you know the best places to find new deposits and larger deposits is on properties that have had work demonstrate that there’s already significant mineralization.

Matthew Gordon: Right. Okay. So some easy questions for you now. 2019. What are the targets that you’ve set yourself? And how are you going to achieve those?

David Terry: Well I mean certainly we hope to see Puna performing as planned, and continuing on with sort of at least 4,000 tonnes a day being trucked between Chinchillas and Picitas mill. And produce a 6-6Moz of Silver. And so we’re hoping that that gets achieved obviously. That’s going to be very important to us. And and then moving forward on these other projects and starting to execute the plan and carry out the the work that’s needed to assess them. And we’re continually working at that and looking at all of our portfolio and the opportunities that are within it, and how to how to best manage that for the benefit of shareholders. The company is controls a lot of the shares, and so we’re certainly aligned with the interests of shareholders.

Matthew Gordon: How many shares to the management and board own?

David Terry: Well between insiders, friends and extended group, it’s close to 50%. I’m not sure exactly what the number is but it’s very large.

Matthew Gordon: Okay maybe a tough one for you. What do you think the five reasons that investors should be looking at Golden Arrow Resources?

David Terry: Five reasons. OK.

Matthew Gordon: Any order you like.

David Terry: Well I think you know experts in exploration in Argentina. And got a great team of people that have mentioned this at the beginning but the Grasso Group of Companies has found 4 significant deposits over the last twenty five years. And there’s not many other group groups that can have that sort of a track record. There is a lot of experience there. We certainly have a good ability to finance the company, and we’ve always been able to do that. How many am I up to now?

Matthew Gordon: Three.

David Terry: We’ve got a great portfolio of projects that we’ve put together. You know we’re always looking for partners to help us come in and help help advance them. And you know we feel that we’re undervalued in the market right now. So I thin…

Matthew Gordon: You and everyone else I’m afraid.

David Terry: And we’ve leveraged the price of Silver as well.

Matthew Gordon: True, it looks like a good year for Silver and Gold. Well and copper. David thanks very much for your time. I appreciate you giving us that insight into the company. It’s the first time we’ve actually spoken with Golden Arrow. So I appreciate that and we will look forward to getting an update with you in a few months time.

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Lumina Gold (TSX-V: LUM) – Turned $175M into $1.5B for Shareholders. Doing it Again With Ross Beaty (Transcript)

CRUX sits down with Marshall Koval, CEO of Lumina Gold. A precious and base metals exploration and development company focused on it’s Cangrejos project in Southwest Ecuador. This team is replicating its success of Lumina Copper.

  • It’s backed by Ross Beaty and several long term investors that have been with them through the Lumina Copper story.
  • Amazing assets in Cangrejos, Ecuador. Still has the potential to grow significantly.
  • Made returns for investors in the past with Lumina Copper, which raised about $175M to return $1.5Bn to shareholders. We think that the opportunity for large returns to shareholders still exist in this story.

Click here to watch the interview.

Matthew Gordon: Hello Marshall, how are you sir?

Marshall Koval: Great Matthew. Thanks for having me on.

Matthew Gordon: Pleasure is ours. So Marshall we’ve been wanting to hear your story for a while. So can you give us a two-minute summary of the projects? Elevator pitch if you will.

Marshall Koval: So Lumina Gold Corporation is an offshoot of the Lumina Group. And you’ll know the Lumina Copper story from the past. Ross Beaty developed that company. So it’s the same group and it’s the same basic business model as Lumina Copper. Basically adding value to projects,  de-risking them. These are generally large projects. The Cangrejos project that we have in Ecuador is a large Gold Copper porphyry system and from the Lumina Copper story we’re pretty good at porphyry systems. So the idea here is to add value, de-risk it, do the technical work we need to. But these type of projects are large-capital-costs projects. So ultimately, we’re an explorer-developer and we’ve advanced the Cangrejos projects since 2014. We’ve completed a PEA study on the project and now we’re in the field doing all the field work: drilling, engineering related to a pre-feasibility study, should we decide to move forward with one.

Matthew Gordon: Thanks for that summary. I guess it would be pertinent to start with understanding a little bit about you, your background and how you got involved the project.

Marshall Koval: Sure. So as far as the Lumina Group goes I’ve been involved since 2014, been a business partner in all of the Lumina Group endeavours. Personally I’m a geologist by profession. I’ve got 40yrs experience in the industry. A lot of it has been with major mining companies, engineering companies and prior to joining the Lumina group I was president of Pincock, Allen & Holt, which is an engineering company that did a lot of work on project finance as an independent engineer for banks on major projects like Los Pelambres. So my background is more in engineering development. I’ve been involved in building mines. So that’s kind of the thumbnail sketch.

Matthew Gordon: Okay, Marshall, so tell us a bit about the board. There’s some pretty big names associated with it – Ross Beaty, obviously. Who put this thing together?

Marshall Koval: So this was a Lumina Group effort and Ross, and then we have quite a few long-term investors that have been involved with this story: Rick Rule, Asif Sharif. Management owns quite a bit in the… Ross and management own quite a bit of the company, about 27.5%. I’ve got about 4% of the company myself. So we’re really well aligned with shareholders and that’s been kind of the philosophy of all the Lumina Group companies.

Matthew Gordon: And who are the active members in terms of the project itself?

Marshall Koval: So I act as the CEO, Scott Hicks is V.P. of Corporate Development. Martin Rip is the CFO. Martin has been involved with the Lumina Group companies for quite a while. In country are Vice President and Country Manager Diego Benalcazar. He’s our senior V.P. Diego is an Ecuadorian geologist with substantial experience in Ecuador and internationally and he’s been a key-player. And then on government, corporate affairs – John Youle, who’s been with the Lumina Group for quite a while. Leo Hathaway is the key guy as far as geology goes. He’s been with Ross and myself since 2004. So we have a senior management team that’s worked together on quite a few of these projects, both through Lumina Copper and today.

Matthew Gordon: How do you deal with local issues? You spend a bit of time in your deck talking about that. Obviously, it’s a fairly new mining jurisdiction, so how does that work?

Marshall Koval: Yeah, I mean basically, I’m directly involved myself a lot with the government relations and actually in the field with the communities as well. Diego Benalcazar, country manager is really key. He’s based in Ecuador. John Youle  our V.P. of government affairs is down there every couple of weeks. And so basically, we’ve got a pretty robust corporate social responsibility team focused on community relations and we’ve got quite a few people in the field in our camp. Good relations with local communities. We don’t have indigenous communities in the area and the closest community is about 7km-8km away. We have a lot of programs with several employees and it’s primarily agricultural areas. So a big focus of the company is on CSR and community relations. As I mentioned.

Matthew Gordon: And given the team has been together for a while, this is a long-term play, in terms of getting this thing through to production but that’s not necessarily your end-game. And so can you explain what your business plan is?

Marshall Koval: Right. So basically when we acquired the asset in 2004, we were an early-mover in Ecuador. We saw things were changing. We did a lot of work compilation and put a big portfolio together. And then, you probably saw last year in August, we split Luminex Resources out of Lumina Gold and that was more earlier-stage Copper projects and subsequently Luminex has deals with BHP that we’re working on now with Anglo American and with First Quantum. And that’s more of an early-stage exploration play. So the philosophy with Lumina Gold is that this is a development project. It’s on the development pathway. It’s large. Right now we have four drill rigs in the field and we’re drilling, we’re doing exploration drilling. We have a new discovery area called Gran Bestia. That’s separate from the main Cangrejos deposit and I can give you a bit more details later. And we’re doing the geotechnical, hydro-geologic environmental work. Also doing a pretty robust metallurgical testing program and we’re supporting all that with these four drill rigs. So far this year we’ve drilled about just shy of 8,000m. And it’s been divided between Gran Bestia deposit, where we have about six drill holes and +200m of drilling. And that’s really exciting because it’s got the potential to change the whole project, make it even bigger. The PTA had about a 400Mt project that we have identified. So it was roughly a 16yr mine-life and there’s a lot of things beneficial to the project. In Ecuador, it’s close to the port facility, it’s close to infrastructure, power, roads, that sort of thing that’ll help the project. So back to the start of your question, the idea here is to continue to understand the magnitude of the project, to de-risk it ethically, socially, environmentally and then move the project on to somebody that would build it. We’re looking at initial capital cost on the project of over $800M and then an expansion in Year 5, that would require another $400M roughly. So it’s a big-dollar project and we’re a one-asset company, a junior developer, so it’s logical that a major or mid-tier producer would take it on and build it.

Matthew Gordon: So if I just understand that, obviously, the management, the board, friends and family have got about 27.5% of the business. Who holds the rest?

Marshall Koval: So Ross and the management own the 27.5%. And then I would say friends and family beyond that, but as a close to 50%. We have a lot of long-term investors that have followed the company. The Lumina Group, the Lumina Copper and it’s a pretty strong investor base in Canada, the US and Dubai. That’s been a lot of the history of the people that have followed us.

Matthew Gordon: And in that context they’re high-net-worth’s or they’re retail?

Marshall Koval: There’s a bit of both. We also have some funds involved. You know, we have a couple of funds out in California and in Canada and New York that are following us. But we do have a retail base. We just recently listed on the OTCQX in the US to try to get a broader investor base in the US. So I would say there is a mix of all of the above.

Matthew Gordon: The reason I ask about the shareholding and the type of shareholders is… The plan, the business plan as explained by you, it seems to be ‘we’re gonna drill a whole bunch more and sort of work out the size of what we’ve got’. But how do you put that in the context of explaining to existing shareholders or new shareholders coming in what the plan is for creating value?

Marshall Koval: So, you know, I mentioned the Cangrejos deposit and we still haven’t totally defined that.  That’s the main deposit for the project and we’re drilling it now. So basically there’s an opportunity for that main deposit to grow but Gran Bestia, which is about a kilometre to the North-West isn’t included in our resource that we used in the PTA. And we’ve got some really long drill intercepts that are above the cutoff grade that were included in the mine plan and the PEA. So it looks like we have either a satellite deposit that’ll be a new starter pit for us, or to add mine life to the projects. So basically, if you look at the PEA resource we had about 8.5Moz of Gold and a 1Blbs of Copper. So this thing is really large-scale. And it’s growing and it’s got the potential to bring the Gran Bestia deposit. So if you look at where we’re at in the market as far as share price, we’re trading at a really high-discount to NAV. And there’s a lot of upside and we haven’t unfolded the whole story as how large this deposit is. And this was formerly a Newmont project, so what we would anticipate is, as we start to understand the larger nature of this and de-risk it, that there’ll be a lot of upward movement in the share price potential, with the Gold price environment that’s increasing. And we did the economics of the project at $1,300 Gold and $3.25 Copper. So that’s roughly where we’re trading in the market today and there’s a lot of optionality to the projects. So, if we go up to $1,400 Gold, for instance, the project gets a lot bigger. So the upside is being able to come in now and at a low-point in the market or relatively low -point. We moved up a bit since last year. And then as we add value and de-risk this, the potential to move up and, ultimately, just positioning the company with a buy-out.

Matthew Gordon: You touched upon a couple of points there. You’ve put the numbers in there at, well $1,400 on page seven, $1,300 on page eleven on the Gold and as you say, the Copper price is also quite well-priced, considering today’s pricing. Why have you shown the numbers using those high-prices, do you think it’s justified?

Marshall Koval: Well, basically, the study was done back in mid-last year and at the time those prices… We looked at analysts estimates, we looked at consensus, and looked at pricing going forward and that seemed like a good place to be. At the time when we released it, Gold was about $1,350. And then when we did most of the work and then when we released it, it moved down towards $1,300 and then a bit below.

Matthew Gordon: Will you be releasing an updated PowerPoint with slightly more discounted Gold and Copper numbers or are you going to stick with what’s in the deck?

Marshall Koval: So what I think we would do in the current market is be right in the same ballpark in… Our plan right now is to update the resource in the second half of 2019 and then we’d have most of the field work done, and the metallurgy, and basic engineering that we can move to a pre-feasibility study. And that would roughly take another year beyond the release of the resource estimates. So you know, my view-point is the current Gold price would make sense at this point in time to do the next study.

Matthew Gordon: But I think sort of generally you’re peers with the share price around $1,100-$1,150 in the deck, I just wondered why you hadn’t. And again with the PEA, do you feel that that’s quite an aggressive number or you feel that’s fair in relation to what you’ve got?

Marshall Koval: No, I think it’s a fair number. Basically, a lot of engineering backup went into this. I mean, you see a lot of… You know, my background is running engineering companies and serving as independent engineers for banks on projects. So, the way we look at a PEA, it’s a full industry scoping study. We do a lot of engineering backup to support it, and then we extract the results from the PEA and results from the scoping study and put those into the PEA.

Matthew Gordon: Right, okay. Because again, you know, the IRRs at the moment using a high Gold number, a PEA, which, typically, with my investor hat on, I’m gonna go plus or minus 30%. You know, the IRRs right now, they’re not complementary to what you feel you’ve got. Is that because, again coming back to, we need to be thinking as investors, we need to be thinking there’s a long term play?

Marshall Koval: Basically when you look at large projects of this sort of scale, you get a project like this up to, say a 20% IRR, which we show in the deck and I believe it was $1,400 Gold price roughly. There’s very few large-scale projects like this that end up with those kind of IRRs. So we feel pretty good and, obviously, we’re trying to de-risk it and improve the economics with the work that we’re doing, with the target to move up towards that 20% IRR range, with the discount rates as we showed them in the PEA.

Matthew Gordon: Right. So I guess I’m trying to get the balance between getting in early with some potential upside as you build out the resource, because you’re talking it’s a very large district-wide body you’re working with here. This is not a small company or a small asset because there are more attractive grades out, there are more attractive immediate, seemingly immediate returns with lower-costs associated with them. I mean, how are you selling this to people? When you’re talking to investors, what are you saying to them?

Marshall Koval: I mean it’s still a growth story as we speak right now, like I mentioned earlier with the exploration works on. And like I say, Ecuador is evolving and it’s becoming a premier mining destination and the sovereign risk related with Ecuador is going down substantially. I mean, we’ve seen in the time that we’ve been in the country, the royalty rate… the windfall tax disappear, the royalty rate reduce, the tax risk fiscal tax regime reduce, so that you attracted majors, like I mentioned earlier, BHP, Anglo, First Quantum, Newcrest. So basically it’s one of the last systematically explored jurisdictions in Latin America and probably the world. So basically the upside for investment, investors are participating in the early-stage of the project. The project has enough legs that will likely build this mine in the future and we’re doing all the work we can to identify the scale of it, which looks like it is growing at this point. De-risking in, putting in place the permitting, and if you compare it to a lot of the… Let me just scroll through the deck here for a second. This is kind of important to go to page 14. Basically what we did here was we looked at Gold producing projects that have the potential of over 250,000oz/yr. And on this slide what you’ll see is projects in blue and then projects in yellow. So basically Cangrejos is the fifth-largest global development project, controlled by an independent developer. And all the blue ones are majors and mid-tiers. And if you look at how it stacks up, the project is significant. I mean we have about 373,000oz of Gold production a year.

Matthew Gordon: What are the assumptions that that’s based on?

Marshall Koval: That’s based on the PEA study and that’s the economics that we did in the PEA study. So basically, if you go, let me scroll around a little bit more here, the slide number eleven. Let me just walk through the PEA metrics real quick and you’ll get a feel for it. So on the bottom left on page eleven we’re looking at the initial production of 40,000tpa. Initial capital cost there is $831M and then in year five we would finish the expansion to 80,000tpd. That’s another $406M of initial capital. And then the life of mine – 16yrs. So there’s another $271M of sustaining capital. And then if you go up to the production scenario, in the first 5yrs you get 270,000oz of Gold a year and 25Mlbs of Copper. And then at the expansion, starting in Year 6 through 16, that’s 421,000oz/yr for the overall average of 373,000oz. And the other aspect that the project has in its favour is low operating costs. So if we look at C1 cost, we’re looking at $523/oz. And then if you look at AISC on Gold, we’re looking at $569/oz and then, because it has Copper, if you look at Gold equivalent, our cash costs are $706 C1 cost and then $741 AISC. So that gets us down to the pre-tax IRR of 15%, in the NPV – $920M and that’s at $1,300 Gold. Now one of the interesting aspects of this is we did this on the 5% royalty rate and the government has just changed the scale on the royalties that you negotiate with an investment contract. So if we were to go to 3% of the bottom grade and then… The government did this acknowledging that some of the projects, like Cangrejos don’t have the high grades that say a Lundin Gold, Fruta del Norte does. So the government, if we could get 3% that would bring the post-tax NPV up to a billion dollars roughly. So we’ve had initial  conversations with the government and we need to continue to move the project along to get an investment agreement in place. So you know there’s upside in that context.

Matthew Gordon: But just again for investors new to you, new to this part of the world, explain to them what large-scale low-grade mining involves.

Marshall Koval: I mean basically long mine life and I think it’s in economy of scale type project. So for instance Ecuador has low power costs, it’s about 6 cents per kWh. It’s a diesel-producing country in its oil sector so diesel is relatively inexpensive. The project itself has a low stripping ratio. So when you look at all of these aspects from an operating cost, when you look at whether this project will be feasible and during production will it throw off generate good, free cash flow. Really it comes down to two things. It’s not so much the sustaining of the initial capital, it has more to do with the operating costs and the Gold price. So we can’t control the Gold price environment but we can, with the scale of this thing, be very effective in the operation of it. So there’s quite a few things going for it. That’s why you see on page 11 that it’s got favourable cash costs. And when you benchmark it against a lot of other Gold projects in the world and if we go over to slide number 15, for instance. When we start to look at average Gold production versus all in sustaining costs, Cangrejos ranks really well compared to its peers. And that even includes Fruta del Norte that’s quite a bit higher grade. We’re producing a similar amount of Gold every year. And then if you look at the mine life versus the U.S. dollar capital per ounce of mine, the capital efficiency, as you would say, it’s sort of $250/oz. So that benchmarks well with peers as well. So Cangrejos, compared to other independent developers, is a long-life, low-cost asset. And if you go back and you look at page 14 again, you can see a lot of the high-capital cost projects or a lot of the blue projects to the left of Cangrejos, a lot of those projects are looking at quite a bit higher initial capital to operate.

Matthew Gordon: Yes. Again help us understand this a bit better. So this all have been based off a PEA, which is a very, well, includes in the name, preliminary document. But in terms of the team’s experience of moving projects from PEA stage, you know the assumptions you’re making… Tell us why you’re confident of being able to get through to a point where someone would want to take this off your hands because the economics are delivered as you are forecasting them here.

Marshall Koval: If you look at our history with the Lumina Copper story – and that’s the best way to compare it – the first major project that we advanced and it’s a mine today is the Caserones mine in Chile and it’s a large upper Porphyry mine. We took the same approach, we went in and explored, tried to fully define it. We went ahead and de-risked the project and it was acquired by Pan Pacific. So the key to that was really good solid engineering exploration work. So that project was de-risked. And then we moved on, I was the CEO in Northern Copper and that project was acquired by Chinamin metals and Jiang Xi Copper and what we did there is we did a PEA, real solid engineering work and we were at the pre-feasibility stage and it was acquired for $550M roughly. Then we were involved in the religio project which is a project today in Chile and that project, we had a resource estimate, we were still doing exploration drilling, very similar to where we’re at with the Cangrejos project and check acquired that Project. And it’s in the development pipeline today and when tech required and they did a lot more exploration work and it’s a much larger project. Now the ultimate one that we sold was talk and talk. The first quantum. And that project we did at the PEA level. We took major risk areas like the pre-strip, metallurgy, water and we advanced that word to a pre-feasibility level and First Quantum acquired the project and that’s next in their Q after coming into Panama. So that’s going to move into the development scenario. So I think as far as an exit goes, basically the level of work that’s being done now should give most companies comfort that this project can move forward and be economic in the future. And obviously, a lot of that depends on the Gold price, Copper price environment. But there’s very few projects out there with this sort of scale, particularly ones that are in independent developers’ hands. So I think that the potential for a major or mid-tier to come in, probably before we even complete the pre-feasibility study exists, and then, ultimately, if we have to continue to move towards pre-feasibility study, we’re doing all the work right now to continue to advance the project.

Matthew Gordon: Okay. So I’m hearing it’s a large project. We’ve seen it before, we’ve done it before and we’ve delivered for investors before.

Marshall Koval: Exactly. Exactly. And I think just to highlight that in the Lumina Copper scenario, we raised about a $175M and returned about $1.5B to shareholders and, I guess, maybe the best way to look at that is if you flip over to Slide number 17. You can see the tombstones for all the different companies that have been part of the Lumina Group and the senior management team and Ross have been involved in all these companies and that’s been our business plan, our model and we’ve been very successful at it. And very few companies have done that. I guess on another note, the Enfield Gold asset that’s shown there, that was merged with track and with Newcastle to form Equinox Gold, where Ross is the chairman. So we have a long history, we have access to capital, we have the ability to execute tactically, and we have the wherewithal socially, environmentally to navigate difficult jurisdictions and Ecuador is evolving in a really positive way. And we feel that we’ll be successful in Ecuador as well with Lumina Gold.

Matthew Gordon: Yeah. We heard the Equinox story earlier this month. Great story there. Do you think that the Ross Beaty factor always helps, because you said it just now. You feel confident about being able to go and raise capital for the next stage. So on the money front, you’ve got $14M in the bank. Now you’re going, what are you going to deliver in 2019 with your cash?

Marshall Koval: Basically that cash gets us through the year and the bulk of the money is going into the ground in Ecuador right now, related to the drilling programs, the engineering work, the metallurgical work. All of that is where the majority of that money is going. We run a pretty thin corporate overhead. So most of the money is in the ground and it’s going towards de-risking and further understanding the extent of the project, particularly understanding the new Gran Bestia area where it could be a project changer from the PEA.

Matthew Gordon: Right. And are you raising any more capital this year or you’re good?

Marshall Koval: We don’t anticipate it at this point, no. Basically if you look at the history of the Lumina Group, we’ve just got six holes into Gran Bestia. Newmont drilled five holes. We just finished a hole that was some 800m deep and we had mineralization through it and we’re in the process of really getting into the Gran Bestia area. Now if we continue to have good success there, we may bring more drill rigs in. And that’s the history. If you look at the talk and talk project, we started with one drill rig and ultimately ended up with 10 drill rigs. So that’s the only thing, continued success there that could change the spend for the year. And if that happened, we would evaluate where we the set cash flies, and determine if we need to go back to the market.

Matthew Gordon: Marshall, our investors want to know how you’re going to make them money. How can you answer that question?

Marshall Koval: Yeah I think basically one of the main ways to look at that is, we still haven’t discovered the full scale of this project and I think what I want to do is direct you over to Slide number 10 in the deck. And I think this really shows you the upside here, which isn’t realised in the market at this point. And basically if you look at the right side of Slide Number 10, that is the Cangrejos deposit. And basically what you see on this slide is, the pinkish colour is all of the Gold equivalent grades between 0.35g and 0.85g. That’s all above the cutoff grade that would go into the mine plan in the PEA. And then the hot red colour there is over 0.8g per Gold equivalent. And what you can see in this slide is that there’s a significant deposit in the Cangrejos deposit at the right, where the majority of those drill holes are. And about a kilometre to the left of that is the Gran Bestia project. And basically what you see there is five of the Newmont holes and two of our holes. Subsequently we drilled four more holes and this thing is holding together.  What we don’t know is if this is a true satellite deposit, if the two deposits are connected and are one deposit. So if you look at that slide, there’s this red outcrop at the surface which is 4.8g/t Gold and 2.3g/t Silver. Basically, there’s some other intercepts around 10g and this is all at the surface, on the very edge of that which is that grey outline. And if these two things are connected and we’re going to drill in between, we’re going to fully understand the size of Gran Bestia, which looks large at this point. If these two things are connected you’ve got a really large pit, which would totally change the scale and the economics of the project. So as we have it right now and the PEA, just the deposit at Cangrejos on the right is included in the PEA. Everything to the left at Gran Bestia is not, so that’s going to be new resources added. And if the two are connected, it’s a substantially larger deposit. So there’s upside on the scale of the project. The number of Gold ounces.

Matthew Gordon: And potentially the grades are… they seem higher at the surface, why is that?

Marshall Koval: The outcrop on the surface that could be a little bit of secondary enrichment from the oxide near the surface. But we do have good Gold grades. For instance the best Gran Bestia  Gold grade was, I believe was hole number 99, was 208m of 0.91g/t Gold and 1.16g/t Copper right from the surface. So like I said earlier we’re looking to see if Gran Bestia will be a higher grade near surface starter pit or if it’ll just add resources to the mine life for the project, so there’s some real upside in the scale of Gold ounces that could potentially be discovered here. So that’s a big upside for investors.

Matthew Gordon: Thanks for pointing that out. And do you think there’s any, I mean, what else do you think the company is going to be able to do this year to, again, just drive that market cap, drive the share price. How are you promoting this for instance?

Marshall Koval: Yeah, you know, it’s kind of been a story that for quite a while we’ve sort of been flying under the radar. We were consolidating our land position in the district. Now we control 100% of the known mineralization at Cangrejos and Gran Bestia. And really until we put out the PEA last year we were pretty quiet. We had some press releases on it. Now we understand the scale of this thing is real. And we’re more active getting information out to the public, generating more of a project definition and I think there’s a couple other aspects of the project that are really positive. If you look at a lot of candy and Copper and Gold project they’re high elevation in Peru and Chile. Cangrejos, the highest point on the projects is 1,300m, we’re 40km from a deep water port where you could export concentrates. We’re looking at developing a couple of different concentrates – a Gold concentrate, that could go to Europe or the US, and then a Copper concentrate with Gold and that can go to China. So the transportation operating costs, related to the proximity, the infrastructure, the low strip ratio that I mentioned earlier, all bode well for the project. And so I think it sets itself apart from other Andean projects because of the proximity to this good infrastructure, low elevation and it is a high-rainfall area and that can all be managed. But if I look at the project layout, we’re doing some other things also, on page number 12 there. We’ve got the open pit. You can see in the upper right-hand side, it goes to primary crusher down the plant and we’re looking at Dry Stack Tailings Facility. And basically that’s really positive from a water-management perspective and environmental perspective. There’s been a lot of issues out there with tailings failures, particularly in Brazil. So there’s a lot of scrutiny raised to that. And the other thing too at the PEA, it anticipates no use of Cyanide in the project. So from a permitting and environmental perspective the PEA project plan looks pretty positive in that regard. Now we’ll continue to evaluate whether we know what the process flow sheet is going forward. But things look good for the project in that context.

Matthew Gordon: Perfect. Well thanks for running through some of the technical aspects there. What are the top five reasons why we should invest into your company?

Marshall Koval: The team has a track record of success. It’s backed by Ross Beatty and several long-term investors that have been with us through the Lumina Copper story. We have an amazing asset in Cangrejos. It still has the potential to grow significantly, we’re exploring it now. We have access to capital to execute and de-risk this project and put it in the position that a major and mid-tiered company can move it forward. We’ve been there, we’ve done this. I mean, we’ve had high-returns for investors in the past. The Lumina Copper story, which is the same group here, raised about $175M to return $1.5Bn to shareholders. We think that the opportunity for large returns to shareholders still exist in this story.

Matthew Gordon: Okay well that’s great. That’s our first time hearing the story, we’d love to catch up with you in the next couple of months and sort of see how things progress with the drilling.

Marshall Koval: Okay. Appreciate it Matthew. Thank you.

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