Salazar Resources was highlighted as the featured investment in the MJG partnership’s mid 2019 investor letter. We first initiated our position in SRL in April 2019 and today have a cost basis of roughly C$0.17 per share. The past six months have again been light on substantial news flow, which is largely a function of a nationwide backlog on water permits for exploration drilling and a three-month Covid-19 lockdown. Even in light of these challenges, the Salazar share price has continued to re-rate higher due to the significant number of catalysts expected by year end.
The first of these catalysts pertains to the development stage Curipamba Project where Salazar has a 25% free carry to production. Salazar’s partner Adventus Mining (OTCQX:ADVZF) is a credible group backed by shareholders such as Altius Minerals (OTCPK:ATUSF), Greenstone Resources, Wheaton Precious Metals (WPM), RCF, and the Nobis Group of Ecuador. In late June, Salazar announced that a regional exploration drilling program is set to begin shortly at the project – with drill mobilization expected in September or October. The size of the drill program will be results driven, but it’s safe to say that the program will consist of a minimum of 3000 meters with the potential to go up to 10,000 meters if the Curipamba technical team likes the results. The focus of the program will be the Sesmo Sur and La Vaquera targets. With this program, Adventus is looking for additional upside beyond the PEA-stage El Domo deposit (which on its own boasts excellent economics).
At its current share price, Adventus carries a market capitalization of roughly C$150m. Most if not all of this value stems from its 75% stake in Curipamba. Were the market rational, it would seem that Salazar deserves at least a ~C$50m valuation (one-third of the Adventus valuation) for its 25% ownership of the project. Salazar currently sports a ~C$35m fully diluted market cap which indicates that the company is undervalued for its stake in Curipamba alone. Adventus plans to announce a Feasibility Study for Curipamba’s El Domo deposit in late 2021. If the upcoming drill program encounters excellent results elsewhere on the Curipamba property, it is possible that this study will be delayed. That would be a good problem to have for shareholders of both companies.
In early June, Adventus and Salazar announced that they would also be drilling Pijili and Santiago – two earlier stage projects distinct from Curipamba. In the case of these two projects, the ownership split is 80% Adventus and 20% Salazar – with Salazar free carried through a production decision.
Pijili is a mineralized porphyry directly in line with the Rio Blanco porphyry (owned by the Chinese, ready for production, struggling with social license to operate) and the Chaucha porphyry (undergoing late-stage evaluation by SCCO). Over the past two and a half years, Adventus has spent US$2.7 million defining drill targets at Pijili. Results to date have been promising, including a channel sample of 42 meters grading 0.44% copper, 0.14 g/t gold, 0.012% molybdenum and a chip sample of 26.7 meters grading 0.77% copper, 0.32 g/t gold, and 0.020% molybdenum. Two drill rigs are currently turning at Pijili, and the partners expect that a minimum of 5000 meters will be drilled by year end.
Drilling will start at the Santiago Project in southcentral Ecuador in Q4 2020. Santiago is primarily a porphyry target, though there is also epithermal potential at the project. This project has seen drilling in the past, and the historical results are quite impressive in today’s terms – with hole FUD-01 intersecting 323 meters of 0.65% CuEq and hole FUD-02 intersecting 268 meters of 0.70% CuEq. The partners anticipate that a minimum of 3,000 meters will be drilled at the property by year end.
Salazar also has a stable full of 100%-owned properties, which I view as free upside at the company’s current valuation. The primary asset is the 2,200 hectare Ruminahui property in the north of the country on the Cascabel (OTCPK:SLGGF) and Llurimagua (Codelco) trend. Fredy Salazar recognized the potential of the area 20 years ago, impressed by high grade samples and intense alteration. After 15 years of community liaison Salazar Resources has only just managed to gain a written agreement with the locals to enable systematic work to be carried out. The project has the potential to be a major new discovery.
The company plans to drill two of its other 100%-owned properties by year end. At Los Osos, which has never before been drilled, preparations are underway with a 3000 meter program set to commence in August. In this program, company plans to test the depth-extent of gold-copper mineralization that is visible at surface in porphyries and hydrothermal breccias. Assays from this program can be expected by year end.
In parallel with the drill program at Los Osos, the company plans to advance the Macara license area in southern Ecuador. Macara hosts the potential for buried volcanogenic massive sulphide (VMS) deposits with gold caps at surface. The project has undergone mapping, soil geochemistry, and rock-chip sampling in previous field seasons. The next step is gravity geophysics (a proven tool for VMS discovery) prior to drilling. The program at Macara is expected to be roughly 3000 meters – with drill assays due in Q1 2021.
An additional catalyst is the expected reopening of the Ecuador Mining Cadastre, which has been closed for the past two and a half years. Salazar has a number of applications for new mining concessions sitting at the mining cadastre ready for review, some of which are for areas uncontested by other bidders and are known to host promising geology. The company is confident that, once the cadastre is reopened for business, Salazar will be granted these uncontested, and possibly other, new concessions to add to its land position in Ecuador.
I’ve provided below the Salazar milestones that can be expected over the coming eighteen months. We can expect to see drill results from no less than four different properties (Pijili, Santiago, Los Osos, Curipamba) by year end.
- Reopening of Ecuador Mining Cadastre by end Q3 2020
- Drill results (5000m) at Pijili by end Q3 2020
- Drill results (3000m) at Santiago by end 2020
- Drill results (3000m) at Los Osos by end 2020
- Drill results (3000m minimum) from exploration drilling at Curipamba by end 2020
- Drill results (3000m) at Macara by end Q1 2021
- Drill results at Rumiñahui by end 2021
- Feasibility Study at Curipamba announced by Adventus by end 2021
Salazar remains well-financed with a working capital position of ~US$2.5m. The company also expects roughly ~US$1m in net income for 2020 from advanced payments, management fees, and drill rig rental income. This puts Salazar in the enviable position of theoretically being able to finance its two drill programs on 100%-owned properties without having to raise a cent. After a frustrating twelve months of permitting and COVID-related delays, these next six months are set up to be the most consequential period in the company’s thirteen-year history.
Disclosure: I am/we are long SRLZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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