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Salazar Resources: DEEP DIVE
OVERVIEW

Salazar Resources shows it’s possible to make exploration a value proposition, even in these tough equity markets

Salazar's exploration efforts are supported by a consistent income stream
Salazar Resources shows it’s possible to make exploration a value proposition, even in these tough equity markets
OVERVIEW: SRL The Big Picture
The company is targeting gold as well as base metals

It’s a torrid time for exploration companies, or at least that’s what they say.

But a quick look at the share price graph for Salazar Resources Ltd (CVE:SRL) shows that at the current C$0.18 the company is on the cusp of a four year high.

Admittedly, there was a run up to C$0.17 back in 2017, and then again in 2018 so the new high can hardly be called a breakout. Nevertheless, it does give the lie to the commonly held notion that the equity markets have little or no appetite for junior exploration companies. 

Quality assets, quality team

So what makes Salazar stand out?

The obvious first answer is the quality of the assets. The company owns a portfolio of highly prospective gold and base metals exploration properties in Ecuador and Colombia, of which the most advanced, Curipamba is joint ventured out to Adventus Zinc Corporation (CVE:ADZN).

The second answer is that the team behind Salazar is highly experienced in the region, and boasts a considerable track record of success.

“The founder is a guy called Fredy Salazar,” explains Merlin Marr-Johnson, Salazar’s director, corporate development.

“He’s one of Ecuador’s best geologists. The footprints of him and his wing men, Pacho Soria and Carlos Moncayo have been on many of the big deposits discovered there.”

It was Fredy, Pacho and Carlos who discovered Curipamba, which now boasts nearly nine million tonnes of ore and which is the subject of an ongoing feasibility study. Among the many successes Fredy has been involved with, the standout is probably Fruta del Norte, now owned by Lundin Gold (TSE:LUG), and which boast a probable reserve of over five million ounces grading upwards of eight grams per tonne.

Income stream keeping dilution to a minimum

And the third reason that Salazar stands out is that although primarily an exploration vehicle, it nevertheless does book income of between C$1mln and C$2mln every year from a wholly-owned drilling company that’s able to deploy three rigs, plus a ballpark C$350,000 management fee chargeable for work within the Adventus joint venture.

That sort of regular and reliable income can make a world of difference to a junior miner trying to make its way in an equity market full of investors skittish about dilution. If there is to be an equity raise for Salazar, you can be sure it will be for a very good reason, and not just to pay listing fees and salaries.

The current cash-pile of around C$5mln sets the company up nicely for current and future exploration programmes on projects The team is particularly keen to advance the Rumiñahui project, a gold-copper porphyry target in the same district as the Llurimagua and Cascabel deposits, currently being worked up by CODELCO and Solgold respectively.

Interest from bigger industry players

The portfolio in both Ecuador and Colombia has already been attracting significant amounts of interest amongst industry players, as Ecuador has rapidly moved onto radar screens through a combination of geological endowment and government support.

Ecuador’s Vice Minister of Mines, Fernando Benalcazar, is a prominent advocate of the sector, and plans to grow mining from 1.55% of GDP to 4% of GDP by 2021.

Aspiring junior miners couldn’t help but take note of the tussle which broke out between Newcrest (ASX:NCM) and BHP Group (LON:BHP) for influence at Cascabel once the magnitude of the discovery had become clear. Nor could they ignore the flurry of serious companies that are now active in country include Fortescue, Lumina, Anglo American (LON:AAL), Hancock Prospecting, First Quantum, and Rio Tinto (LON:RIO).

It’s an address that’s flavour of the month, so it’s not surprising that companies are getting in touch with Salazar.

“We have several mid-tiers and majors knocking on our door,” says Marr-Johnson, “because Fredy is well-respected in industry and people want to know what we’re working on, both in Ecuador and in Colombia.”

Focus on further in-house exploration

For now though, with the funding of the Curipamba deposit and exploration on the Santiago and Pijili projects fully carried via the Adventus deal, it seems that Salazar will be keeping the rest of its assets to itself for the time being.

“We’re going to be doing the basic exploration programmes of remote sensing, mapping and sampling, soil surveys, and ground geophysics to develop drill targets” says Marr-Johnson.

“And then we want to drill these properties on a 100% basis, at least to begin with. Several are copper-gold porphyry targets and they could be game changers, so we will take them up the value chain and then think of farming out.”

Drilling isn’t scheduled until next year, so for now Salazar’s suitors will have to bide their time, at least as far as deals at the project level go.

If anyone wants to get in at the equity level though, the current price still offers compelling value, as Marr-Johnson sees it.

That’s because the 25% of the El Domo deposit at Curipamba that Salazar retains looks to be worth between C$40mln and C$75mln by the company’s own estimate models. A recently completed preliminary economic assessment on the El Domo volcanic massive sulphide deposit at Curipamba set a net present post-tax value for the project of US$288mln, albeit at a modest 8% discount.

The post-tax income for the first six years was set at nearly US$450mln, so the returns will be handsome.

Of course, it’s not built yet. But for Salazar to have one foot on this highly attractive near-term development project, as well as cash flow and considerable exploration upside elsewhere, is it any wonder the shares have outperformed? It would hardly be a surprise if they continued to do so.

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