Salazar Resources (SRL) - Ecuador Upside as Drilling Starts

September 28 2020, 11:57 GMT+01:00

Salazar Resources (SRL)

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

Salazar Resources is a TSX-V listed exploration, project-generated company. It is an Ecuadorian company. Very Ecuadorian; the entire team is based in Ecuador, and Freddy Salazar is one of Ecuador’s leading geologists. They have 6 projects, 3 of which are fully carried by Adventus and 3 of which are 100% their own exploration licenses that they are drilling. They are hunting big Gold and Copper targets in Ecuador.

The Salazar team has been involved with many discoveries in Ecuador, including Curipamba (Adventus Mining and Salazar Resources), Fruta Del Norte (Lundin Gold), the Mozo deposit, Cangrejos (Lumina Gold) Rio Blanco (Junefield Mineral Resources and Hunnan Gold), and Gaby (ENAMI). Salazar Resources aspires to be Ecuador's leading project generator with the right partners at the right time making the company self-funding.

Salazar Resources has an agreement with Adventus on the Curipamba VMS discovery, whereby Adventus can earn 75% of the project by funding exploration and development expenditures of US$25 million before October 2022. A feasibility study is expected to be completed during 2021, after which Adventus is required to fund 100% of the development and construction expenditures to commercial production. In addition, Salazar Resources has a funded exploration alliance with Adventus on two other projects, Pijili and Santiago, within a defined Area of Interest. Salazar Resources is advancing its 100% owned Rumiñahui, Macara, and Los Osos projects with the aim of making Ecuador's next significant copper-gold discovery.

We Discuss:

  1. 0:53 - Company Overview
  2. 2:44 - Project with Adventus Mining: Process, Upside, & Timeline
  3. 5:36 - Red Flags: Water Permits, Mining in Ecuador, Social Licenses
  4. 10:24 - Adventus' $35M Raise: Allocation of Funds
  5. 12:13 - Salazar's Projects: Business Plan & Model Going Forward
  6. 21:17 - Re-Opening of the Mining Cadastre
  7. 23:17 - Barriers & Solutions; Ecuador's Anti-Mining Stance
  8. 26:30 - Loosening the Tight Share Register

Matthew Gordon: We’ll give people new to the storyline one-minute overview and then we’ll pick it up from there.

Merlin Marr-Johnson: I’m the Executive Vice President of an exploration company called Salazar Resources, a TSX-V company, market cap USD$35M.  We’re an exploration company really focused on creating value and positive change through discovery in Ecuador.  It’s an Ecuadorian company by heritage, we’ve got a team of probably the best, Ecuadorian explorers with an extraordinary track record of discovery.  We’ve found, probably, seven out of the ten most advanced projects in Ecuador.  Not all in Salazar resources but one of those we have made the discovery within Salazar Resources it’s called the Curipamba deposit, it’s a highly valuable VMS project that we’ve worked up from grassroots discovery, through to a resource status and we’ve farmed that out and we now have a carried interest, all the way through to production.  25% interest on an asset which is worth USD$300M - USD$400M metal price.  Our carried stake on that is close to USD$100M and USD$70M - USD$100M versus our market capitalisation of 35, so essentially what we offer as a company is a de-risked approach to exploration in Ecuador.  We’ve got the best team; we’ve got a great understanding of Ecuador and you’ve got full exposure to the upside on the 100% owned exploration portfolio that we have in this company.

Matthew Gordon: When can you sort of expect to see some sort of upside benefit to that particular component?

Merlin Marr-Johnson: You say we’re not in control of it, but we’re still very much involved throughout the process.  It’s our team on the ground, we earn management fees from doing the work, our ecological team, our social team and, in fact, what we’ve seen in Ecuador is that you have to get the social side of the business absolutely right.  You can destroy value by getting it wrong and it’s not just being an Ecuadorian that makes the difference, it’s actually really knowing what to do and how to handle it.  The project is in Bolivar State which is the most anti-mining province within Ecuador and there have been many companies that have failed to manage to operate in Bolivar Province. 

Several companies in the past have actually tried to get in, been kicked out by the locals and Salazar, through Freddie Salazar and his kind of genius touch for this, has managed to, not only, work but actually succeed in-country.  So, one of the key things of working with Adventus is that we’re really driving the social programme as well and we’ve got the ecological team as well and we earn the management fees from that.  We probably get … well we get about USD$600,000 a year of income from Adventus and that project is at the … it’s going into the feasibility stage; we’re doing some in-fill drilling now.  We’re doing about 6,000m of in-fill drilling and we’re also doing about 10,000m of expansion drilling around the edges of the existing resource on the border project area.

Matthew Gordon: Have they got enough money to develop this thing out?  How do you benefit?  The upside is really in developing this asset so, where are they?

Merlin Marr-Johnson:  They’ve just raised CAD$35M, so, they’re well cashed up and the plan was to complete the feasibility study in 2021. We’ve had a six-month delay because of coronavirus and water permits.   That’s now pushed out into the middle of 2022, but the plan very much is to march this towards production.  Within 2-years we should have a completed feasibility study on this and a mining permit and at that point, you’ll really start to see the full value accruing through to Salazar.

Matthew Gordon: You mentioned water permits, one and two doing business in Ecuador.  Should I be worried about either of those?

Merlin Marr-Johnson: Business in Ecuador, absolutely not.  Progress is being made.  The government have completely committed to developing the mining industry.  It needs to as a financial imperative.  To fund its Social Infrastructure Programme, to fund its budget deficit it needs to continue the progress that’s been made in recent years.  Every signal that the government makes is about supporting that, about the mining industry being a core part of the economy. I would say don’t worry about that, although I should also say that there’s a presidential election coming up in the second week of February next year.  Now, why that is not a real risk is because the mining sector in Ecuador is now apolitical.  It’s such a crucial part of the economy and the government is so committed to receiving foreign direct investment, foreign exchange earnings, job creation and tax revenue from the mining sector, that whether you are radical left-wing, centrist or right-wing, you’d actually need the mining sector to pay for all of this.

Matthew Gordon: Tell me why I should not be concerned because Freddie’s got it all under control on that front.

Merlin Marr-Johnson:  Social licence operators is an on-going thing.  You can’t not look after it for six months’ or weeks’ or a year.  It’s an on-going process.  It really helps that we are Ecuadorian.  Salazar Resources is incredibly well respected within Ecuador.  Adventus Mining has brought in Nobis Group as a shareholder and they are a well-respected business conglomerate, so, at every level, Salazar Resources and Adventus are not just doing the right things but being seen to do the right things.  There’s a funny anecdote that there’s a nationwide anti-mining organisation within Ecuador, championing, trying to stop mining across Ecuador and their representative in Curipamba where we have been for the last 13-years, spent two years trying to drum up local resistance to the mining idea and he had to leave after two years because he couldn’t get any traction with the locals.  I mean, I could easily go into detail about the football teams, about all the local initiatives but really I think it’s a key thing to realise that we’re absolutely focused on making sure that the social licence is no impediment to the development and the economic progress of Curipamba or any of our other projects.

Matthew Gordon: You look at the recent Rio Tinto story, which is out in the press, are you aware of that?

Merlin Marr-Johnson:  I am, yes. 

Matthew Gordon: I do get concerned that companies do have the social licence to operate and if they don’t, I think it could be problematic.

Merlin Marr-Johnson: I think it’s very easy to have your social licence or your community, your CSR programme as a box ticking exercise.  To feel, oh this is the … there’s the movement towards enhanced ESG, we’ve got to be warm and fuzzy and let’s go and hug a tree and hold hands with the protestor and, therefore, everything will be all right.  In a sense, those are soft issues, but it feels very different for Salazar Resources.  Remember that this is an Ecuadorian company, it’s from an Ecuadorian heritage and this isn’t just an exercise in cosmetic, it’s not a cosmetic programme, this is their people.  One of the reasons Curipamba was found, was because our chief geologist was from the local community and had always wondered what the geology was.  This is in their backyard, so, there’s a hard edge to the economic rationale behind having your social licence to operate that we fully understand.  But more than that, it’s actually part of our DNA and our culture.

Matthew Gordon: CAD$35M raised. What are they going to be doing with that?  How much drilling are we talking about?

Merlin Marr-Johnson:  There has been a 5/6-month delay.  We’re just about to go back into Curipamba and be drilling.  We’re looking at about 16,000m of drilling there on Curipamba.  What I haven’t mentioned is that we’ve also farmed out two Porphyry exploration projects to them.  We are carried 20% on those all the way through to a construction decision.  So, a drill out of a Porphyry ten of millions of dollars and several years of studies, we don’t have to invest a cent, but we actually get paid for that.  We get a management fee for doing their geology and they’re using our rigs, so we generate earnings from the drilling.  We’ve already put out announcements that on one of those, Pijilli, drilling is underway. 

We’ve intercepted sulphides, we’ve intercepted the right kinds of geology, assays haven’t come out yet and the plan there is to do a 7,000m programme first and, obviously, one hopes that that would lead into a second programme.  For the sake of arguments, double that, you’ve got 14,000m there and you’ve got 16,000m at Curipamba, looking at a 30,000m programme, and then Santiago which is the third project which is another large Porphyry target that we carried on, that will be drilled in 2021.

Matthew Gordon: How are you going to advance those projects?

Merlin Marr-Johnson: It’s probably worth saying that we’ve got … at the end of June, we had CAD$2.8M in the bank, we earn USD$600,000 as a minimum from management fees and advanced royalties from Curipamba alone.  We get additional management fees from the other projects Pijilli and Santiago and there’s this question where I get quite a lot of questions from shareholders about the drilling revenue.  We’ve got this subsidiary and this drill that’s 100% owned, we’ve got three drill rigs, is that going to generate a million dollars, two million dollars on an annual basis?  This year we’ve had to invest a bit more than we wanted, in terms of the kind of refitting it so this year it’ll be a wash, the money that we earn from the drilling contract in this year will payback for the investments, but next year it could be generating a million or so, in terms of earnings to the company. 

So, that’s kind of the financial situation that we’ve got enough money to do kind of, the full programme that we’ve got for the next months which is drilling at Los Osos, geophysics at Macara and ongoing mapping and sampling at Rumiñahui.  Now, why is Los Osos interesting and when are we going to start?  Los Osos is a licence that was picked up by our Chief Geologist and he was the main geologist behind the Cangrejos discovery, which is 70Moz of Gold sitting in an open pit just to the north of our Los Osos licence area.  So, he did all the mapping, he did all the sampling, he drilled the first 22 drill holes and, actually, he felt that the highest grade area was to the south-west and, in fact, we’ve got some historic drilling just to the east of our licence which Newmont drilled and they’ve put in a 156m which returned 2.6g/t Gold and 0.2% Copper. 

Then just to the north of us, Challenger Exploration reported 146m at 1.5g/t Gold.  We know that there’s almost kind of like a feeder structure, there’s a high-grade grain going from the north-east of our licence area radiating through our licence area and we’ve got a very strong Gold and Copper anomaly that we’ll be testing with hydrothermal breccias. Our guys have been all over it, we’ve sampled it, mapped it, been underground at some of the artisanal workings, we’re very excited about this drilling programme. Then in the south of the area, we’ve got a slightly metamorphosed, slightly weaker signs of mineralisation so Copper, Gold, Porphyry we’re putting some holes in that. 

The plan is to do a 5,000m drill programme on Los Osos, dividing into two phases.  First of all, the first five holes, review what we’ve got and then push on with the second and we hope to be announcing that imminently in the sense of the detailed drill plans and the start of the mobilisation of the drill rig, we’re not there yet but all of our rigs are busy with Adventus.  We are actually trying to locate … well, we have located a drill rig, it’s just a question of mobilisation date that we’ll be able to announce.

Matthew Gordon: Remind me about the model going forward here. 

Merlin Marr-Johnson:  We’ve got a pipeline of other projects and, in fact, in Ecuador, the reason why the world is interested in the reason why BHP, Newcrest, Lundin Gold, Fortescue, you name it, they’re all rushing into Ecuador it’s because this is the one place in the world where you can find tier-one global assets at the surface and we have done that.  We have identified a Porphyry which is sitting at the surface, it’s got Gold mineralisation in the upper zones which have been worked by artisanal then you come down into the Porphyry and you’ve got a superb anomaly over a kilometre long and we applied for that ground a couple of years ago and it was uncontested, no-one else applied for it. 

The government is currently processing 77 historic applications, and this is one of those and a couple of others.  One, funnily enough, in conjunction with Adventus so their portfolio, with us, will grow from three to four and ours will grow at least from three to four projects, including this Porphyry, so.  The government has said they want to get those processed before the election which is in early February.  We hope it’s going to come through before the end of the year and our portfolio will expand.  Our strategy is to review the four that we’ve got, work them up the curve a bit through low-cost geochemistry and geophysics, possibly phase one drilling and smart geology and then farm out two or three or four of those so that we can preserve treasury, maintain carried interests.  But in this market what we really want to do is we want to take our best project and drive it on a 100% basis further up the curve. 

Matthew Gordon: Do you know what the best project is going to be?

Merlin Marr-Johnson: No.

Matthew Gordon: Right.  They’re all so good.

Merlin Marr-Johnson:  They are all good, and the reason we like them so, Los Osos that we’re just about to drill, we’ve commissioned the team so where can we get 100m of 1g/t or 50m at 2g/t and they said Los Osos is where we can do that with the greatest certainty.  That’s where we with the lowest risk project.  And that’s great, but, Cangrejos to the north 70Moz, it is a sub-one gram ore body and we’d like a plus 2g/t ore body so, does Osos have the grade, we’re going to find out soon enough with the drilling.  I mean even if we get 100m at one gram, it will still be a fantastic result.

In the south, Macara, the VMS target, it’s got a beautiful Gold cap on it and the analogue is just over the border in Peru and that has 7Moz at 3g/t sitting in Oxide at the surface.  We’ve got these two beautiful anomalies with up to ten grams in soil and 30g in rock chip and we’re just about to go through a geophysical programme which will highlight the potential or we hope it will highlight the potential for buried Sulphide bodies, which again, the analogue in Peru is they’ve got 300Mt at 1% Copper 1g Gold. So, that is a superb target.  Now we’ve applied for the ground around our licence area so if we can expand it, that would be great, and that’s one of the 77 licence areas that we hope the government will release before the end of the year.  So, I certainly wouldn’t like to do a deal on that before we’ve drilled it because I think that that’s a tremendous package or project. 

Then up in the north, in elephant country where you’ve got Llurimagua which is a billion tonnes at 0.9% Copper equivalent, and you’ve got SolGold with their 3.6Bt pushing 4Bt 0.5%.  We’ve got the Rumiñahui project, Freddie Salazar has been tracking this project for 20-years, he really likes it, it’s at a very early stage of analysis.  We hope to get it to the point where we can drill or generate drill targets in 2021 but we’re not sure yet, that might be suitable for farming out, who knows.  Then of course the new Porphyry project that we hope to be bringing in.  Remember, this is generated at zero costs pretty much by us.  It’s a direct application to the government.

Matthew Gordon: How are things on the ground at the moment?

Merlin Marr-Johnson: The Mining Cadastre is expected to open, as I’ve said, by the end of this year.  We can’t guarantee that it’s going to happen.  The Minister of Mines or the Vice Minister of mines, Fernando L Benalcázar, held the position for a couple of years and then there was a change in the Energy Minister, and he stepped away for about 6-months last year.  He came back in again when there was another change in personnel and he has committed to, Fernando L Benalcázar has committed to making sure that those 77 licences are being processed by the government, they get issued before the end of his current term which is going to be at the end of January.  So, he’s also signalled that those licences will get processed before the end of this year.  We had also heard that they were going to be ready by September, October. 

A couple of our guys in our team used to head up the Mines Department on a kind of technical level, like a civil service level, they were Directors of the Mining Department and their protégés are now the current heads of Mining Cadastre so we speak to them on a regular basis.  We know that the government is sorting through those 77 permits asking everybody, are you committed, do you still want to apply for those licences that you wanted to apply for, and they’ve almost finished that process.  We hope that we get those licences through in the next couple of months.  It would be great.  I think the country needs it.  But if it’s during January, then it’s during January.

Matthew Gordon: These water permits at Macara and Rumiñahui, have you heard of any issues around those?

Merlin Marr-Johnson:   Water permits in Ecuador is kind of an emotive and a complicated matter.  In fact, water is one of the emotive things and the chief opponent to mining in the country who has said that if he gets into power, he’s running for president and he’s got a very slim chance of winning, he has said if he gets into power he will ban all mining and he changed his name from Carlos to Yaku which means, in the local Quechua language, it means water.  He’s saying water, not mining.  He doesn’t have a very large support base, but it is an emotive thing in Ecuador.  In fact, last year the head of the Water Board put a political appointment who was very linked into this kind of, anti-mining group.  Then we had this ironic situation in the middle of last year where Fruta del Nore one of the great developments in the country which was going to generate so much benefit for the country was actually being blocked by the lack of a water permit. 

What happened was the government took this underhand, they replaced the political appointment for the Water Board with a mining engineer and suddenly lots of water permits were processed.  Then, the next step of streamlining the water permit issuance was to merge the Water Board with the Environmental Agency, that has taken place.  Coronavirus hit, you’ve got elections coming, so actually now in those two departments, people aren’t sure what’s happening.  After a huge amount of progress last year, there’s actually a little bit of a delay this year and you have to get a … in your environmental clearance, you have to show that you’re not going to pollute the watercourse and you also need to get a permit to extract water. 

Now, what we have got through our areas is we have got the sign-off and the certificate of non-affectation so we’ve got the environmental clearance to do the drilling programmes under the Scout Drilling Permit Law in Santiago, Pijilli, Los Osos; we haven’t applied yet for Macara and we haven’t applied yet for Rumiñahui.  What we don’t have yet in some places, is the ability to extract water from exactly where we are using it so in some places we have to track water in and this is what … this is the workaround that several other exploration companies are doing in Ecuador at the moment.

Matthew Gordon: The trucking solution. why haven’t you applied at Macara or Rumiñahui yet?

Merlin Marr-Johnson: Because at Macara we are doing the geophysics first, we want to find out where we want to drill and how many holes to do, and at Rumiñahui we haven’t got drill targets yet, so, we’re still on the pre-drill phase there.

Matthew Gordon: Share register.  How does that situation improve and what are you looking to do to help people access your shares?

Merlin Marr-Johnson:  It is tight, we’ve got 25% held by the Salazar family and probably another 6% or 7% held by directors and employees.  The Arlington Group picked up 10% to 15% and placed out some large blocks of shares, so there’s probably another 20% to 25% there so you’re talking about 55% which is very tightly held with the Arlington Group out of London and a few funds and directors and management, and the rest is retail.  The company’s been listed since 2007 so there is a long history of retail involvement.  I think the liquidity will improve on two things, one is when we start putting out regular news flow on our own projects and the market capitalisation closer reflects the value that we have in the 25% stake in Curipamba. 

Because, at the moment let’s say that stake’s worth USD$60M or USD$70M today, our market cap is 35 so people will still think, well why would I sell it at a discount to the carried stake and you’ve also got all this exploration in for free as well.  If we can put out some regular news flow through drilling which we hope to be doing over the next 3-4-months, I think that will help.  The other thing is I’ve just come off the Precious Metals Summit, the Beaver Creek Virtual Conference, and we’ve heard several times from US investors that they’re struggling to buy shares so we’re looking into an OTCQX, sorry OTCQB listing.  We looked at it last year, it didn’t feel as if the time was right.  We’ve pretty much got buy-in from the directors and so we’re pushing ahead with that and once we’ve got a formal timetable of when this might happen, I’ll be able to put out the news release.

Matthew Gordon: Thanks for the update.  Since we started talking to you, the share price has practically doubled, you’ve got a way to go and I agree with you, if you can start actually putting out your own results on your own projects.

Merlin Marr-Johnson: Great, thanks very much.

Company Website: https://www.salazarresources.com/

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