Rio2 (TSX-V: RIO) – Take Me to the River, Dip Me in the Water (Transcript)

Rio2

Interview with Alex Black, President and CEO of Gold Developer, Rio2 Ltd (TSXV: RIO).

We like Black’s honesty. The managements track record is good. They have made investors money. They have a problem with water but has a work around. They had a large Feasibility Study plan, which has halved in size. Investors are concerned. We ask him why investors should trust him.

Rio2 is a Gold mine development company, focussed on taking its Fenix Gold Project in Chile to production, and its exploration platform in Peru.

Rio2 used to be the talk of the town, but things have changed in the last couple of years. Since hitting reaching CAD$2.85 at the end of March 2017, the share price has fallen to CAD$0.43 today. The market cap stands at c. CAD$78M. This decline will be more concerning given 2019’s strong gold performance.

Why has Rio2 struggled? Black explains the primary driver behind Rio2’s fall from grace is the expectations of investors. As a gold mine development company, Rio2 plans to methodically develop a fully-operational mine in the shortest possible timescale.

While Rio2’s management team has an impressive track record of developing gold mines, demonstrating technical prowess and adding value, what are they doing today to get Rio2 out of this slump? Strangely, given the current gold bull market, Rio2 has decided to reduce the scale of the gold project laid out in a PFS conducted by a different company in 2014. Why reduce scale? Black acknowledges it might take some of the “sexiness” away from the opportunity Rio2 presents, but is adamant it is the right way to go. An updated PFS was concluded in August 2019. The scale is down to get cash flowing. CAPEX has reduced from USD$400M to just over USD$100M. The strip ratio is lower and the IRR is slightly higher, but the AISC has increased, for now. This is a low-grade gold bulk tonnage operation, so surely scale is the most important element of this resource? Rio2 will seek to get the gold mine constructed as quickly as possible to create value, increase the production rate from an initial 100,000oz per annum to 200,000oz of gold per annum, and reward investors with returns.

Black is keen to explain how his team is different from any other junior: diverse with a variety of specialist roles. Black also touches on the environmental and political challenges of Chile as a gold mining jurisdiction, with a particular focus on the water licence/trucking situation. Is this interim solution effective? Black is attempting to concurrently apply for a permit while generating cash. This could mean investors won’t have to wait as long for value to be added. He then explains why an EIA should be very straightforward for Rio2 to complete in the next few months. Rio2 can’t afford to hang around. Investors will want to see results soon.

Rio2 has about US$13M in cash currently. They’ve already spent c. CA$40M on the project. Rio2 is going to be telling its gold story to the markets. What is going to make them stand out? Long-term Rio2 is M&A a possibility. Rio2 will continue to pursue strategic acquisitions with the intention to build a ‘multi-asset, multi-jurisdiction, precious metals company focussed in the Americas.’

Interview highlights:

1:48 – Company Overview

  • Share Price Decline: What Went Wrong?
  • Background and Business Plan: What Did They Set Out to Build?
  • Finding Value: Why, in a Gold Bull Market Situation, They Choose not to Expand?
  • Jurisdiction: Water, Power and Political Challenges
  • Money Spent on the Project to Date
  • Raising the Share Price: How Will They do it and Why Should You Invest?

Click here to watch the interview.


Matthew Gordon: Thanks for joining us today. You are going to tell us about Rio2.

Alex Black: Rio2 is a mine building company. We are mine developers. We have built two mines in the last ten years here in Peru: La Arena and Shahuindo, when we were the old Rio Alto. And here we are again with a flagship project in Chile, which is very much a buildable proposition. It’s a large Gold deposit, and obviously, in this video you will learn more about it.

Matthew Gordon: You are after Gold. Let’s start with the big stuff. Share price: you have been absolutely hammered since 2017, for a long time, you were the darling. I remember people talking about you a lot. But since then, it has been on a downward slope. What’s gone wrong?

Alex Black: I think, once we became a mine development company, people’s expectations changed. I’ve had a lot of people ask me the same question and I’d say to people, ‘Look, if you are looking for the quick 10%, 15%, 20% increment in share price, because of drill holes or drill results or exploration results, that’s not us. We are actually in the process of getting a project ready to turn into a mine. This happened, to a certain extent, this happened to us back in 2009, when we started Rio Alto; it took a lot of time to get traction in the market, for people to understand and believe the story. And then, once we did, everything took off from there. Rio Alto started off as a USD$12M company when we acquired La Arena, and on the take out with Taho Resources, we were USD$1.2Bn. So we did create value, we can create value and will create value in this company.

Matthew Gordon: I have seen the track record, it is pretty impressive. Those are big numbers but that’s history. We’ve got to talk about today. What did you start off thinking you were going to build? What was the business plan Day 1?

Alex Black: What we did when we acquired this asset, it had a pre-feasibility study which was put together in 2014. Typical Junior company pre-feasibility study. Big project. Big CAPEX. Big NPV, everything big. Why? Because they were never going to build it. They were looking to flip it and it never happened. So we looked at the asset and we said, there’s some analogies here between what we have seen, both at La Arena and Shahuindo, which we both operated, built   here in Peru. And we said, look, the way we started those two projects was to start small and incrementally build up, and we created a lot of value doing that.

So, going from a USD$400m CAPEX in the original pre-feasibility study done in 2014, to our CAPEX today which is about USD$110 – 115m is a big change, but it is completely doable now because of that gearing down of that particular project. So with La Arena and Shahuindo, we geared down right at the beginning. We had the opportunity to build some pretty reasonable sized projects, which they eventually got to, but we started small and we are going to do exactly the same.

Matthew Gordon: It was another management team that had done this PFS in 2014?

Alex Black: Yes. Let me give you a quick overview of the story: Atacama Pacific discovered this asset in 2010. It was a geological discovery. Albrecht Schneider and Karl Hansen, who were the two principals of Atacama Pacific, they drilled this thing out and low and behold -bang! They hit pay dirt and cobbled together a reasonable sized resource. And the problem they had, because they were exploration geologists, they just didn’t have the ability to then take it that step further. And that’s part of the issue with the market these days; there are a lot of the companies out there with some good geologists, but at some point, they need to step aside and let a mining development team come in and take the project forward, and the company forward, after they have done it because there are too many disasters of people who just don’t know what they are doing in this industry. So in our case, we identified this opportunity. We thought this was right down our alley, being a Gold Oxide heap leach project, and we acquired it and then convinced them that they should be doing a deal with us.

Matthew Gordon: So the previous exploration team came up with a very large Capex number to build a very large scale mine. You then came in and said let’s start smaller, and get some cash flowing, and then we can build it out from there. So this is more like a Phase 1?

Alex Black: Exactly. We try not to call it a starter project, but essentially it is; it is a starter view of the project. And I think that is what not has translated through to the market. The market has gone – ‘oh shit, you know, you’ve got 5m oz of Gold, but you are going to build this really tiny project. Why are you doing that? And so, once again, typically, a Junior company would drill this thing, keep drilling it. We’ve got 1.4m oz of inferred resources here that we could pull a drill rig up to tomorrow, start drilling and convert most of that to indicated. But why would we do that? We’ve already got 5m oz before we even get to that point. So, we are all about building mines and that will translate to value down the track.

Matthew Gordon: It’s one thing saying the market doesn’t understand, but the reality is that that is your fault; you haven’t explained it properly.

Alex Black: What I say to the market, we started off with a reasonable valuation when we did the Atacama transaction. We then ran into this bad market. We raised about USD$7M back in February 2019. We had to put money together because we had to advance the project so that was done very cheaply. What can you do? You have got to go with the market. The market says that you are worth USD$0.30 c, at the time, or whatever it was. And we took the money. And then later on, in August 2019, we did another financing. This time it was a USD$25M financing. That financing was led by Eric Sprott, and a whole bunch of people came into that financing with Eric. When I say a whole bunch of people, people that I don’t even know, they are mainly retail followers of him. So they are the people that don’t understand what they are getting into. They follow Eric and Eric typically gets into stories that are exploration stories, putting out drill holes and things like that. We are not one of those.

He bought us because he could see us as being a little bit different to those other stories that he has been into. So the crowd that follows him watches that and goes, where’s all the juice here? Where’s all the sexiness here? All the sexiness happened back when this thing was discovered, now we’re going to build it.  As you probably know, in the lifecycle of a development company, this is the quiet time because here we go, leading ourselves into the construction phase of the project.

Matthew Gordon: Let’s go through some of the numbers: so you have taken the PFS and said ‘we are going to create a Feasibility Study, we are going to reduce the scale of this project, just to get things going’. So you have managed to lower things like the Capex down to, from whatever it is – down from $400M, strip ratio is lower; the IRR is slightly higher. The AISC has gone up. Because you haven’t got the scale there. This is a low grade, bulk tonnage operation.

Alex Black: Well, there are three peaks there. 1, 2 ,3. And basically, we’ll be mining all three of those. This is an extinct volcano. And you can see, hopefully you can see that photo clearly, but what I see here is terrain that is very accessible, and everything outcrops at surface so we are just knocking the tops of those hills off. It’s a beautiful thing and it’s very simple.

Matthew Gordon: Let’s answer the question the market is asking you, which is in a Gold bull market; prices are USD$1,500, your AISC is about $1,000, so there’s money to be made; surely you can go out and raise capital? You can put it back at the original PFS levels can’t you?

Alex Black: I think we can get the money to build this asset. The good thing is, we raised USD$25m in August. That money will last us all the way through, and we are going to make it last us all the way through to EIA approval. We are about to file our EIA in the next few weeks. And then we are anticipating approval about 12 months after that. Once we have got that, we will be in a position to look at raising a lot more money and obviously, taking a lot of the risk out of… any development project is getting the EIA.

Matthew Gordon: But the question was different; the question was, in a gold Bull market, USD$1,500 or so, you are making USD$500 per oz, you are still going with a smaller project – why?

Alex Black: Because we are a USD$70M valued company. If we were a USD$500M company, maybe we would go harder at this. But one of the key constraints we are dealing with here in Chile is water. Let me just clarify this because it is not as though there is a lack of water, there is plenty of water. We are right near to the Maricunga Salar. There is no mining going on in this district, right?  There’s plenty of water rights in this district. The issue is: applying for water rights is one thing, but getting permanent water rights, which means you can pull water from the rights you have been given, is another thing. That’s the issue in Chile. That’s been generally created by a big demand for water, to the north of us in the Atacama Salar, which is way to the north of us. We have all the big guys: the Codelcos and the Rio Tintos and the BHPs with Escondida, Quebrada etc, etc. There has been a huge drain on water supplies in those areas. So the Government has gone, ‘whoa, let’s just slow down here’. But it is supply that is slowing down for the whole country, as far as water is concerned.

Matthew Gordon: That doesn’t answer the question: are you able to go and have conversations with institutions, funds or strategic partners, to give you more money to do the larger project, yes or no? Or are you telling me that because of the water constraints, people are not minded to fund you for the larger level project?

Alex Black: So, if we had the water rights, and we had permanent water rights for 80 litres per second, which would satisfy an 80 tonne per day mine, we would aim to try to build that. Once again, constrained by our balance sheet and the size of our company; we are a Junior company. So, what we have done is, we have elegantly, I think, we have looked at how we expedite the start up of this project without getting entwined in this water rights, water permitting issue, and that is to truck the water from Cupiapo to the project.

Now -140 kms. And we can do that. It raises our AISC to about USD$1,000 per oz, as you pointed out. That’s at the moment, I think we can show that we are working on bringing that AISC down as we get closer to and into production. But the idea is to bring enough water up. 20,000 tonnes a day requires about 2,000 tonnes of water. So it is about 10% of the mineral that you put on the pad, is required to be irrigated on the pads. So we need to bring up 2,000 tonnes a day of water from Cupiapo, and we can do that in trucks, in tankers. We have costed it out. It’s about USD$1.50 per tonne. That’s haulage costs, water costs, all in costs, to drive from Cupiapo to the project, 140 kms. Eminently doable.  A lot of people go, ‘How do you do that/ Why are you bringing water up in trucks?’ It’s like any other consumable. We are going to bring fuel up in trucks, we are going to bring explosives up in trucks, we are going to bring everything up in trucks.   There’s a major international road that goes from Cupiapo to Argentina, it’s between 15kms to 18 kms of the mine, of this peak. So the infrastructure is fantastic. So bringing up trucks is not an issue. And I want to say that because I’ve had a lot of people go, ‘The only push-back here is the water.’ And I have said, ‘Why?’ We have got a solution for water: 20,000 tonnes a day, 2,000 tonnes of water going to come up the road, every day, eminently doable. We have costed it, we have worked it out and it has been built up into our EIA. What is does do is speed up the EIA process because we are not pulling water up from the ground. So we are going to have an EIA approved, according to our consultants and according to all our officials that we have been talking to, the authorities, etc, we will have an EIA approved in about 12 months. And that’s running fast in Chile, right?

If you look at the latest EIA that was approved in Chile; it was for Salar es Norte: a big project that   Goldfield was, I don’t know, 150 kms to the north of us. They got that approved in 18 months but that involved tailings deposition, permitted water; very complex project in comparison to what we had. So that is what it is all about. And you are right; Gold is USD$1,500.  How long is it going to be USD$1,500? It could be more than USD$1,500, obviously.  The idea is to get to production as quickly as possible. That is what will create value for us and enable us to increase production from our initial rate of maybe 100,000oz per annum to plus 200,000oz per annum.

Matthew Gordon: I agree. I understand the model. You have been very clear about what your model is. Get into production as early as possible to generate cash. You have got to get into economic production.  I know water is the big issue that everyone wants to talk about – let’s just cover it and move on.  So you are trucking water up the mountain, I don’t know how many trucks that is and how many times a day?

Alex Black: I’ll tell you right away: very quickly – 25 trucks going up three times a day. So it is 75, essentially 75 trucks. We are going to have 25 trucks physically in the fleet that will be contracted out. And that means a truck, leaving Cupiapo, essentially, every 20 minutes.

Matthew Gordon: As an investor, all I’m concerned about is what does that add to the bottom line?  You have said it has. I’m more concerned and institutions will be concerned with this interim, this temporary solution is over strikes, or the towns and villages that you go through not liking 75 trucks going through each day, every day.

Alex Black: So we will be bringing the trucks up to the project and depositing the water, we are not going to be building a separate reservoir, we will be depositing the water in a major events pond. The major events pond is secondary to your leach pond that accumulates the pregnated cyanide that you are going to put through the plant. The major events pond will have the capacity of about 2 weeks of water, right. So we will make sure that before we start this project, we will fill this major events pond up and we will keep it filled up which means that we therefore have about 2-weeks of water. So if there is a weather event. Whether there is a labour event, or something like that, we believe that will be a way of mitigating those events.

Matthew Gordon: Well, 2 weeks of events. Sometimes these things can go on; whether it is natural events or people protesting or otherwise. And let’s face it, that happens in that part of the world a lot. So I appreciate that.

Alex Black: Good point but however, but during the latest event that happened in Chile, mining was not stopped anywhere in the country. And the road between Copiapo and where we are was never barricaded or anything like that, for any reason.

Matthew Gordon: Will you be applying for the full-permitted water license while this is going on?

Alex Black:  What we have guided is, we are looking at the longer-term water options, and there’s plenty of them. There are people building desalination projects.

At Copiapo and the coast.They are looking for clients. They are looking for end-users. The off-take we have with the water retreatment facility in Copiapo, owned by Aguas Chanar, we have the right to access up to 80 litres a second, which is for the bigger project, we are pulling 20 litres a second initially and putting them into trucks. We could build a pipeline from Aguas Chanar to the project, that’s still a possibility, we may do that in consortium with other people doing business in the area. Codelco have just mentioned that they are going to apply for exploration rights over the Maracunga Salar for Lithium. There’s going to be quite a lot of activity in that area. Having Codelco, the biggest mining company in the country, as our neighbour is going to be a good thing, I believe.  So there are options that are in the background, that we are working on and as we bring this thing into production, we will be able to say, we are in production now and in year 2, we are going to tap into this water X, whatever it is and we are going to increase production accordingly.. So that is how we see these things playing out, but I just don’t have those solutions –

Matthew Gordon: Today.

Alex Black: Right.

Matthew Gordon: Okay. So at that point, you are going to have to apply for an EIA permit, presumably?

Alex Black: Well, you do a modification.

And that’s the good thing about it; the modification of the EIAs take 6 to 8 months, typically. We have done quite a lot of research on this. Once you have got your first EIA, then it becomes a much easier process o modify and do things.  The good thing here is, and this is what investors need to understand: this is 100% Gold Oxide leap leach. There is no tailings, there is no complex sulphide transition zone, etc. This is going to be Gold Oxide heap leach. Which means no tailings dam. It’s only ever going to be a leach pad. So all the modifications we do to the EIA, will be relatively simple compared to this transitioning into a major sulphide project or a complex project with Copper and other things. There’s no Copper here. This is an anomaly in the Maracunga region: this is an anomaly because all the other Gold deposits in the Maracunga are associated with Copper, complex metallurgy, huge CAPEXand complexity.

Matthew Gordon: How are you getting power to site? Using diesel, or have you got another solution?

Alex Black: There’s a powerline within 15kms of this project. But instead of tying ourselves to the powerline, going through the negotiations, including that in the EIA, which would delay start up of this project, we said to ourselves, I’m going to start this with Gensan, which we did with La Arena, which we did with Shahuimindo, here in Peru. Once you tie yourselves into the grid, maybe in year 1 or 2 of production, Gensan then becomes back up power. So, we are going to start with Gensan and bring diesel up and power it that way. But there is a powerline 18 kms away.

Matthew Gordon: And how does this work? I’ve looked at similar projects elsewhere in the world, the people controlling the water, the people controlling the energy. They put their prices up at their discretion and that has a big impact on your costs. So what is it like in-country with regards to power, water, etc?

Alex Black: Well, in the case of water, we have got a fixed cost on water so there is no inflation built into the cost of the water we are pulling. We are actually using retreated sewage. Which is good from a leaching perspective, probably from other allergical perspectives it may not be, but for leaching it is okay, so we have got a fixed price. Energy:  Energy used to be a huge problem in Chile years ago and now it has stabilised and there is much more power on the grid. But typically, if oil prices go up, Gold prices move and other things – these are things we have to watch and build into our models as we go forward.

Matthew Gordon: How much money have you pumped into this project so far? You have talked to me about USD$7m and USD$25m, so far in cash, but how much did you pay?

Alex Black: Oh, we just did a share transaction; so we did a business combination with Atacama Pacific. We paid a premium – they were lucky because these days, nobody pays a premium.  It was all paper. We have raised in total so far, I’m just trying to do the maths, about CAN$40m, from the time we started Rio2, and here we are.

Matthew Gordon: How much cash are you sitting on today?

Alex Black: Today, about USD$13m.

Matthew Gordon: So you have spent about USD$40m, your market cap is about USD$75m – ish. You have about USD$13m in the bank.

Alex Black: And we are mixing currencies here. Let’s say it is CAN$15m or CAN$16m, sitting in the bank

Matthew Gordon: Sitting in the bank. Okay. So what’s going to happen this year that’s going to change the direction the share price is going in? Are you going to spend that on talking to the market more? What are you going to deliver?

Alex Black: Two things: we are going to be telling the story a lot more. We have just come out of the Christmas/New Year period. We came out with our updated PFS in August/September. We did two shows in Colorado. We went to New York last year. We are going to be going to Zurich this year, to the Denver forum in Zurich in April. We are going to be doing London, Frankfurt – you know, we are going to be marketing, telling people the same story I am telling you right now. So that’s one thing we will be doing. From a news perspective, we will be filing the EIA towards the end of the quarter. That’s a major milestone. We are also in the process of completing all our basic engineering for the project and that will be able to reveal how that looks, what tweaks we have done to the look of the project and traded off on OPEX, CAPEX to get to that point. We will start to talk to financiers about the project, once we get the compete overview of the project that is filed in the EIA, to present to financiers.  We will be doing that.

We also are refining our agreement with Aguas Chanar, which will be to our benefit and we will be announcing that at some point. We are also looking at the future of tying into the grid. We will be announcing things about that. That won’t be for the start-up of the project, but the longer-term future. And we will talk about the impacts to OPEX and future sustaining Capex that we will need to do those various things.

Matthew Gordon: That just sounds like every other story we are hearing every other week. I am trying to work out, what do I need to hear that says, this guy knows where this thing is going, alright? We look at people like Equinox right? They cleverly brough together three quite ordinary projects and did something quite big. You are in a district-wide, you have got Kinross behind you, who aren’t doing too much at the moment, and you are surrounded by some other big names. And you have got Eric Sprott involved in this thing, so why aren’t you offering up a bigger vision?

Alex Black: We have been talking about a bigger vision, and the bigger vision is to consolidate ourselves with other companies. We’ve got a management team that is second to none.

Matthew Gordon: You certainly have. So let’s do something with it.

Alex Black: And let me tell you, for the last three years, apart from doing this acquisition, for the last three years, we have been looking at lots of things. We are completely different to other Junior companies. We’ve got a full team here: geologists, financial people, mining people, environmental people, social people.  We can walk into a mine tomorrow and run it, anywhere, anywhere. And the other thing we come with is our Capital Markets experience, because I’ve been doing this for the last 20 years or so, front-end of companies, so we’ve got all the ingredients. But you think, there are people out there that, us plus them, that would look interesting, like what Equinox has done with Leagold, etc, let me tell you, it is just so difficult. So difficult. And there is entrenched management. Lack of management in various companies, skimming the game like we have. But you try and convince them that putting them together with is would make a lot of sense for the future of the company and also for shareholders, and it is like you might as well be talking to a rock.

Matthew Gordon: You’ve got Eric Sprott who is a big player. What does someone like him see in you? Is there something we need to know?

Alex Black: We continue to try to find deals. We may come up with something in the next short little while and everyone goes, wow, you’ve made the right move. All I’m saying is that until now, it has been difficult. With Eric, he is backing our management team, he has invested in a lot of things. At some point, those things have to perform. My reckoning is that they are either going to perform or he will potentially be a catalyst for consolidation, right?  You can have X number of investments but if they don’t form, it’s like, well why don’t I reduce the size of that pool to buy a factor of 2 or 3 and put things that have synergies or focusses that could be combined, and maybe that’s what he’s going to do. He hasn’t really said anything about that but I’m hoping he does that because at the end of the day, that’s what this business needs: consolidation.

You know what interests me as well? You know, here we are, we have been trying very hard to look at consolidation. Do you think anyone has come to me to say, why don’t you consolidate with us? Not one person has done that. That shows you the state of this business.

Matthew Gordon: At some point, as you say, it makes sense that he has got to pull the trigger because there are a lot of fundamentally good assets, there is some very average management and then there is some exceptional management.  I think your track record speaks for itself. What I’m hearing is: get into production early, earlier than you originally planned, and get some cash flowing.

Alex Black: Get into production that anyone else would do with this project. If this was in the hands of Kinross, they wouldn’t be doing what we are doing, right? If this was in the hands of anybody bigger, they wouldn’t be doing what we are doing. They would be looking at what impact can we make to 200,000+ oz per year, etc. So, we are doing something that nobody else would do with this particular project. But we did the same, and you’ve got to go back, and I keep harping and mentioning La Arena and Shahuindo, we did that there. We started those projects very small: La Arena was 10,000 tonnes a day to start with, focussed on high-grade, outcropping materials, which is exactly what we have here. And so, you know, we have that skillset to be able to do it and to have the vision of what it can become. What the market will eventually do, and this happened with Rio Alto, their market will eventually gel with that and go, yes, I want to be in this story.

The problem is that we are not in production yet. The closer we get to production, the more the interest and value will come into the story because everybody will doubt that we can do this, irrespective of the fact we have done it twice before, that’s just the nature of the market. People go,  ‘Oh, can you do this? You have never built a mine in Chile, have you?’ Etc, etc. It’s one of those things and I’m very pragmatic. I’ve been in the business 40 years.  I’ve been at the front end of the business for 20 years. I’m a technical guy, I’m a mining engineer. All I do, I’ve got a great team of people behind this wall here. Great team of people: second to none here in Latin America. All I do is   just focus on what we’ve got to do, let’s just show people that what we’ve been telling people for the last piece of time, we actually deliver on, and that’s all we can do – is deliver and execute on what we say.

Matthew Gordon: We shall see. Alex, thanks for telling us the story today.

Matthew Gordon: Alex, I appreciate your time, telling that story. It was great to get you to articulate what the plan is and why you’ve been doing it in this order. I can understand that now. I think you have got to get out there and tell the story in an articulate way to the market place, because your share price says; no one understands it. Eric Sprott coming on board – great new addition. I’ll look forward to seeing how your relationship with him develops.

Alex Black: Alright. And I just want to say that I like the way you ask questions; the tenor of the questions that you ask are really good. I think it really suits people who are maybe not so knowledgeable about mining, so you are doing a great job. Keep doing it. I look forward to following up.


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Rio2

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: https://www.sierrametals.com/home/default.aspx

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Regulus Resources (TSX-V: REG) – A Very Successful Exploration Team, Looking to do it Again in Peru (Transcript)

John Black, CEO of Regulus Resources (TSX-V: REG) sits down with us for an interview. Regulus Resources’s focus is on their Gold / Copper project AntaKori in Northern Peru. They have an experienced and successful exploration team of geologist with Southern American knowledge. $10M in cash will help them continue to drill well into 2019 but they will be looking to raise at the end of the year with a strategic investor.

Click here to watch the interview.


Matthew Gordon: How are you, John?

John Black: I’m doing well, thank you.

Matthew Gordon: Lovely to have you on the show. First time for our viewers. Wondered if you could just start, just give us a quick two-minute elevator pitch, as it were, to help people understand a little bit about the background of the project, please.

John Black: Regulus has the Antakori project and we’re a group of experienced Exploration geologists that specialise in identifying projects like Antakori that have potential to become very large Copper or Copper Gold deposits. And in 2012 at the market bottom, we were fortunate to be cashed up, we identified the project and we acquired it by merging with a company called Southern Legacy. In the last two years, we completed our first major drill program. And recently in March we announced a very exciting new Resource that we consider to be an interim Resource. As we continue to drill this year, we anticipate it will continue to grow.

Matthew Gordon: Quickly run us through the financing component here as well. You’re sitting on a lot of cash, which is great for an Explorer. But talk us through some of the shareholders and the way that that’s been structured.

John Black: As a junior Explorer we depend a lot on a loyal shareholder base. Regulus is a company that was spun out from our predecessor company called Antares Minerals. We made a nice discovery and sold that project to First Quantum in 2011. And the group of shareholders that did well from that fortunately are supporting us to continue as we move forward.

Matthew Gordon: There’s not a lot of retail out there is that at the moment?

John Black: There isn’t. We have, actually, most of our shareholders are fairly aligned with those of us in management and looking towards an endgame where we’re making a discovery, we’d like to drill it out, and then monetise it. We have one large shareholder called RouteOne. It’s a fund based out of San Francisco. They own about 24%, and as management we own a little over 14%. So, the shareholding is quite tight. It’s difficult to get a position, but most of our shareholders are aligned in the endgame. The discovery, the revealing the full value of the project, and then monetising.

Matthew Gordon: Okay so maybe let’s just come on to that in a second. Because I’d like to understand a bit more about the team and the relevant experience and, obviously, with Antares you had a huge success story and I can see why some institutions would continue to back you. So, tell us a bit about Peru, it would seem quite hot. A lot of people are talking about it in PDAC as a good destination for mining. Can you tell us a bit about it?

John Black: Well Peru is… we specialise in Exploring in South America, myself and Kevin. Kevin Heather, who’s our Chief geological officer, the two drivers behind the company really. We’ve had many decades of experience in South America. One of the reasons we really like Peru is that it’s a nice balance between being already established as a mining country, yet still having good potential for additional discoveries. And that mix, that you can Explore in most countries in South America with potential for success. But we always seem to gravitate back towards Peru as being that place where you can find it. And if you find it, you can turn it into mine.

Matthew Gordon: Yeah and you’re also surrounded by some quite large interesting companies as well. You seem to be in the right postcode, I think is what I’m driving to.

John Black: Yeah. Very much so.

Matthew Gordon: Yeah. So now you had a Resource come out recently. So why don’t you tell us about that? You say you want to follow up quite quickly with a second resource. What sort of scale of project are we talking about here?

John Black: When we acquired the project it already had some previous drilling. It was enough to show an Inferred Resource of about 300Mt at about a 0.8% Copper Equivalent. Having both Copper, Gold, and actually a little bit of Silver as well, we completed about 23,000m of drilling in our Phase 1 program in 2017, up to the end of 2018. With that we almost doubled, more than doubled, the existing drill Resource base, the drill database. And it was time for us to do an updated Resource. The resource that we recently announced, it was March 1st right before PDC, it contains 250Mt of 0.48% Copper, 0.29g/t Gold, and about 7.5g/t of Silver as well as 267Mt of Inferred Resource at 0.41% Copper, 0.26g/t Gold and about 7.5g/t of Silver. So, combined over 500Mt, a nice increase from what we started at. And, about half the deposit moving to the Indicated category now. And then we want to emphasise that this is an interim Resource. As we continue to grow, as we continue to drill we anticipate the project will increase substantially.

Matthew Gordon: So, what does that do to things like… we know your market cap is… what’s that do for you NAV numbers or have you any sense of the economics of it? Because those are quite low cut-off points, so I guess, it’s that some indication of the style of project that this potentially could be?

John Black: Well one way to take a look at these type deposits, we’re a little bit early, we’re still in the resource definition stage and we don’t really know how much deposit we’ve identified yet. We anticipate it’ll be substantially larger than it is. So, it’s a bit early to be putting NAV or preliminary economic evaluation (PEA) around the project. But one thing we can do is we can compare the deposit to previous sales of similar type deposits on this. And what we’ve seen over the last couple of decades is that projects that are at the PEA or pre-feasibility stage (PFS) are demonstrated to be large and economically viable Copper deposits, typically are acquired by major mining companies for about $0.04 per pound of Copper or Copper Equivalent in the ground. If we take a look at Regulus currently with our new Resource we’re valued at less than a $0.015 per pound in the ground of Copper.

Matthew Gordon: You’ve been very clear that you are Explorers. You’re there to not get into the build phase or start producing. Your model to sell out to a mid-cap or large producer, is that right?

John Black: Yes, that’s right. But having said that, what we would do in order to define, acquire and define and show the size of a project that might be of interest to a major mining company, it’s very important that we have our eye towards economics and that we do absolutely everything just like we would build the mine. Even though we clearly state that we prefer to be on that steep value-add part of the curve between Discovery and pre-feasibility (PFS) and that our skill set is not the skill set required to take that to become a mine in the future. We do everything exactly like we’ll build it ourselves. That’s the best way to demonstrate the economic viability of a project and attract a buyer.

Matthew Gordon: And also ensure there’s no discount applied by the buyer.

John Black: Absolutely. It’s interesting what we’ve learned over the years is that when you’re on a project like this, a lot of us think it’s simply drill it out and move it up through the stages of a valuation and PEA to Pre-Feas to Feasibility. But what we like to do is, we like to identify the potential weaknesses in the project and really emphasise on those and demonstrate what can be done about those, how to move forward. So, when a project like Antakori, we don’t worry about grade. We have plenty of grade. But we were focusing more on characterising the styles of mineralization. It’s a fairly complex deposit. And working on identifying potential deleterious elements. And showing how we can tackle those as we move forward.

Matthew Gordon: So, you must be quite confident about where the Copper market is going in terms of the future of Copper, Copper as part of battery minerals, because you don’t have the skills today in-house to build this out or get into production. But again, Tantahuatay, you’re being very frank about that. But if the market didn’t go the way you want it, would you make those changes?

John Black: You play your hand out as it goes forward. If we show that the size of this project is an economically viable project, but the market’s not in the right moment for potential buyers to be looking for these type projects, we have a choice of hunkering down, waiting until the market improves, or moving it forward ourselves by retooling the company. What we attempt to do is to identify those projects that almost independent of metal price will be of interest to major companies. However, the major companies tend to buy these type projects when the market’s hot. They buy at the top of the market, it’s generally the case. That’s when they’re cashed up and that’s when they’re encouraged to look for new projects.

Matthew Gordon: Okay. And you alluded there to the fact that you’ve made people aware, or you tried to understand, and make people aware of what the problems were and how to overcome those. You’re again quite frank in your PowerPoint, you talk about three issues that you’ve had to deal with. One being the land ownership position. I think you’ve resolved that with the JV with Southern Legacy Peru. Is that right?

John Black: Yeah. There were three potential challenges on this project when we first started looking at it. The group that had it was called Southern Legacy Peru. And they were working on it. The first was a rather complex land situation and Southern Legacy had done an excellent job to consolidate the district and clean up the title issues and so that issue is largely out of the way and particularly with our joint ventures with the neighbours on this. The second issue was historic rejection from some of the communities for previous exploration activity. And when we took a close look at the situations that had happened there we realised that the previous operators on the project had been working in a way that wasn’t very transparent and wasn’t with full social license. It’s important to point out the two communities that we’re now working well with have allowed the construction of two mines since those incidents happened. So they’re not anti-mining whatsoever at all. They’re just demand to be treated fairly and that’s our motto and how we like to work as we move forward. So, we’re finding it quite easy to work with the communities in the area.

Matthew Gordon: Right. I mean you do talk about the, I mean, this is a slightly technical one. I think it’s worth getting into here because there’s some confusion out there as to how you’re going to tackle it. And that’s with regards to the arsenic content in the ore body. I mean I think there’s number saying that 54% of the ore body is within tolerance and the rest not so much. How do you tackle something like that?

John Black: The first thing that is important understand that the Antakori deposit actually consists of two distinct alteration mineralization styles. There is an earlier scarn and Porphyry related mineralization that is relatively low-arsenic and metallurgically similar to many operating mines and capable of producing a nice clean Concentrate. And then somewhat later and partially overlying the deposit is a high-sulphidation epithermal system that has Copper Gold sulphides as well, but those Copper Gold sulphides are associated with higher levels of arsenic. So approximately 40% of the project right now has high arsenic and approximately 60% of the project has as moderate to low arsenic. What happens is that if we have high levels of arsenic in our ore, when that arsenic is associated with a mineral that also has the Copper, when we make a Copper Concentrate, we capture the arsenic. And arsenic levels make it more difficult to market your Concentrate. The Concentrate buyers have tolerances. Sometimes they charge penalties up to a certain level or if you get very high levels, it can be a Concentrate that’s not attractive for people to buy. And so, it requires extra treatment either at the smelter where you sell it to, or there are a variety of emerging technologies that we can apply to treat the material before we sell it to the smelter as well.

Matthew Gordon: Right. That’s interesting. When you say emerging technology, these are well-grounded, well-used or are they emerging?

John Black: They’re actually… it’s a mix on this. We have conventional roasting which has been around for a long time and is one way to treat Concentrates that have deleterious elements like arsenic. It is been modernised in many ways. There’s currently a large roaster in process at the Hena Harles Mines mine that’s owned by Codelco in Central Chile to process these higher-arsenic concentrates. But there are also, what’s a little bit more emerging is the pressure oxidation technique and many companies are trying to tackle this worldwide. Arsenic contents are increasing in Copper Concentrates and people are looking at technology that can be applied by pressure oxidation. It’s essentially an autoclave that allows you to oxidise your material and sequester the arsenic into a stable safe form. And it actually has some benefits that you improve your Copper and your Gold recoveries at the same time.

Matthew Gordon: And I think some people were asking the question, could you blend it?

John Black: Blending is also a common technique that’s used right now, either blending between materials that you have on your own site or selling your Concentrate to a group that has a lot of clean Concentrate it can blend. So, there are specialist third-parties that blend concentrates for you, prior to sending them to smelters. But quite frankly on the project we have right now, we’d like to develop methods that that higher arsenic material is economically valuable. So, we anticipate that we’ll be doing quite a bit of metallurgical testing in this next year in exploring the different avenues. The pressure oxidation technique that I mentioned is highly promising. The challenge really is overcoming the capital cost and the operating cost. But that’s where the higher grades that we have at Antakori come to play and we anticipate we’ll be able to support those higher costs associated with higher grades.

Matthew Gordon: So, I guess your preferred solution is go and discover additional ores which are clean and focus on those initially, in terms of your optimisation of the project.

John Black: That’s really our strategy right now. We naturally want to find all of the mineralization that’s on our properties or properties that we have access to. We anticipate as we move to the North we’ll be finding additional mineralization and that mineralization will be cleaner. So, depending on what we find in the entire centre of gravity of the opportunity might move towards that cleaner mineralization and input the arsenic-bearing material that’s a little bit more metallurgical challenging further down the road.

Matthew Gordon: Right. And so, there’s one question from some of the chat rooms, which no one had an answer to.  So, what’s happening with hole 30?

John Black: Hole 30 we just announced a couple of weeks ago and it’s a very interesting hole. It’s a 500m step out. It’s one of our first holes that moves to the North or Northwest from the main area of our drilling. We had an opportunity that there was a previously existing pad that we could set up on. So, the pad itself was not ideally located but was a nice step out into a new area. And we encountered both high-sulphidisation mineralization in the overlying volcanics, as well as more porphyry or porphyry-scarn style mineralization at depth. The grades were lower than I think some people anticipated we’d have. They’re approximately 0.25% Copper and about 0.15-0.25g/t Gold. But over very long runs. We find it highly encouraging. It’s between 0.3% and 0.5% Copper Equivalent and it’s a 500m step out. And it’s actually between several promising geophysical anomalies. So, we consider it a proof of concept that we’re moving in the right direction. And probably the most important point on hole 30, is the intercepts in the scarn and porphyry-style mineralization are very low arsenic. So it’s confirming the idea that there’s additional low-arsenic mineralization towards the North.

Matthew Gordon: Well thanks for getting into the technicalities of that. Can I come back to the Resource? I’m looking at page 17 of the recent PDAC PowerPoint. I believe it’s the most recent one. You show the Indicated and Inferred numbers on there. You do use quite high numbers for the Copper and the Gold in relation to the spot price today. Are you getting some sense of the economics…? I know you say it’s too early for a PEA and it’s too early to say what precisely you’ve got here today but what is the process that you’re going through to make this attractive to mid-caps or majors?

John Black: On these it’s a little bit of taking a look at volume versus grade on this. And what are appropriate cut-offs for material. So, we use a 0.3& Copper Equivalent cut-off. As our reporting line grade. But you will notice in many of our presentations, we show the size of the deposit at different grade cut-offs. And some of the things that we’re very encouraged about on this initial resource for us, it’s our first Resource that we put out on the deposit, when we see that we have a cut-off grade and the reported grade is more than double what the cut-off grade is, that’s a very good indicator that the project is quite robust. So, in our case, we’re using a 0.3% cut-off grade. And the Indicated category that results in a 0.48% Copper grade, 0.29g/t Gold grade and about 7.5g/t of Silver. So that’s approximately 0.7% Copper equivalent. So, applying a 0.3% cut-off grade results in a 0.7% Resource reported on that. That’s a good indicator that your Resource has substantial zones of relatively high-grade. And the reason that we use the metal prices that we use for this stage is that’s used to drive the pit. And so that’s not necessarily the metal values that we’ll use when we do preliminary economic (PEA). It’s common to see two sets of numbers on that. One is to drive the pit and then once you have a pit, when we get to a PEA stage, we will most likely use values that are closer to current prices or even lower than those.

Matthew Gordon: What permits do you have now and what permits will you need as you move forward?

John Black: We have a portion of a project that extends on to neighbours’ ground and those neighbours are a joint venture that operates the Tantahuatay Mine. So, the Tantahuatay Mine is immediately next door. It’s operated by a joint venture company called Coimolache and Coimolache is a joint venture between BuenaVentura and Southern Copper which is Grupo Mexico’s Peruvian sub, as well as a small third-party group in there. And they’re mining the oxide cap over a very extensive Copper-Gold sulphide deposit that is the same deposit that we’re defining on our ground. So, the neighbours have reported over 450Mt of Indicated Resource at about 0.7% Copper and 0.2g/t Gold and also a little over 480Mt of inferred resource or over 900Mt of combined Resource at relatively high-grade. Immediately adjacent to the mineralization that we’ve just announced. So, the combined deposit is significantly larger than what we’ve shown on our ground alone.

Matthew Gordon: All right. So that whole area is heavily industrialised, in a sense. There’s going to be no issues around the permitting component going forward?

John Black: That’s one of the things we like about this. We’re in essentially a brownfield situation. Where we have an operating mine immediately next door. They’re mining the oxide cap over a large Copper-Gold sulphide deposit. They have about 5yrs-6yrs of mine life left. And they didn’t have the opportunity to make the transition into the underlying Copper-Gold sulphide mineralisation. We have a portion of that deposit. So, it really sets a nice timeline on the project to move forward. And what we’ve done is we’ve established agreements with the mine. They’re best described as collaborative exploration agreements. If we each knew what we had, we’d probably be entering into a joint venture or some sort of a sales negotiation right now. But quite frankly, we each think we have the better part of the deposit and better could be larger, higher-grade, cleaner, in our case, or closer to the surface. So, until we each drill out our mineralization, we aren’t really in a position to enter into negotiations. But the nice thing is that because that oxide mine is progressing and running out of ore in the not-too-distant future, we’re highly motivated to move the project along quickly.

Matthew Gordon: So, I just needed to go down that line of questioning, there was some discussion, again chatrooms and forums, around block caving as a potential option for you if permitting was an issue. So, I think you’ve knocked that on the head.

John Black: Well really, it’s logical to make an expansion of the existing pit. And the mineralization we had, when we floated the pit, much of it reported quite easily to the pit on there. So, it’s fairly…it’s a good indicator. It’s quite robust and it’s very much in a geometry and an occurrence that’s natural to exploit as an open pit on that. It’s interesting to note that the pit that we floated, had a strip ratio of less than 1 to 1, It was 0.85 strip ratio. So, it’s indicating that there are large volumes of mineralization close to the surface. However, some of the people in the chatroom might be pointing out our more recently announced hole 26. And hole 26 was a hole that we drilled farthest to the North. So, the hole that we’ve been able to reach out is as far to the North as possible on this. And we had the good fortune on the bottom of that hole to intercept 473m of 1.16% Copper and 0.2g/t Gold. It’s a Braccia that’s been healed by calpobyrite and bornite. And that style of mineralization is currently outside of the Resource that we’ve reported. Partly because it’s a hole by itself. So, there’s no support around it. It’s also a little deeper. We anticipate as we drill that out that some of that will be captured by the open pit. But those grades also open the possibility of underground mining, if that’s a more viable operation, either in combination with an open pit or by itself.

Matthew Gordon: So just quickly on your team. You’ve been together awhile, you had a big success back in 2010, 2011 was it? When was the…

John Black: 2010, late 2010.

Matthew Gordon: I mean it was… well, tell people. It was significant.

John Black: When we set up as a company, really the company was founded by myself, Kevin Heather who’s our Chief geologic officer and Mark Wayne who’s our CFO. And we were set up by some other gentlemen who were running companies and had the idea that Copper prices might improve in South America. As we set up, we formed a company to do just what we did with Antares, and what we think we’re all well on our pathway to doing with Regulus again, is carefully identify a project that has that potential to be large enough and economically robust enough that a major company would like to acquire it from us. That’s based on decades of experience. Kevin and I have both lived and worked in South America for many decades, more, probably, than we care to admit on this. And we have access, we have language abilities, and we have familiarity with the ground. So, we scour through our contacts and our knowledge of the area to identify these projects. They’re hard to find but once you find them, get on the right one, drill it out with good support from some of our major shareholders, and then ideally sell that. So, with Antares we had the good fortune to discover the Kira deposit. Drilled that out over a number of years, completed a PEA on it. We’re just at the point of deciding to move it to pre-feasibility and First Quantum made a move on us and elected to acquire the project. So, a project that we paid $15M to acquire in stage payments we ended up selling for about $650M at the end of 2010 to First Quantum.

Matthew Gordon: That was a great result for all concerned. I guess that’s why you’ve got the following you have today. So just on that, you’ve got some cash, which will take you through to when, how long will it last?

John Black: We have a little over $10M in the account right now. We’re projecting 25,000m of drilling in calendar year 2019 on this as well as additional metallurgical work and acquisition of surface. So, we will need to do some type of financing before the end of 2019. It’s not immediately urgent and we have some very exciting targets we’d like to test before we get to that point. But we will seek alternatives to do an additional financing sometime before the end of the year.

Matthew Gordon: And would you expect that from the current institutional shareholders you have, or you’re going to go to the retail market?

John Black: Well it’s kind of an interesting market for juniors like ourselves right now. It’s increasingly difficult and uncommon to see more traditional private placements that we’ve all been accustomed to for quite some time on this. And almost all of the serious financing, the larger financing for groups like ourselves that have a good project, they’ve really come with the benefit of a strategic partner. Many times, recently those have been mining companies that come in and supported to take a 9.9% or 19.9% position. We have the benefit of having Route One, our major shareholder, is kind of being our cornerstone investor on that. So, we’ll explore various combinations on that where, even though it’s a difficult market, we have established large investors to support us, as well as a number of new friends that are curious about watching how we move the project along and there are potential alliances that could emerge from those.

Matthew Gordon: Right. And I think it’s well known, well understood that the retail market is the thing which drives the share price and clearly the better the liquidity, the better with the volume on the retail, the cheaper the money is for you. Not necessarily what your institutional partners want to hear, but that’s good for you and it should ultimately be good for them. So, what are you doing to drive that understanding in the marketplace at the moment?

John Black: Well as we move through stages in the projects, when you really early on want to make those early discovery holes, you see increased volume on that. Now we have a lot of shareholders who position themselves pretty well and are kind of happy to watch their position. So, we need to develop an additional wave of shareholders to come in. And we’re doing that through increased interviews and increased marketing awareness to get the story out. Quite frankly I think one of the main drivers that will be for this, is that if we see the Copper price really take off on this. Where I think …I just came out of the Osisko meeting and in Santiago and there, like many other places, there is a strong anticipation that there’ll be a demand-supply gap in the not-too-distant future and, most likely, a subsequent rise in Copper. I think everybody realises that’s on the way. It’s driven by electrification of vehicles and a number of other increased uses of Copper, at the same time Copper production is declining. So, I think everybody thinks it’s happening but everybody’s a little bit nervous to jump in. And my experience on this is that when we see prices move on that then there’ll be a sudden turn and we’ll see more likely increased liquidity, increased interest in opportunities just like we have.

Matthew Gordon: It will be interesting see how that turns out this year. I think as most commentators always say, ‘they’re right, they just don’t know when they’re going to be right’. So, we shall see. John, thank you very much for your time today. That was very interesting and thank you for sharing that with our viewers. Appreciate it.

John Black: OK great. Thank you very much.


Company page: https://www.regulusresources.com/

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