Salazar Resources (SRL) – This is how to become a Big Company (Transcript)

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

Interview with Merlin Marr-Johnson, Director of copper-gold porphyry explorer, Salazar Resources (TSX-V:SRL)


We catch up with Marr-Johnson to discuss the latest developments in the Ecuadorian mining space, in addition to the copper-gold porphyry exploits of Salazar Resources. It’s time for copper-gold investors to pay attention to Ecuador. The recent joint announcement between their JV partner Adventus Mining, suggests that things are going well. Marr-Johnson gives us an update and points to the future with some confidence.

What did you make of Merlin Marr-Johnson? Comment below and we will respond.

We Discuss:

  1. Company Overview
  2. Mining in Ecuador: The Good, The Bad and The Developing
  3. Growing Ecuadorian Market: What’s Changing the “No-Mining” Mindset?
  4. Adventus’ and Salazar’s Press Release: Simplifying the Technical
  5. Understanding the Projects: Future Interview Topics and Requests

CLICK HERE to watch the full interview.

Matthew Gordon: Merlin, how are you doing, Sir?

Merlin Marr-Johnson: Hi. All good, thanks.

Matthew Gordon: Fantastic. Well look, I thought I had better call you to talk about the press release from Adventus. I just need to understand it because there are a lot of moving parts and it is also quite technical. But I tell you what, do me a favour, could you give us that one-minute overview of the Salazar Resources business so people know what we are going to be talking about, and then we will get into that press release.

Merlin Marr-Johnson: Yes, of course. Salazar Resources is a TSX-V listed exploration, project-generated company. We are an Ecuadorian company. Very Ecuadorian; the entire team is based in Ecuador, and Freddy Salazar is one Ecuador’s leading geologists. We have got 6 projects, 3 of which are fully carried by Adventus and 3 of which are 100% our own exploration licenses that we are drilling. We are hunting big Gold and Copper targets in Ecuador.

Matthew Gordon: Brilliant. Thanks for doing that. Like I said, I want to get into the press release but I think it might be worth addressing something which is the ‘Ecuador factor’ first, because we had an interview earlier this week with Lumina Gold, and they talked about the Ecuador discount. You know, that may or may not exist in several forms, but I just think it is about people understanding what the potential of Ecuador is. Can you give us your view on Ecuador as a mining jurisdiction, please?

Merlin Marr-Johnson: Sure. The thing to remember about Ecuador is that it hasn’t really had a proper mining industry at any stage. There are three key things: the first thing is that it is on a very fertile bit of geology. The Andes run through the western spine of South America, and in Chile and Peru you have got these huge, rich Copper deposits. You get these points in the earth’s crust where there is concentration in minerals; whether it is Copper-moly or Copper-Gold, or Gold-Zinc, there’s a whole range of these minerals which are concentrated in key parts of the crust. And the Andes is one of those, and in   particular in northern Chile and Peru, and the geology and the minerality runs across into Ecuador. So, you have got the fertile geology, you have got the metal endowments, but you haven’t had the minerals industry development. And that has been political. And that brings us on the next key point which is that the government has absolutely endorsed the mining industry. They have realised that it is crucial to their economy and to their ongoing development as a country.

Ecuador is a dollar-based economy, so they can’t print their own money. They need to generate it through foreign direction investment and sales of hard currency, foreign exports or exports in hard currency, and that is mining. And the government has focussed on mining as the key growth area. So that is why the mining code has changed, and the response has been astonishing. You have seen all the big boys, all the major mining companies from around the world come into Ecuador. So, you have seen investment by BHP into the SolGold discovery up in the north. You have got Newcrest from Australia who have invested into Lundin Gold and into Sol Gold up into the North.

Lundin Gold built the billion-dollar Fruta del Norte last year. The Chinese spent more than USD$1Bn on the Copper mine up at Mirador. There’s another Chinese development at Rio Blanco, which is another billion-dollar development. You have got Anglo-American, Ro Tinto, First Quantum: all of the big boys looking for Copper, looking for Gold, they are all sniffing around Ecuador because the geological potential there.

Matthew Gordon: Okay.

Merlin Marr-Johnson: Sorry – that was kind of an impassioned description of what is happening in Ecuador. So, when you talk about the Ecuador risk, it’s not seen as a risk perhaps from the mining companies. It has taken a while to come through. It is taking a while for these discoveries to be made. It is not an overnight process. But when actually you think that the country has really been open for mining for only 3 or 4-years, and you have got all of these companies investing in exploration and geology. You have got two big mines which have opened up. Even modest little Salazar Resources; we made the discovery on the Curipamba deposit. It’s a very high-grade VMS deposit. 5% copper equivalent at surface. These grades are remarkable anywhere in the world and it is going to be a mine in a few years, in 2 or 3 or 4-years.

Matthew Gordon:  Okay. And you are carried on that for the next few years. I think it is worth reminding people of that. Let’s stick with the Ecuador component, I think it is fair enough that…you talked about 3 or 4-years. The big boys are ploughing in there and there are billions of dollars going in, and we had this conversation with Marshall Koval of Lumina Gold, and I can understand why the market is not there yet because the track record up until this point, you know; with the socialist government has been – we don’t want mining, we don’t want to ruin our ecosystems. But why the turnaround now? You gave us some clues, but is this genuine? Is this sustainable?

Merlin Marr-Johnson: I would say that the Ecuadorian government is totally serious about developing a responsible mining industry. They have been incredibly consistent over the last couple of years. There has been a lot of active discussion about whether the environment should come first or indigenous rights, and the government has been consistently saying, we need to develop a mining industry. We have an illegal, irresponsible, environmentally-destructive mining industry at the moment, and we want to develop a responsible, well-regulated mining industry that is going to benefit the whole of Ecuador. It is absolutely a key part of the government focus and they have designated the mining industry as a strategic industry.

There were a few sectors that were able to work through the Corona virus and the mining industry was one of those. Exploration, as it happened, took the responsible route not to continue. So, most explorers in the country, unless they could do it in an extremely isolated manner, stopped, but the mining industry continued.

The government is totally committed to this. In fact, it is apolitical now. In fact, the government had wanted to start looking at the mining industry, wanting to develop a responsible mining industry, had previously been very anti-mining and socialist. There is irrefutable logic; there is no way that you can fund the country without having a responsible mining industry. I would say that the Ecuador discount is on its way out. The number of discoveries, the exploration activities, the drilling that is going on, the companies that are there, the level of activity, the level of interest is such that Ecuador will continue to shine brightly as a country for many years and hopefully, generations of mine development.

Matthew Gordon: Okay. Well, look. We are keeping our eye on it. It is certainly a space, a country which we think has a huge potential. And I think our view, I think, is that it is a discount to our investment, you know; we are getting in on this cheap, this is the way we view this. We have got to back the right management team of course, but that is the name of this game.

Let’s get on to this press release because I saw it. I read it. Very technical. And I wasn’t quite sure what I should be pointing at. It looks to me like you know that we have got three of Salazar’s assets. Curipamba is the main one, but they were talking about, I am going to get this pronunciation wrong on this one. Is it Pijili? Is it that? Close enough?

Merlin Marr-Johnson: That will do.

Matthew Gordon: Okay. Right. But they were talking about that specifically. The numbers, to me look okay, but what were they trying to say with this?

Merlin Marr-Johnson: The news release, yes, it was a bit technical, but the main message is relatively simple, which is that we think we have got our porphyry. We have got a mineralised porphyry that we think we are going to be drilling at Pijili. Remember that this license area was chosen by Salazar several years ago. It has been worked up by the Salazars and subsequently by a joint Adventus-Salazar combo. We have got a coincident geochemical anomaly. So we have got a geochemical anomaly, we have got rocks and we have now got geophysics over the whole thing. And we can see this standing out, and you can see it on the surface. You can see mineralised porphyry rock. I think perhaps the key thing that didn’t really come across in the news release, I would like to emphasise for investors, is to realise that actually, its position is within a chain of known, mineralised porphyry deposits. Just north of Pijili, there’s a group in Mexico with an asset there called, Chaucha, and that’s in advanced exploration. It is over half a billion tons. It has got decent grades. It is actually a Copper-moly porphyry. They are being drilled up. That is in advanced exploration at the moment.

About 8kms north of that, you have got the Rio Blanca deposit. Again, this is close to 1Bn tons of Copper-Gold mineralisation. And then you come to, well, just at the southern end of the chain of these mineralised porphyries, and within Pijili there is the showing, actually, that we are focussed on is called Zambohuayca. It is an indigenous name, and we have got good Gold showings and we have got strong Copper grades, you know, 0.4%, 0.5%. In some places 0.6%, 0.7%. Gold is there as well. This is the stuff that you are looking for.

We have got a 5,000m drill campaign. We will be putting in 500 800m holes, and we will be drilling this out over the course of the remainder of 2020. And this is really exciting stuff. This is how you make big companies and big discoveries.

Matthew Gordon:  You say ‘we’, but you are not spending a penny. You are fully carried for 20%, aren’t you?

Merlin Marr-Johnson: Well, no. It is actually slightly better than that. We get paid because our team gets a management fee for doing the exploration and they are actually using our drill rigs and we will get paid for that as well. Yes, we are carried for 20%. We are not carried, remember that on Curipamba, we are carried all the way to production on 25%.  For Pijili we are carried 20% all the way to a construction decision. But as you know, these big porphyries, when you drill them out, it is tens of millions of dollars and several years. So, we are quite comfortable to be carried 20% all the way through to a construction decision.

Matthew Gordon:  To that point. Okay. Well, look. Thanks, Merlin, for running us through that. One small request for you: we did a report on your company about a month ago. It would be great, and I think we have had a few requests from people to look at each of the three wholly-owned projects and just try to understand those a little bit better, in a bit more detail about what you know, what you are trying to discover. You talked about the decision-making when you spoke to us previously; you are going to have to pick one and focus your efforts on that or focus more of your efforts on that. Is that something that you would be prepared to join us on and talk us through?

Merlin Marr-Johnson: Of course. We can do that anywhere you like. We will find out the best method to communicate those three projects and our thinking behind that. But, yes, of course. Absolutely.

Matthew Gordon: I appreciate it. Thanks very much, Merlin, and thanks for picking up the phone today. It was great to speak to you. I hope that you are well, and we shall speak to you soon.

Merlin Marr-Johnson: Okay. Thanks a lot.

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.

Salazar Resources (SRL) – Smart Copper-Gold Explorer Begins Exploring Porphyry System

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

Interview with Merlin Marr-Johnson, Director of Salazar Resources (TSX-V: SRL).

“Hunting big gold and copper targets in Ecuador.”

Salazar Resources is a company that has had our attention for a while. The Ecuadorian copper-gold porphyry and zinc explorer/project generator maintains a tight balance sheet, courtesy of its exploration alliance with Adventus Mining (TSX-V: ADZN; OTCQX: ADVZF). We caught up with Marr-Johnson to find out about the latest Salazar Resources news, in addition to the evolution of Ecuador as a mining jurisdiction. All the big mining names are there. Ecuadorian mining companies have a significant discount on their stock which we think represents a meaningful opportunity. Lumina Gold is a good example.

Salazar has 6 projects. The JV with Adventu Mining means Salazar is fully carried on 3 of them, the largest being the high-grade copper-gold project, Curi Pamba. The other 3 of which are 100%-owned exploration licences for Salazar. The whole operation is led by Fredy Salazar, a renowned Ecuadorian geologist, having previously been geological team leader for Newmont in Ecuador. Ecuador itself has never really had a proper mining industry up until now as the main revenue source was oil.

Matthew Gordon talks to Merlin Marr-Johnson, 15th June 2020

The three key things to remember about mining investment in Ecuador are the following:

  1. The geology is highly-prospective in Ecuador. Salazar Resources’ flagship Curi Pamba project is a VMS deposit with 5% copper equivalent at surface. This is world-class, and Marr-Johnson indicates that this geology is consistent throughout much of Ecuador. Salazar Resources is carried all the way through to production at Curipamba by Adventus.
  2. The government has realised the importance of mining to the Ecuadorian economy. It is now “totally serious” about developing a strong, sustainable mining industry, and investors can expect possible subsidies. In fact, the government is now sees mining as the key growth area.
  3. The mining code has now changed, and many of the world’s biggest mining companies have now come into Ecuador.

The Ecuadorian risk is mainly derived from the fact it is taking a while for discoveries to be made. It is not an overnight process, but the entire mining industry has come on leaps and bounds in the last 3-years.

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The big piece of news this week comes from the Pijilí Project JV project. We were excited to hear about what sort of exploration upside could be on offer for investors for 2020, and this is now a clear indication of what could be in store. Adventus Mining and Salazar Resources have now mobilised field crews to the Pijilí project to commence a drilling program on a porphyry copper-gold-molybdenum system. The system was identified at its Mercy concession located in Azuay province in southwestern Ecuador. The 3,246 ha property is 80%-owned by Adventus and 20%-owned by Salazar Resources. The message is plain and simple: Salazar Resources thinks it has a mineralised porphyry, and it is hopefully going to go after it with the typical efficiency and speed that investors have come to associate with Salazar Resources. It’s a 5,000m drill campaign and Marr-Johnson is extremely excited about what could be in store in terms of growth. In addition, Salazar Resources is not only fully-carried for their 20% equity, but they also get paid by Adventus. The company continues to advance on its own project in a non-dilutive manner and will choose which of its three projects to focus on by the end of the year. A difficult choice as all three look good.

What did you make of Marlin Marr-Johnson and Salazar Resources? Comment below and we will respond.

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.

Salazar Resources (TSX-V: SRL) – An Exceptional Copper-Gold-Zinc Business Model

Salazar Resources Ltd
  • TSX-V: SRL
  • Shares Outstanding: 127M
  • Share price C$0.18 (30.04.2020)
  • Market Cap: C$23M

Crux Investor recently conducted an interview with Merlin Marr-Johnson, Director of Salazar Resources (TSX-V:SRL). We were already interested this copper-gold-zinc story based on our last interview. Were we equally impressed this time around?

Salazar Resources is an Ecuadorian exploration company. There are some important decisions on the cards for this year. Which one of Salazar Resources’ three 100% owned copper-gold-zinc assets will it develop, and which two will it farm out?

What is the plan for the Adventus Exploration Alliance in 2020? How will Salazar Resources work to resolve Ecuadorian permitting and liquidity issues? Marr-Johnson has answers to everything as he usually does.

We Discuss:

  1. Company Overview
  2. Business Model: Uniting the Different Components
  3. Partnership with Adventus Mining: Terms, Conditions and Benefits. What Did They See in Salazar?
  4. Timing Value Creation
  5. Upcoming Exploration and VMS Deposit Potential
  6. Plans Going Forward: Focus and Money Allocation
  7. Ecuador as Mining Jurisdiction: Mineros Conquering the Pitches
  8. Solving Liquidity Issues
  9. Catalyst Moments and the Future for Salazar

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.

Salazar Resources (TSX-V: SRL) – I saw it coming, from miles away (Transcript)

The Salazar Resources Ltd company logo
Salazar Resources
  • TSX-V: SRL
  • Shares Outstanding: 127M
  • Share price C$0.18 (30.04.2020)
  • Market Cap: C$22M

Interview with Merlin Marr-Johnson, Director of Salazar Resources (TSX-V:SRL).

Salazar Resources is an Ecuadorian exploration company. In our last interview, we discussed how this gold explorer had farmed out its first copper-zinc-gold asset, the El Domo Curipamba VMS discovery. The PEA shows an economically viable resource. The company is fully carried for 25% and receives US$250,000 in advance royalty payments (to a limit of US$1.5M), additional recurring management fees standing at over US$350,000pa, and was also given the ability to lease out their 3 drills. At the time, they had c.$5M in the bank to continue exploration and consideration of M&A options. Salazar Resources has 3 additional copper-gold assets at varying degrees of licencing. Adventus has a 75% option on project, obtained by funding CAPEX of US$25M over five years. Fully carried for 25%, and receiving annual cash payments. Interesting. A Feasibility Study will be completed in 2022 for El Domo Curipamba, and lots of metallurgical work has been carried out. The aim is for production in 2024, possibly late 2023.

We really like project diversification and commodity diversification. It helps mitigate risk by removing a company’s reliance on a single asset performance. So, in addition to running the copper-gold side of things smartly, Salazar Resources has a zinc-exploration JV that falls within the Adventus-Salazar Exploration Alliance that contains two projects, Pijili and Santiago. Salazar Resources has no activity-funding burden at Pijili or Santiago because Adventus must provide 100% of development and construction expenditures up to a construction decision. Exploration activities of the Alliance are carried out by Salazar on a cost +10% basis.

It’s a good solid model: Salazar Resources can seek out exciting copper-gold and zinc projects, then get other companies to foot the bill. CEO, Fredy Salazar is an ex-Newmont team leader in country and Salazar Resources.

Lots of green lights here, but what about concerns and possible red flags? Ecuador a mining jurisdiction making changes to mining code. The permitting process, both water and environmental, is slow. In light of this, Salazar Resources has been quite slow to deliver on exploration ambitions in the last 18-months due to Ecuador-wide permitting issues. Like in many countries, the mining industry has some social issues in Ecuador, with the usual vocal protests and populist sentiment. However, the administration itself is very pro-mining. Another issue is that the board is a little burdensome.

Perhaps the primary reason behind Salazar Resources’ share price stagnation is the issue of a lack of liquidity in the stock. Marr-Johnson and the rest of the Salazar team are clearly aware of this. Marr-Johnson was steadfast in his response: all the team can do is get out there and tell the story to prospective investors, and continue delivering results. We feel Salazar, and in particular, Marr-Johnson, have communicated the value proposition effectively. It’s up to investors to listen and decide if they think Salazar Resources is an Ecuadorian winner.

Moving forward, what will Salazar Resources do with its US$3.5M cash? Exploration is planned. Potential catalysts in 2020 will be drilling on the 3x 100%-owned exploration licences: Rumiñahui, with copper-gold porphyry targets, Macara Mina, with VMS targets, and Los Osos, with copper-gold-silver targets. The big decision the Salazar face is to select which of their 3 assets they are going to select to develop; the other 2 likely then farmed on on a similar basis as El Domo. There is a lot to like about mining in Ecuador and lot to like about this business model.

We Discuss:

  1. Company Overview
  2. Business Model: Uniting the Different Components
  3. Partnership with Adventus Mining: Terms, Conditions and Benefits. What Did They See in Salazar?
  4. Timing Value Creation
  5. Upcoming Exploration and VMS Deposit Potential
  6. Plans Going Forward: Focus and Money Allocation
  7. Ecuador as Mining Jurisdiction: Mineros Conquering the Pitches
  8. Solving Liquidity Issues
  9. Catalyst Moments and the Future for Salazar

CLICK HERE to watch the full interview.

Matthew Gordon: Hi Merlin. How are you sir?

Merlin Marr-Johnson: Good, thank you. How are you?

Matthew Gordon: Not bad. Locked up at home, as I see you are?

Merlin Marr-Johnson: Yep. Yep.

Matthew Gordon: Enjoying it?

Merlin Marr-Johnson: It has its advantages. The children are back at school, so they are all logged on, so if the Wi-Fi goes down, I know that one of them started gaming.

Matthew Gordon: Right? That’s a control mechanism. I love it – well thought through. I think I may experience the same problem and not to mention the various animals running through the house so bear with me as well.

Well, good to speak to you, we haven’t spoken for a few months, and obviously the world is a very, very different place so I think it is worth catching up. Not to mention we have recently done a little bit of, now, we have used you as a guinea pig, Merlin, used Salazar as a guinea pig to try and help people understand South American Explorer type stories. So, it would be great to catch up with you to be able to sort of see if indeed we’re close to being correct. But first of all, let’s kick off with a one-minute overview for people new to this story and then we’ll kind of pick it up from there.

Merlin Marr-Johnson: Salazar Resources is an Ecuadorian company listed on the TSX-V. It has made a big discovery of a very rich VMS and it has farmed out a stake in that. So it’s fully carried all the way through to production, but it’s kept its exploration roots intact. And it’s an exploration company that’s well-funded, that gets a little bit of income from it’s a joint venture partner and it aims to make the next big discovery in Ecuador.

Matthew Gordon: Okay. Thanks for that. So like I said, we have produced a report recently, which is just to kind of help wade our way through the masses of exploration stories out there and try to find points of differentiation. And I think why we picked on you guys as it were is because when we spoke before, there were a couple of things I liked. I liked the newness of Ecuador and the fact that the big boys are piling in there because it’s a much-underexplored country. But the second thing was that you have got an interesting business model, and if you don’t mind, I wouldn’t mind going through that with some people. So, can you just tell us a little bit, give us a little bit of background about what you’ve done because those are kind of farm-in components plus this exploration component.

Merlin Marr-Johnson: Yes, so you know, some of these companies have a classic project generator model: that you find something and you work it up the value curve and then you farm it out and you have a retained interest and you get some cash from that. Salazar Resources has actually been listed for 13-years and it set out as a pure exploration company. It made the one discovery and it worked it up, got it into indicated resources, got it to a very advanced stage and then has done the farm-out. So, on that farm-out, we bought a 25% state code all the way through to production but we also get advanced payments through royalties and management fees, which ticks us over with about USD$600,000 a year. So, we have got income from that asset.

We have also got some drill rigs which we’re using on those joint venture properties, actually 3 projects that we have farmed out and that provides us with income as well. So as an exploration company with about USD$1M of income, we can then fund the early stage value accretive work, which is a lot of the expertise of our Ecuadorian geology, our Ecuadorian exploration team, and it’s a very low-cost but high-value point. You know, you spend USD$1M and you can mix up a big discovery. So we’re actually using the money from the advance payments, management fees to turn it into the next discovery.

Matthew Gordon: Okay. So, so let me drill down on that: so, the who are the farm-in partners? And if you could give us a sense of their capability or ability; I mean, are they desperately scrabbling around looking for money or are they fully funded to do what they need to do?

Merlin Marr-Johnson: Our funded partners are Inventus Mining, and they set up in 2016, maybe 2015, as a special purpose vehicle looking for Zinc and Copper assets backed by an A-list of investors and shareholders. So, they’ve got Altius behind them. They’ve got Wheaton Precious Metals. There’s a big group out of Ecuador called the Novus group. They’ve got RCF, you know, it’s an extraordinary shareholder list backing Adventus Mining, which is, at the moment Ecuadorian-focused, they are not in production yet, but they’ve got very good access to capital.

So, they’ve done very well raising money for the joint venture. And actually the, I think a key point for Salazar is that because we have managed our treasury very well, and because we have done the farm-out, we haven’t had to issue equity, so we are kind of a dilution protected vehicle. We haven’t actually issued equity since 2014.

Matthew Gordon: Yes, I noted that, but we’ll come onto that in a bit. But what exactly have they bought into? You know, why did they pick your asset above others which may have been available to them, give them the capital that they’ve got?

Merlin Marr-Johnson: Oh, well, I think one of the key reasons is that El Domo, which is the name of the deposit within the bigger Curipamba project, this is in central Ecuador, just South of Quito. It was a discovery made by Salazar and it’s one of the richest volcanogenic mass of sulphides in the world, discovered in the last 10 years. A really good analogue is the Degrussa deposit in Australia, which Salazar also has. Now, when they made that discovery, their share price went from $0.07 to USD$7. And they are now mining that company, they’ve taken about USD$2Bn of revenue out of that asset. Their market cap, even with the 50% drop they’ve had in the last couple of months is still around USD$500M, and it is these assets that can be the cornerstones for really big companies.

Matthew Gordon: But why do you say that? I have got to interrupt you there. Why are you making that comparable? You know, where they are and where you are is miles apart? So in what way is it comparable?

Merlin Marr-Johnson: Their maiden discovery was 7M tons at 4.6% Copper and 1.8 grams of Gold. It then grew into 14Mt and it’s around 5% Copper with about 2g/t Gold. On a recovered value basis, their ore is worth about, today, USD$280 p/t. Our asset is 11Mt and it is running about 5% Copper equivalent. In our ore value it is about USD$260 p/t. You know, we have got Copper and Gold, Zinc, Lead and Silver. You know, they’ve just got Copper and Gold, but the value per ton is roughly similar. Our sizes are roughly similar. There’s nothing like it.

I mean, the average grade of Copper mines in the world today is around 0.5%. Our Copper equivalent grade is 5%. That’s an order of magnitude that’s 10 times higher grade than anything else. The economics on that deposit are stunning, and as a company, Salazar Resources with a market cap of USD$15M today is fully carried on 25% of that. We don’t have to issue a single share to get it into production. We don’t have to invest a single cent. We are fully carried to production.

Matthew Gordon: Which is fantastic. The fully carried, I was actually going to get onto it so you’ve answered my question. You stole my thunder, Merlin. So, you are fully carried and they are paying you money, which is fantastic. You said they haven’t started, well, where are they at the moment and when do things get moving? When can you, Salazar, expect to start seeing some value accretion for your share of this?

Merlin Marr-Johnson: Okay, Salazar Resources, because it’s been an Ecuadorian company; it’s run by Freddy Salazar, I’m the only gringo in the team, they are all based in Quito. They haven’t done over the 10-years that have been listed, remember, it’s been a downturn in their in resources sector for most of that time. They haven’t been pounding the streets telling the world what a great asset they have so it’s a slightly forgotten, slightly overlooked asset. Our liquidity is poor, but equally our value doesn’t really reflect what we have got in the portfolio.

The project is at the PEA stage where we did a PEA about a year ago. We have gone through metallurgy, we’re going to complete the Feasibility Study in 2022, sorry, 2021, and aim for production in 2024. That’s when the Ecuadorian government is expecting us to be in production.

Adventus is in a real hurry to get into production. They want it to happen. So, production date, they are probably aiming for late 2023, but 2024 is a more realistic timetable. I think the key thing about, you know, you asked about when are we going to start accreting value, that is, when does value really start being recognised; I think once we have got a mining permit and a Feasibility Study, then people will sit up and realise, well, hang on, this is a Degrussa, this is a Sandfire Resources lookalike. You know, the NPV on the PEA was USD$300M and our 25% of that is whatever you want to call it, USD$70M or USD$75M. That is at our market cap today at $15M.

Matthew Gordon: Exactly. Which is, you know, 0.2?

Merlin Marr-Johnson: 0.2 of NAV.

Matthew Gordon: Yes, it seems ludicrous in a way.

Merlin Marr-Johnson: It is ludicrous just on the value of El Domo. But then actually, El Domo is the value case for the company. But what you would want to get invested in Salazar resources for is the fact that we are Ecuadorian and that were explorers and we are going to find the next deposit.

Matthew Gordon: And we’ll come onto that. We will come onto it, but I think you’re being valued at the moment on that 25% free carry on El Domo. Okay. So, I just want to just dig down a little bit deeper on that one. So, these guys are fully funded, delivery 2024, into production 2024, there or thereabouts.

Merlin Marr-Johnson: They are not fully funded. We are fully funded. They have to keep issuing equity, but they’ve got very supportive shareholders.

Matthew Gordon: Sorry, bad phrase from me. They have got the ability to, I meant, I was referring to their shareholder base and the expectation that they could carry on funding themselves without coming against difficulties in the marketplace. So thanks for clarifying that. But I want to talk about, you know, where value accretes for them, because if their PEA stages is, NPV is nearly $300M, once they get into a PFS, Feasibility Study and the DFS, one would expect that to continue to gain in value. Typical Lassonde curve type structure. Right. And for you too, you can, you would hope to see that. But at the moment, I’m looking at your share price: it’s fairly static. It’s fairly flat. Non-dilutive for many, many years, which is fantastic. And you know, from what you’re saying, the money that you’re bringing in should allow you to do quite a bit and that is probably a time to talk about some of the things that you are going to do to try and drive some kind of value which people recognise and hopefully reflected in your share price, which is the exploration assets that you’ve got and that you’re working on. Can you give people a quick rundown of the, I think you’ve got three at the moment, but one which you’re focusing on in particular.

Merlin Marr-Johnson: Yes, smaller companies typically really only get the value when there are kind of good catalyst, as you say. And the best catalyst is mineralized drill core and when the market can see that you’re on a growth story. So, discovery and drill out, that’s the most exciting. And that’s when you get a rocket-fuelled share price, and that’s tremendous.

Now, we have got in Salazar Resources, we have got three kind of main exploration licenses that are 100% owned buyouts. We have got one in the North, which is a Copper porphyry. Sorry, it’s a porphyry system, but actually it’s Gold rich. And that’s kind of a Gold target with Copper associated with it. And that’s right up next to the SolGold Yuri Manhwa kind of the big deposits up in the North. Right down in the South, we have got another VMS target and that is just over the border from some fantastic VMSs in Peru and our assets in Ecuador. And then we have got another Copper-Gold asset in South-Central Ecuador, next to the Lumina Gold deposit.

Matthew Gordon: Can you just quickly explain for people what VMS is? Because some geologists love it. I like those types of deposits, but not everyone understands what the potential there is. So maybe if you just give us a quick overview.

Merlin Marr-Johnson: Okay. A VMS is a volcanogenic massive sulphide and they form on the sea floor when the ocean floor is spreading and you get hot vents coming up, paring minerals, they hit the sea water they cool down and they deposit and they, you get circulating hot water and lots of fluid flow. And these things occur in little pods along the structure on the base of the ocean floor. So, where you get the Quasi Rift, or the faulting system, you can get lots of these pods. Typically, they are very high in value and they are normally quite small. So, you get clusters of them. They are typically 2Mt to 3Mt to 5Mt. And in every cluster, you get a bigger one and it’s 10Mt or 20Mt or 30Mt.

Rio Tinto, down on the Iberian Pyrite belt, they are called down in Southern Spain, that’s where there’s a whole series of these VMSs. Rio Tinto got started on here Agnico Eagle, Kid Creek, that’s VMS. Lundean Metals up in Sweden, they are going on a VMS now. They can be company makers. And the reason why they are so attractive is because they are high-grade and relatively compact and so they are absolutely ideal for a starter company to get going. Sandfire in Australia, the Degrussa deposit, they have got there. That requires a huge amount of infrastructure. They are a small compact, high-grade deposit that really helps you get started as a mining company. And that’s why they are liked.

Matthew Gordon: Okay, so I have got to deal with this, El Domo took a while to kind of work up and get into that kind of farm-in position. The potential here is to kind of replicate that model, to keep replicating that model, you know, find assets, work it up to the point where you bring someone in who has got cash to be able to develop it and get some free carry on it. Nice model, lovely model, but it takes time and there’s no real blue sky for you in terms of the upside potential. You are kind of almost restricted by whatever deal you can construct. So, can you just help me understand what you’re going to do with the money that you have? I get that it’s non-dilutive, which is great for shareholders, it does cause problems with liquidity, I think, in the way that you’ve got things set up but we’ll discuss that in a sec. What do you do with your USD$3.5M between now and the end of next year with exploration? And how do you work out which one to focus on and which ones to potentially farm out?

Merlin Marr-Johnson: Okay. Well, just on the farm-out question, there would be the landscape and Ecuador has changed enormously. So, because they’ve reformed their mining code and because they really need their mining industry to develop, they actually prioritised it as a strategic industry. The oil price collapse has meant that they weren’t getting paid from the oil industry anyway and now they are getting even less. So, they are really pushing the mining industry and the world has woken up to that fact. And so, there is a very competitive landscape in Ecuador, and we are being called up the whole time with people wanting to do farm-in deals to get access to our expertise and our land position.

So, the ability to do a farm-out is completely different now to what it was 5-years ago, 2-years ago, 10-years ago.

Matthew Gordon: What do you mean by that?

Merlin Marr-Johnson: That there are people willing to do farm-in deals now whereas they weren’t 2-years ago or 5-years ago.

Matthew Gordon: But not in the sense that the type of deals that you do, they haven’t changed. It’s just that the number of people inquiring has increased. That’s what you mean?

Merlin Marr-Johnson: The terms of the deals are better. And also, they are willing to come in and pay for much earlier stage assets. So, the farm-in deal that we did on El Domo, Curipamba was on a well-defined resource that we’d been drilling for seven years at that stage, or six years. It was indicated and inferred resources about to go to PEA state. And we did a value accretive farm-out deal at that stage. But we have now got people looking to do farm-ins at a very early stage on our exploration portfolio, which are essentially grass roots in the sense that we have got drill targets, but we haven’t drilled them yet. Now, as I said, exploration companies really get the rocket under their share price when they have a growth story that they can follow on a hundred percent basis, and we will keep our best assets or what we think is our best asset for ourselves so that we can drill it and report those results to the market.

Matthew Gordon: Which asset of your three is that?

Merlin Marr-Johnson: Well, there’s a slight discrepancy within the team over which is our best asset and so we have got to do a little bit of work first work out, which is our best assets. Freddie Salazar, great geologists, they are going to the CEO of the company. He really likes Rumiñahui, up in the North. He’s said that there’s a one Hector area where out of all the outcrops he has seen, he says it’s about an average of two grams Gold for 0.2% Copper. He said this is a really big and rich Gold target. He has seen the alteration up at Cascobel, sold all asset and he seen the alteration and the veining in our area, and he says he prefers ours and he wants to drill that as a priority and we will be drilling that later this year. So that’s got all the potential to be the company number one.

The one that I’m quite keen on is the one down in the South, Macara. It is the VMS target. It’s got a lovely Gold cap. The beauty about those Gold barite caps is that it’s often oxide Gold. So, it’s free milling, very low-cost operating. When I was at a conference, one of the old timers from who’d been working in Peru came up and he looked at our licenses and he said, wow, I like those. He said that Gold cap, he says, I reckon you have got 500,000oz, 3g/t, maybe 3.5g/t. That well, okay, that’s a nice compliment. And he says you’ve got all the indications of the VMS body underneath as well. I can’t tell if it is on the edge or on the top of it, but you need to do gravity, you need to do a gravity survey. And it’s the classic thing for VMS deposits; you have to do, or you don’t have to, but the best way to find these things is to do gravity surveys. So that means that Macara is running actually behind Rumiñahui. So the one up in the North, we can go straight in to drill, while we’re drilling that we can do the gravity survey and then come back and he’ll mock it up. Okay. And with those, we afford to do both of those and at that point farm out the one that we want to take on.

Matthew Gordon: Okay. So, that process will take what? Between now and the end of this year? Or will it take a bit longer? By the end of this year you’ll make a decision?

Merlin Marr-Johnson: Yes. Yes, absolutely. The field teams are out at the moment and kind of getting ready to go back into Rumiñahui Freddy is on the phone all the time with the landowners. He’s actually, he owns some of the land at Rumiñahui. One of the reasons he is so keen to get in there is that when he first went there 25 years ago, there were these massive blocks, 10m blocks of boulders, rocks, which obviously have not travelled very far. And he assayed them and they were running 20g/t Gold 2% Copper.

Matthew Gordon: Right, which would get everyone’s notice.

Merlin Marr-Johnson: So, you know, he really likes Rumiñahui, he thinks it has got real potential. But getting the field crews back in, as I said mining is a strategic sector for Ecuador, we are being pushed to get back into the field. Obviously, with COVID-19 concerns, people have to do it in a very safe manner and not introduce, you know, isolation, dealing with the communities, working that all out, but we’re still looking at a plan to get into the field, wrap up the final drill pads, get the water permits for drilling and aim to be drilling kind of September, October this year.

Matthew Gordon: Okay. So, you make an interesting point there: in Ecuador, as a sort of relatively new virgin territory in in many ways. Although I do appreciate that Freddy is of ex-Newmont and they’ve been working there for 20 years, but in the sense where there hasn’t been a lot of money piled in. The government is encouraging and wanting people to start mining for revenue reasons but there are some groups who are anti-mining in the country who are either looking for you to stop or looking for assurances about the way that mining is carried out. So, the government’s going through some kind of assessment at the moment. What can you tell us about where that is and what it may involve?

Merlin Marr-Johnson: Yes, sure. I mean, Ecuador is an amazing country and the mining industry has really struggled to get going there, and it’s for a whole host of reasons. Some of it is political. It is historic, it’s socialist governments which have been kind of quite anti-mining. It has had a very pro-environment and tourism and ecological bent to the politics. The local communities, the indigenous communities are anti-mining. They are pro-tourism. You know, it has been tough going and in the past, they have put on windfall taxes and all kinds of things to almost inhibit mining.

The great turnaround, should we say, came around in about 2010 when the socialist government realised they couldn’t afford their welfare programs. They couldn’t afford the investment into social infrastructure education, you name it. And looking around at what sector could provide the funding for those, the societal, the country level investment that was required, the only thing that could work was mining. You know, there was X growth and they had done these bad loans to the to the Chinese oil firms for cash. Agriculture was X growth. It’s also a dollar-based economy so it’s quite hard to compete with Peru or Columbia or Bolivia for coffee or cocoa. Tourism was X growth. And then the final kind of realisation was that actually there is already mining in Ecuador. There’s a lot of illegal mining, there’s a lot of environmental degradation, and so the choice was between good mining and bad mining and if you can get good mining, which is well regulated, safe, properly done and it generates tax dollars and foreign exchange earnings for the country, so much the better. Now, that’s all the positive. The negative is that you’ve got a community that doesn’t really understand mining or if it does understand mining, it’s bad. It’s kind of criminal enterprises. It’s environmental degradation. There’s a great deal of fear in the local communities about mining, and you’ve got a couple of very, very vocal anti-mining protestors calling for referenda the whole time. So, it is one step forward, half a step back.

Matthew Gordon: But you guys, I read something that was quite interesting: I mean I like football. I think a lot of people like football, most of South America likes football. But you guys, I think Freddy has started an initiative which seems to be growing. I’m not quite sure whether you can be a mining company or a football team because you’ve created this kind of, what are the, I’ve forgotten the name what’s miners in Spanish?

Merlin Marr-Johnson: Los Mineros.

Matthew Gordon: Los Mineros – there you go. The Los Mineros program, which is about building out these local football teams who, you know, play in leagues and so forth. I guess that’s not just for the love of football, but to help spread and educate the right way to go about mining and why is it a positive for, could be a force for good. Can you tell us a little bit about that program? Because I kind of, I’ve only seen bits and pieces, but it seems great.

Merlin Marr-Johnson: Freddy is Ecuadorian. He is from the communities. You know, the El Domo project was discovered by one of our best geologists who lives in the town nearby. We are not a foreign company coming into kind of plunder the riches of the empire. It’s a very Ecuadorian company with a focus on developing the community and working for the benefit of Ecuador, and Freddy has got a real knack for knowing what is going to work in which area. In some places it’s a cattle project, in other places it is corporate projects. And around El Domo he felt that there were two things that worked really well: one was a dance school with local cultures. And the other was this football team, the football team, he sets up his little community academies. So, both male and female, boys and girls. They come through and there’s training, there’s football and he’s funded also the state football team in Bolivar state, which didn’t really have a football team. He called that Los Mineros and all the little community football teams in the areas where we’re working can feed players through to the kind of the central Academy, and we’re putting some money into that central Academy and it’s going really well through the leagues, through the division.

We are speaking to some other mining companies. We hope that they will take us up on it, but we’re looking to offer them our template so they can set up their own little football academies in the regions where they are working. And that can all feed through to the mining football team, which of course helps a country realise actually, here we go, the miners are a real deal. That’s a kind of a cultural force for good.

Matthew Gordon: No, I thought it was very interesting way to do it. Because normally you read, it’s the same old thing, you know, we built a school, it was great, built a school but then walked away. We built a well and then walked away. But there’s a kind of, there’s a real kind of legacy component to it. I really, really liked it. I thought it was a very attractive way of doing it and enabling the mining community, because you are opening it up to other mining companies in the region and the country to be able to tell and sell the same story.

Merlin Marr-Johnson: There’s one quite cool thing: Ecuador played England in a world cup match in the nineties.

Matthew Gordon:  I remember. Yes.

Merlin Marr-Johnson: And the goalkeeper, the Ecuadorian goalkeeper from that game, he is actually from a town near us and so no, it’s not one who got shot. I think that was a Venezuelan or a Colombian?

Matthew Gordon: The Scorpion, the guy who did the scorpion kick.

Merlin Marr-Johnson: No, that’s a Colombian, with the dreadlocks. I think he died, unfortunately. But the Ecuadorian goalkeeper who played against England, lives in the town local to us, a couple of communities away, which has traditionally been a very anti-mining town. He has joined Los Mineros as our coach and also as our goalkeeper, and he’s really interested in mining. So, it is a, it’s a nice kind of full circle thing. He’s is an ex-national player, playing for Los Mineros. I think he’s in his forties now.

Matthew Gordon: Okay. So, so old. So old.

Merlin Marr-Johnson: So old, right?

Matthew Gordon: Well, we better get back to how you’re going to make money for shareholders, because one of the things I talked about earlier was this liquidity issue, which I think is problematic for small companies where lots of shares are held by management or insiders, or even large institutions in some cases and they are not, they are not fully traded. What are you going to do about that?

Merlin Marr-Johnson: Well, what can you do? All you can do is tell the story, get out there and deliver results. The only two things you can do, communicate what you’re doing and the value proposition. And you can get out there and return results. So, that’s what we have got to do, and we will be drilling at Rumiñahui later this year. We will be pulling samples and maps and targets out of MACRA, the VMS project in the South. We’re applying for new licenses. We have got our eyes on, because we’re Ecuadorian, we have got our eyes on some of the best ground in Ecuador, and ongoing projects, ongoing work with our joint venture things. But what I haven’t said is that El Domo is the one that’s going to Feasibility that’s the VMS, but Adventus are also drilling a couple of big porphyry targets and they will be drilling those this year. So, we have got that funded drilling that will also generate value and results for us later this year. So, we have got five or six projects which we will be drilling this year, or advancing this year, plus the main one which is just going through to feasibility.

Matthew Gordon: Okay, Merlin. Well, I think we’ll leave it there because I mean, like I said, we have done a ton of this analysis or appraisal of your company. It was really just a case of helping us kind of wade away through the many, many South American junior explorer stories which we get on our desk every day. And this did stand out for all the right reasons. I think, like I said, I do think my concern is like if people are interested in you, it’s going to be difficult to get hold of shares because there is not that selling going on. So, I’m looking forward to seeing some of these results and if they are going to make a difference in the market in terms of these catalyst events. I’m looking at your face. Do you think they will?

Merlin Marr-Johnson: Can I just chip in with a couple of extra comments? One is that the risk-reward profile of exploration companies is always quite scary. You hope that they are going to find something but you’re never sure that they are going to. The kind of the value proposition that I see in Salazar Resources are that we have already found something and it’s not in the price and it’s marching up that value curve as it goes towards production. So, we know that the share price for Salazar is going to gradually reflect that stake in El Domo. It might take six months, it might take a year, but the value is much closer to USD$1 than it is to $0.20 and that is the kind of return that you want to be looking at as an investor over a year or two. And then we have got the kind of the spice, or the excitement of this great exploration portfolio with a team of proven geologists who know how to operate in Ecuador in one of the most fertile geological districts in the world. You know, that gives you the real excitement on this exploration story.

Now, when it comes to liquidity and can you buy the shares? The company has been listed for 13-years. It’s got 50% of the shareholder register, which is very tightly held, but the other 50% has been relatively, perhaps relatively tired, having held it on for a number of years. Liquidity will come, you know, get out there in the market, bid for a hundred thousand dollars worth of stock and you’ll see that the liquidity will come. It might not be at $0.17, but it might be at $0.25. The key thing is that I’m pretty sure that liquidity will be there, and as you approach the right valuation point, that liquidity will come back. I’ll leave it there. Thanks.

Matthew Gordon: So, we should stay in touch, please, because I think you’ve got a lot of things which are important that are coming up, once we get through this kind of COVID-19, you know, lockdown that we’re in. Like I say, pick up the phone, let us know what’s going on because it’s one of our favourite South American junior exploration stories now. We spent a lot of time on it. And we look forward to speaking again. So great. Thank you very much.

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The Salazar Resources Ltd company logo

Salazar Resources (TSX-V: SRL) – A Smart Business Model That’s All About Making Money

Salazar Resources
  • TSX-V: SRL
  • Shares Outstanding: 127M
  • Share price C$0.19 (29.04.2020)
  • Market Cap: C$24M

These days, everyone’s got big ideas. “Become an established Tier-1 producer within 5-years,” “build up the gold Resource to 5Moz and then get taken out by a major,” “blow the market away with high-grade exploration,” and “deliver value through the drill-bit.’

However, an idea isn’t a plan. We are often told a story by a mining CEO, and it becomes very clear, very quickly: they have an idea, but they don’t have a plan.

If you’re going to pitch an idea to me because you want my money, I don’t just want to hear what you want to accomplish; I want to hear how you intend to accomplish it. If you can’t explain your business plan in logical, achievable steps, I’m not interested. CEOs seem to find it very easy to promise investors the world, but they are usually much less adept at explaining a systematic process for achieving returns. There’s a reason for that: some CEOs are learning on the job with your money, some are making it up as they go along, some don’t have a clue what they are doing, and some are knowingly designed as a lifestyle company.

Salazar Resources

A company that most definitely doesn’t fit into this lacklustre bracket is one we have interviewed recently: Copper and Gold Explorer Salazar Resources (TSX-V: SRL).

Director, Merlin Marr-Johnson, was able to effortlessly break down the steps that he thinks will lead Salazar Resources to the top of the mountain: becoming a meaningful South American copper-gold-zinc player.

Merlin-Marr-Johnson, Director of Salazar Resources
Merlin Marr-Johnson has really impressed us

We recently spoke with Marr-Johnson for another interview to follow on from our last conversation with him in December 2019.

We’ve previously written an article about Salazar Resources on the Crux Investor website. For those who haven’t had the chance to give it a read, Salazar Resources is an Ecuadorian mineral exploration company. The company is led by CEO, Fredy Salazar. Salazar is a renowned geologist and ex-Newmont team leader in Ecuador. He has been exploring and discovering major copper-gold assets in Ecuador for over 20-years.

El Domo Curipamba

We’ve previously discussed with Marr-Johnson how the company farmed out its first copper-zinc-gold asset, the El Domo Curipamba VMS discovery, in a JV with Canadian miner, Adventus Mining (TSX-V: ADZN).

It looks like an astute move. A PEA conducted for the asset demonstrates an economically viable resource…

What the the key figures?

  1. Measured Mineral Resources for El Domo total 1.4Mt grading 1.92% copper, 0.37% lead, 3.52% zinc, 3.75 g/t gold, and 58 g/t silver.
  2. Indicated Mineral Resources for El Domo total 7.5Mt grading 2.02% copper, 0.26% lead, 2.81% zinc, 2.33g/t gold, and 49 g/t silver.
  3. Inferred Mineral Resources for El Domo total 1.3Mt grading 1.52% copper, 0.20% lead, 2.25% zinc, 1.83 g/t gold, and 42 g/t silver.

The numbers are great on paper; most mining executives would probably leave it there. Marr-Johnson isn’t most mining executives. He was keen to get into the details of Salazar Resources’ partnership with Adventus Mining.

  1. The company is fully carried for 25% at El Domo.
  2. Salazar Resources receives US$250,000 in advance royalty payments (up to a limit of US$1.5M). The Ecuadorian miner also receives additional recurring management fees of over US$350,000pa, and will also lease out their 3 drills.
  3. Adventus has a 75% option on project, obtained by funding CAPEX of US$25M over 5-years.
  4. Exploration activities of the Alliance are carried out by Salazar on a cost +10% basis.

The FS will be completed in 2022 for El Domo Curipamba. In the meantime, Marr-Johnson explains there is some metallurgical work on the ore body still to carry out, though much of it is finished.

Salazar Resources intends to be in production by 2024. If you’re an optimist and want to go along with what Adventus is saying, production could possibly begin in late 2023.

We like that Salazar has the geological knowhow to seek out promising copper-gold resources, then get other companies to foot the bill. It’s a de-risked, substantiative and methodical plan. We like it a lot.

Adventus-Salazar Exploration Licence

Adventus Mining works with Salazar Resources on several other projects as part of the Adventus-Salazar Exploration Alliance. Salazar Resources looks to have secured a great deal.

Commodity diversification is something I value highly. If a company is reliant on the performance of a single commodity, risk is enhanced. Salazar Resources has managed to mitigate risk by adding zinc to its copper-gold formula. The Ecuador-wide variation of the Alliance covers all zinc targets. It also covers some additional specific projects:

  1. Again, as part of the Adventus-Salazar Exploration JV, Salazar Resources has two addition exploration licences, both for copper-gold porphyry exploration targets with epithermal gold/silver veins: Pijili and Santiago.
  2. Salazar Resources has a minimal financial burden on either project. It has no obligation to fund activities. As part of the agreement, Adventus must provide 100% of development and construction expenditures until a construction decision is made.
  3. You can read more about these two smaller ventures on Salazar’s website.

Aside from the alliance, Salazar Resources has an impressive portfolio of 100%-owned concessions/exploration licences:

  1. Rumiñahui – a 2,910ha exploration licence (2 concessions) held 100% by Salazar Resources that hosts copper-gold porphyry targets.
  2. Macara Mina – a 1,807ha exploration licence (2 concessions) in southern Ecuador held 100% by Salazar Resources that host VMS targets. 
  3. Los Osos – a 229ha, single concession, copper-gold-silver exploration licence in the Cerro Pelado-Cangrejos mineral district in southwest Ecuador.
  4. Lastly, as previously mentioned, Salazar Resources has a wholly-owned stand-alone subsidiary, Perforaciones Andesdrill S.A, that owns three diamond drill rigs.

Rumiñahui, Macara Mina and Los Osos could provide potential catalyst moments in 2020 and beyond. Exploration is planned for 2020. The difficult decision Salazar Resources will have to make is which one of these projects to focus on, and which two to farm out. We’re sure Fredy Salazar’s geological expertise will come in handy. The plan is clear and concise: identify the best, monetise the rest. Excellent.

All of these projects are at varying degrees of licencing, but they are conglomerating to form a comprehensive portfolio in a country that is regarded by many mining commentators as under-explored and full of potential. When we last spoke to Marr-Johnson, at the turn of the year, Salazar Resources had c. US$5M in the bank to continue exploration and the possible addition of further licences.

Nothing Is Perfect – Any Red Flags?

So far, I’ve been very impressed with Salazar Resources’ business plan. The leadership also appears to be top-notch. However, there are a few concerns I’d love to see the company address.

Ecuador – Slow And Steady Wins The Race?

Ecuador isn’t a mining jurisdiction with an enormous amount of history.

While this brings with it a wealth of exploration potential, there are some shortcomings, particularly in the permitting department. Ecuador is currently modifying its mining code. As a consequence, the permitting process, including water permits and environmental permits, is slow.

This perhaps explains why Salazar Resources has been relatively slow to deliver on its exploration plans for the last 18-months. These permitting issues are Ecuador-wide, and there is little Salazar can do other than control what it is able to control. We have no doubt the management will position the company effectively despite permitting hitches.

Ecuador – Social Issues

Many of the mining companies we interview have societal issues to contend with in their respective mining jurisdictions, and it appears Salazar Resources is no different.

There is a presence of anti-mining, populist sentiment in parts of society, with occasional vocal protests taking place.

However, the much more important thing is the attitude of the national administration. The Ecuadorian government itself is actually very pro-mining. This should stand Salazar Resources in good stead as it proceeds with exploration this year and beyond.

Liquidity Difficulties

The primary concern for shareholders is that Salazar Resources has been suffering from share price stagnation.

Marr-Johnson spoke very candidly about this: the main issue for the company right now is a lack of liquidity in the stock. Low trading volumes are being driven by a great story failing to resonate in the market. How can Salazar Resources resolve this?

Marr-Johnson was confident that Salazar Resources can get this under control. The company needs to clearly communicate the value proposition in a manner that gets investors up out of their seats and heading towards their nearest broker. The company has been delivering the operational results investors will demand, but now it’s time to get out there and start telling the story.

This situation reminds me of another one of my favorite companies Crux Investor has interviewed recently: Neometals. They have an equally smart business plan but are being hampered by ineffectual storytelling to the market. The reality is that some CEOs are such good salesmen that they can sell you snake oil with consummate ease. Others can actually run their mining company properly. I know which camp I’d rather be in…

Looking To The Future

Investors will now be interested in Salazar Resources’ plan going forward; in particular, what will Salazar Resources do with its remaining US$3.5M in cash?

The Ecuador National Flag

Exploration for growth on Salazar’s 100%-owned portfolio appears to be the current priority. As previously mentioned, these operations could create the catalyst moment the company is crying out for, and turn this diligent and smart Ecuadorian miner into a copper-gold-zinc winner.

There is plenty to like about mining in Ecuador and an awful lot to appreciate about this business model. Let’s hope Salazar Resources can deliver for investors in 2020 because I have faith in the team and the model. Now, this needs to be reflected in the share price.

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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.

I <3 geology, I <3 Ecuador

In June 1991 I was unlocking my bicycle after my last first-year exam in geology at the University of Manchester when a bubbling surge of happiness stopped me in my tracks and made me look up and smile and just take it all in. I couldn’t believe that I had gone through my life until then without knowing what I had been taught in my first year of geology. It had opened my mind to new concepts of time and space, fascinating processes of rock and mineral formation, and also of how geology had influenced human activity through millennia. It had been a revelation, hard work, and a lot of fun. For me, the study of the science of the earth had shone a light onto politics, economics, the environment, climate change and of course the role of mineral deposits in the development of man. As I stood there, bicycle lock in hand, I thought how amazing the world was, and how much I loved this subject that I had come across by chance when I had mistakenly started an engineering degree.

Twenty-nine years later I am happy to say that my love of geology is still there. While the digital age thunders on, with apps and memes, full of ideas on a high-tech future, full of concerns about sustainability and climate change, geology is as relevant as ever and it still captures my imagination. As it was in my revelatory moment back in Manchester, so it seems to me that many of the key issues of the age are met in the exploration and development of mineral deposits. Is this too gushing¸ a case of hyperbole?  I argue that it is not an exaggeration, and that a look at the extraordinary events in Ecuador will help you share my appreciation.

The Ecuador national flag

Ecuador has it all. All of the issues, all of the challenges, all of the opportunities and all of the natural resources it might need to make a transformation. And I see this on a daily basis as I am a director of Salazar Resources, a proudly Ecuadorian Gold-Copper exploration and development company.

Ecuador is a traditionally socialist country that until recently had economic policies that deterred foreign direct investment in the mining sector. In 2007 the country trumpeted its eco-tourism and promoted a green economy, which was all well and good, apart from the fact that the country soon ran out of money. And in a dollarized economy (since 2000), printing is not an option which just leaves borrowing, inward investment or foreign export earning as potential sources of US dollars. In 2008, Ecuador borrowed $6.5 billion from China, with repayments partially based in Ecuadorian oil and terms negotiated at times of historic high oil prices.  While the oil price was strong, everything seemed fine, but commodity prices are cyclical and the cycle turns as inexorably as the arrival of taxes and death. Oil prices to 2014 had covered up the multiple sins of an inefficient public sector, large macroeconomic imbalances, and limited private investment, but eventually the oil price fell. As the new oil price reality bit, and growth opportunities in Ecuador (oil, agriculture, tourism) were remarkable by their absence, the government reassessed its attitude towards mining.

Maybe the 2008 moratorium on all mining was overkill? Maybe a subsequent imposition of a 70% windfall tax and mechanisms for 50% national ownership were deterrents on investment? Maybe the rampant illegal mining sector that paid no taxes and was completely unregulated in areas of environmental monitoring safety or any degree of social governance, should be brought under control? Maybe it would be better to have foreign direct investment to build a regulated, responsible mining industry that employs thousands, grows domestic economic capacity, pays royalties and taxes and earns hard currency? Maybe the mining sector in Ecuador should be nurtured not shunned? Maybe the remarkable geological endowment should be used to help build a better nation for the people?

An ineluctable truth emerged. Ecuador needed a modern mining industry to pay for its social and infrastructure agenda.  There were no other options, no other cards to play. And so reform was embraced.  Consultants helped create a plan for the Ecuadorian mining industry that led to bidding rounds by metal and by region, and critically the development of a new mining code.  The government introduced similar conditions to other countries, including incentives such as a fiscal stability agreement, VAT reimbursements and investment recovery before taxes kicked in. The results were astonishing.

A photo of copper-gold ore.
Copper-gold ore

Geology is apolitical, and copper-gold mineralisation doesn’t necessarily stop at a political border. Ecuador straddles some of the most prolific copper-gold geology on the planet and since the dawn of modern mineral prospecting it has experienced negligible systematic exploration. Almost uniquely for a peaceful country there are still walk-up large-scale high-grade deposits sitting at surface. When the government signalled it was serious about developing a modern mining industry, the world’s resources companies responded.

Almost overnight, Ecuador became a global mining investment destination. Foreign direct investment (“FDI”) surged to more than $250 million per year in 2017, with a projected $1 billion per year for the next four years. Over 200 new mining concessions were granted in 2017, accompanied by investment commitments of nearly $500 million of exploration expenditure in the first four. Since 2018, twenty-eight internationally renowned mining companies have established entities in Ecuador to pursue investment opportunities. Not only that but in 2019 two billion-dollar investments were completed, and the country now has two well-regulated, carefully monitored mines, employing thousands of local people, and generating vital foreign exchange earnings by producing copper at Mirador, and gold at Fruta del Norte.

Unsurprisingly there has been a backlash to this level of activity. A prominent anti-mining activist Carlos Perez has changed his name to Yaku Perez (Yaku is the Quechua word for water) and is vehemently opposed to foreign investment in the Ecuadorian mining industry, even though he turns a blind eye to the devastatingly destructive illegal mining in the country. Yaku regularly calls for referenda on the future of mining projects in Ecuador and he will continue to delay and obstruct the industry where he can as he persists in his argument that Ecuador should be pro-water and anti-mining. Incidentally, most professionals in the mining industry are supporters of clean water, responsible employment, wealth creation, the sustainable supply of vital raw materials and are not supporters of water pollution, environmental degradation, dangerous working conditions, tax evasion and all of the problems associated with illegal mining.

Another factor is that the population of Ecuador is split between those wanting jobs and those experiencing a very human resistance to change. What does a large mine entail? Will dastardly miners raze mountains, and bury villages under toxic waste? Some fear the rapid introduction of a new industry; others have the luxury of working closely with some of the many in-country professionals and learning first-hand about the industry. Suddenly the Chamber of Mines in Ecuador went from a clubby outfit to needing to assist the government and a population learn about the role and importance of a well-regulated mining industry in society.

Predictably, some of the mining companies gamed the system. Companies bid to spend $250 million on a single exploration licence (a ludicrously large amount) over four years, only to load the vast majority of the spend into Year 4 and then make it conditional on material success in the under-funded years 1-3. Companies committed to investing multiples of their market capitalisation in early-stage exploration within a 4-year period. Stuff and nonsense perhaps, but given that it seems easier to find a near-surface deposit in Ecuador then other parts of the world, many companies were enable by the vagueness of the new mining code to put placeholders on title in the rush.

Stunned by the whirlwind of real and promised FDI, protest referenda, the arrival of most of the major mining companies, and by the general pace of events, the government closed the Mining Cadastre in 2018. The commitment to a modern mining industry is as strong as it has ever been, supported by public pronouncements, progressive changes to process and structure within the mining ministry, and of course, the stark reality of ongoing national budget deficits. But it was a case of too much too quickly. The cadastre is still closed as the government is redesigning the mineral title permitting process to make the exploration expenditure more accountable, transparent and digital. No new licences have been issued for eighteen months and although in that time wrinkles in environmental permitting and water use permitting have been ironed out, there has been a knock-on delay in exploration activity. It does mean, however, that those companies that already have a licence portfolio are at an advantage over new entrants looking to build a presence in-country.

Which brings me full circle, to that moment when I was standing outside the exam hall in Manchester so long ago. The study of the science of the earth continues to shine a light onto politics, economics, the environment, climate change and of course the role of mineral deposits in the development of man. I am just as excited and fascinated by the interdisciplinary nature of my subject as I was as an undergraduate, and each of those competing and complimentary aspects are manifest in the gloriously complex reality of the mining industry today in Ecuador.

Companies, such as Salazar Resources, that already have mineral title to explore have a wonderful opportunity to continue the discovery journey (discovery of an economic resource is always much more of a process than a single moment in time). Community relations and environmental stewardship are critically important, and those enterprises that can bring its local and regional population along the discovery journey with them will succeed where companies that fail to engage, encourage, and educate its neighbours will face protest and delay. The government understands the vital developmental and economic role that a responsible mining industry offers and it is working as fast as it can to create the framework for that industry to grow, and yet it is weighed down by the responsibility of having to make decisions now that will have long-lasting effects. It is no exaggeration to say that the fate of the nation depends on it. The officers and directors of companies that I know are genuinely excited about the positive transformation that a single well run mine can make to individuals, families, a community, a region, and the contribution that it makes to nation-building in a relatively small economy. And within it all there are the pure geologists among us, thrilled at the prospect of being part of a team that will make the next big discovery and bring vital commodities for our future needs to market.

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Salazar Resources (TSX-V: SRL) – The Very Model of a Major General

  • TSX-V: SRL
  • Shares Outstanding: 126.48M
  • Share price CA$0.21 (21.01.2020)
  • Market Cap: CA$26.56M

I am concerned, when interviewing a CEO, if they are unable to clearly articulate their business plan. Call it an elevator pitch, call it a sales pitch, call it what you like, but if you, as a CEO, cannot tell me in less than 2 minutes what separates your business from the crowd and how I am going to make money, you’ve lost me; big red flag planted firmly in the ground and I am onto the next opportunity.

My other bugbear is when I think I am being misled or the CEO is avoiding answering the question directly. Very few people are smart enough to hide the childlike tells. The furtive look, the eyes searching into the distance hoping to find inspiration to be magically plucked from the air and the awkward squirming in their seat. Non-verbal communication and reading body language in all walks of life is important and accounts for so much of how people see you.

Sometimes it can be fun to set a trap for the CEO: ask a difficult question to which I already know the answer and see how the CEO responds. If it is a mistruth or even a small misdirection, I now know I cannot trust this individual to report properly. Another big, and in this case, terminal red flag.

We tend to begin our diligence from a standpoint that places the burden of proof on CEOs: we will not be giving you our money. It is their job to tell me why I am wrong and why I should. I’m looking for faults in their argument. It doesn’t take much, and I’m off. It’s my money. There are thousands of ways and places I can invest it, so why take a risk?

That brings me to Salazar Resources.

Salazar Resources, an Ecuadorian exploration company, has appointed Merlin Marr-Johnson as Director. A mercurially fabulous name! I’m already intrigued. We spoke to him. Mr. Marr-Johnson is British, very British, and demonstrably intelligent. We set about our task of finding reasons not to invest.

A black and white portrait photo of Merlin Marr-Johnson.
Merlin Marr-Johnson, Director of Salazar Resources

The first thing Marr-Johnson talks about is their business plan. They are gold-copper project developers in Ecuador and Colombia. They have just farmed out their first gold-copper-zinc asset, the El Domo Curipamba VMS (Volcanogenic Massive Sulfide) ore deposit discovery. The PEA conducted at the site shows an economically viable resource.

So, here is the clever bit. Salazar received a royalty payment, courtesy of an ongoing partnership with Adventus Mining Corporation. Adventus has the option to acquire 75% interest in the project by funding initial costs of US$25M over five years; they must provide 100% of the development and construction expenditures up to commercial production after the completion of a PFS (scheduled to be conducted in 2021). Salazar Resources earns US$250,000 per year in advance royalty payments up to a limit of US$1.5M. As operator, Salazar receives an additional 10% management fee (on some expenditures), standing at a minimum US$350,000 annually. Salazar also has the option to lease out 3 of their drills and is fully carried through at 25% with no additional capital outlay needed. Salazar Resources currently has c.$5M in the bank and with this additional reoccurring income and low overhead, Marr-Johnson believes that their exploration programme for this year is fully funded. Marr-Johnson takes time to apply a formula for investors to consider how to value the deal with Adventus. It’s reasonable and not wildly out of line with our numbers. So far, so good. I’m still listening.

Salazar has four other 100% interest options; three are in the form of Ecuadorian gold/ copper/VMS assets with exploration licences: Rumiñahui, a 2,910 hectare exploration licence that hosts gold/copper porphyry targets; Macara Mina, a 1,807 hectare exploration licence that hosts VMS targets; and Los Osos, a 229 hectare exploration licence that features a system of gold/silver veins, combined with hydrothermal breccias and mineralised gold/copper porphyries. Salazar Resources also holds 100% interest in a drill company, Perforaciones Andesdrill S.A, that owns three diamond drill rigs.

A diagram of a VMS deposit.
A VMS deposit diagram

Each asset is at a different stage of exploration or development, and each asset has had differing levels of mapping, soil geochemistry and rock-chip sampling conducted. However, when he spoke to us, Marr-Johnson provided some reasons for confidence. Salazar, in the shape of CEO and ex-Newmont in-country team leader, Fredy Salazar, has a ‘proven track record of discovery in Ecuador.’ In addition, the mining jurisdiction of Ecuador is seen by some to have a huge degree of untapped potential. The major mining companies have flooded into Ecuador in recent years, so there is clearly truth in Johnson’s claims regarding the unexplored nature of the geology. Ecuador could have a lot to offer for investors looking to invest in a region in its mining infancy.

We like the gold/copper/VMS side of the story, but the options keep on coming. Their joint venture with Adventus Mining Corporation was originally intended as a zinc exploration alliance. Adventus Mining was offered a stake in zinc-rich assets but instead opted for two different copper-gold (with some silver veins) sites: Santiago and Pijili. Adventus possesses 80% ownership but is required to fund all activities until a construction decision is made on any project.

So, what does this mean for investors?

Salazar Resources is funded for 2020: no dilution anytime soon. We like the look of their cookie-cutter approach to developing their portfolio of assets with minimal cash burn. If they can continue to replicate the Curipamba farm-out model, the numbers start to look very attractive. There is scale to this project. Marr-Johnson was keen to point out that Salazar does want to develop some of their own projects too.

A robust and, more importantly, refreshingly honest appraisal from Marr-Johnson. So far, no red flags, but this is mining. We are waiting for news on the water permit before we get too carried away, but if that comes, Salazar Resources is something that we can see ourselves investing in.

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

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.

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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