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In the first half of 2019, most of the questions I received from readers involved the gold price and where I thought it was headed. Now, 8 months later and with the gold price surpassing US$1500/oz, the focus of the questions has shifted to the other precious metal – silver.

Silver is often referred to as gold on steroids, as historically it has outperformed gold both to the upside and downside depending on the direction of the market.  Today, the silver price has eclipsed US$18.50/oz and, at this rate, may even surpass US$20/oz by the end of 2019.

The factors driving the silver price are closely related to those driving gold, mainly the FED lowering interest rates, the talk of further QE, negative interest in Europe, the turmoil surrounding the U.S. and China trade war, and the ever-increasing list of financial calamities around the world.

Additionally, silver has a component of industrial use, which I think is the added driver of its volatility.

The rising silver price has brought with it a large amount of speculative cash which is flowing into many of the junior silver companies. Reviewing my watch list, many of these companies are up by huge amounts, mostly for no reason other than they offer perceived leverage to the silver price.

It’s the classic buying of junior resource companies because of a bullish outlook for a metal. This mentality in the junior resource sector, while it may bring short-term gains, will ultimately lose money for investors over the long term.

Junior resource companies are speculations on management’s ability to execute on a well thought out plan, which aligns with their overall vision for the company. If people can’t execute, it doesn’t matter where the metal price goes, the metal will either not be discovered or developed into a mine – period.

Today, I have for you a company which is led by good management, has roughly $3 million in cash, a high potential flagship asset – Diablillos – which has an existing M&I resource with around 140 Moz of silver equivalent, a portfolio of Chilean projects ready for JV, and a great plan to bring value to shareholders.

This company is the newly proposed AbraPlata Resources, which is expected to announce a definitive agreement regarding a merger with Aethon Minerals very soon.

Let’s take a closer look.

Merger – Aethon Minerals and AbraPlata Resources

Earlier this year, Aethon announced that they had struck a deal which would give them the exclusive right to perform technical due diligence, over a 5 month period, on AbraPlata Resource’s Diablillos silver-gold project in Argentina.

For this exclusive right, Aethon paid AbraPlata US$50,000 and agreed to spend at least US$150,000 on expenditures in connection with a metallurgical testing program and other related test work.  At the end of the 5 month period, Aethon could then acquire a 50% or greater interest in the project.

Five months later, Aethon and AbraPlata announced that they had agreed in principle to a merger of the two companies, creating a new junior with a great flagship asset in Diablillos, a portfolio of JV ready projects in Chile, and around $3 million in cash.

Additionally, I think it’s important to point out that the merger signals that the money Aethon spent on testing the deposit’s metallurgy must have returned good results or this merger wouldn’t be happening. A HUGE plus for both sets of shareholders, because it’s one thing to own a deposit, but without the economic ability to liberate and concentrate the mineral, it’s worthless!

NOTE: In accordance with the merger agreement, AbraPlata will issue 3.75 shares for every share of Aethon. At the time of writing, there is an arbitrage opportunity in owning Aethon shares, which are selling at a discount to the deal.

I fully expect to see the announcement of a definitive agreement in the coming days, and would expect the transaction to close before the end of the year. 

Aethon Minerals (AET:TSXV)

MCAP – $6.3 million (at the time of writing)

Share Price – $0.23

Shares – 27.6 million

FD – 46.3 million

AbraPlata Resources (ABRA:TSXV)

MCAP – $6.7 million (at the time of writing)

Share Price – $0.075

Shares – 96.7 million

FD – 131.5 million

People

In early 2018, Altius Minerals spun out a portfolio of its Chilean projects into Aethon Minerals. For those who don’t know, Altius is focused on the mining and resource sector through prospect generation, and the creation and acquisition of royalties and investments.

Over the course of my investing career, I have learned that to make money consistently, it’s of the utmost importance to identify and invest in the best people. I believe it’s a given that Altius has a keen interest in the success of the newly formed AbraPlata Resources and, therefore, with the appointment of Aethon’s interim CEO as its leader, John Miniotis, I believe it speaks volumes about his abilities and future in the mining business.

AbraPlata will be Miniotis’ first crack at being a CEO, but he certainly isn’t a newbie to the industry, as he has over 14 years of experience, previously working at AuRico Metals, Lundin Mining and Barrick Gold, as well as roles in equity research with BMO Capital Markets and Wellington West Capital Markets.

Miniotis is technically supported by Chief Geologist, David O’Connor, who is currently based out of Chile. O’Connor is a veteran of the industry with over 40 years of experience, founding or co-founding 5 publically listed companies, discovering the El Espino deposit in Chile, leading early exploration for Western Mining Corp. at the Olympic Dam deposit, and Chief geologist of Peko-Wallsend in Australia.

Additionally, with the merger of the two companies, a new Board of Directors will be announced. Right now, we know that current AbraPlata interim CEO and Director, Rob Bruggeman, will become the Chairman and the remaining seats will be broken down as follows: two directors nominated by AbraPlata, two directors nominated by Aethon, one director by SSR Mining and one director nominated by Altius Minerals.

This should prove to be very good for the new company, as this should ensure that there will be good representation on the board with people who have creditable mining experience in Argentina and, most importantly, in-depth knowledge of their flagship Diablillos Silver-Gold Project.

With the support of Altius and the financial backing of Sprott Asset Management, who is also a major shareholder, the newly formed AbraPlata has all it needs to be a success in the future.

Diablillos Silver-Gold Project

• 2018 PEA: After-tax NPV@7.5% – US$212 million, After-tax IRR of 30.2% at US1300/oz gold and US$20/oz silver.
  • 6,000 tpd open pit mining operation, producing 9.8 Moz AgEq per year
  • Open pit estimated initial CAPEX US$293 million, includes US$91 of pre-stripping cost
• 2017 Historical Resource – 140 Moz @ 161 g/t Ag Eq or 1.7 Moz @ 2.0 g/t  Au Eq at spot prices
• Aethon successfully completed, pre-merger, extensive testing of the Oculto deposit’s metallurgy, ensuring that the PEA results are representative of the entire deposit, not just a specific zone.
• SSR Mining is the original vendor of the project and supports the transaction and has agreed to delay property payments of US$5 million and US$7 million by four years (see March 1^st press release). I expect further detail of the payments to SSR to be given at the time of the announcement of the definitive agreement regarding the merger.

Last week, I discussed the potential of the Oculto deposit expansion with Miniotis and O’Connor. O’Connor highlighted some of the high grade core associated with breccias zones, where high grades have been intercepted over broad widths in historical drilling.

Interestingly, reviewing some of the historical results, you can see that these intercepts have some really good high grade hits.  A few of the highlights are: 98.5m of 861 g/t silver and 3.98 g/t gold, 27.7m of 2,192 g/t silver and 0.45 g/t gold and 54m of 2,292 g/t silver and 0.46 g/t gold.

This is especially great because, in our discussion, Miniotis brought up the possibility of changing the mine plan from open pit to an underground operation, which has the potential to dramatically drop the initial CAPEX cost needed to bring Diablillos to production.

Upon completion of the merger, priority number one for AbraPlata will be to establish continuity between these intercepts, at a drill spacing where they can be added to an updated resource calculation. Miniotis expects the drill program will cost roughly $1 million, making it easily affordable with their cash position.

The second priority will be to explore some of the satellite breccia deposits, which sit within 1 to 2 km of Oculto and could be potentially mined in a future production scenario.

In my opinion, there’s a clear path to improving the NPV of Diablillos in a big way and, most advantageous, is investors really don’t have to wait that long to get an idea of how much better the project economics will be.

Chilean Project Portfolio

The newly formed AbraPlata will own 100% of a large prospective land package, totalling over 100,000 ha in northern Chile. The land package includes the Arcas Copper-Gold Project, Maricunga Gold Project and the Peineta Gold-Silver Project, which all sit in close proximity to some of the most prospective ground in South America.

Each project is ready for JV with a partner and I fully expect to hear news of a new partnership before the end of the year.  The prospect generator model is great way to mitigate risk in the mining industry, and for a company like AbraPlata, who has a focus on their flagship Diablillos, any JV partnership is like icing on the cake, as the partner is on the hook for the exploration funding.

Currently, this aspect of the company has been overlooked by the market, but I expect that to change quickly in the weeks ahead.

Chile and Argentina

Jurisdictional risk is everywhere; no matter where you look, there’s always a chance that your money will be lost due to some country or region’s political calamity.

In saying this, I do think that certain countries come with a higher probability of an investor realizing a loss in their investment due to their chaotic state.

The newly formed AbraPlata Resources has projects in Chile and Argentina, two countries which, besides sharing a border, are very different in terms of their perceived mining investment risk profile. Currently, Chile is considered one of the best places for mining investment; the Fraser Institute which ranks countries in terms of their mining investment attractiveness gave Chile a score of 84.90, placing it 6^th in the world.

Given this, I don’t think that we have to go into much detail about the merits of Chile and why I believe it’s as good as it comes in terms of mining jurisdictions.

While Chile ranks very high, Argentina on the other hand has been riddled with issues over the last 20 years, from 2001’s $100 billion sovereign debt default, to the controversial two term presidency of Christine Fernandez de Kirchner from 2007 to 2015.

Here’s a brief summary of some of the most contested issues during her reign:

• Heavy government spending in social programs by both Nestor Kirchner (President 2003 to 2007) and his wife, Christine (President 2007 to 2015).
• In 2012, Argentina’s congress nationalized Repsol’s (a Spanish oil company) portion in the national energy company, YPF. Kirchner defended the move by stating, “it failed to boost oil and natural gas production needed to keep up with local demand” (Reuters).
• Nationalized private pension funds, known as “Las Administradoras de Fondos de Jubilaciones y Pensiones (AFJP)” (Wiki).
• Kirchner fostered relationships with China, Venezuela and Iran.
• Nisman Allegations – Kirchner and Argentine Foreign Minister, Hector Timerman, were allegedly involved in a plot to cover up Iran’s role in the 1994 bombing of the Amia Jewish Community Centre, in which 85 people were killed. Alberto Nisman, who was investigating this bombing, made the allegations against Kirchner and Timerman.  Days after the allegations, Nisman was found dead in his apartment.
• Raised taxes on exports, which the government later overturned, due to mass protests.

Mauricio Macri defeated Kirchner in Argentina’s 2016 Presidential election and was widely regarded as the man to turn Argentina’s economy around. While he didn’t stir up as much controversy as Kirchner, he has had his own issues trying to turn around Argentina’s economy.

Today, Argentina sits with higher levels of poverty than four years ago, a Peso which has dramatically devalued against the US dollar, and now an upcoming election which could see the return of Kirchner, albeit in a Vice President’s role to Presidential candidate, Alberto Fernandez, who just recently won the primary election, called PASO (Primarias Abietas Simultaneas y Obligatorias).

PASO allows parties that receive at least 1.5% of the vote to participate in the general election on October 27^th, 2019.

Fernandez hasn’t won yet, but the results of the PASO election put a lot of doubt on Macri retaining the presidency. The possibility of Kirchner having any political influence given what happened during her past terms as President is a great glimpse into the culture of Argentina.

I have said it before, cultures take hundreds of years to change and, while they may appear to be better in the short term, rarely is it ever sustainable, as the society’s true colours will always show.

So what does this mean in terms of investment in Argentina?

First and foremost, no doubt there’s risk associated with this potential change in government leadership, as left-leaning political ideology has a long history of being bad for a country’s economics.

Given Kirchner’s history, I’m sure many investors may be concerned with the possibility of the government nationalizing the Diablillos Project. However, I think that there is very little chance of that happening at this point, because of where the project is in its development.

Bottom line, Diablillos is at least a couple of years away from this becoming a mine and, by that time, we should have a better idea of how much of a threat the Argentine government might be.

Salta Province

One other note; all of the discussion, thus far, has centred around the politics at the federal level, however, it’s arguably more important to focus on how mining is viewed within the specific Argentine province with which the project is located, as there’s a lot of variation among them.

Diablillos is located in the Salta province, which is in the northwest portion of the country. Salta has a long history with mining, with a variety of metals being mined across the province. The most famous, because of the battery metal craze, may be Salta’s lithium brine mines, which are a part of the world-famous lithium triangle.

Thus, Salta is known for being supportive of mining and have provided a framework in which permitting applications are expeditiously vetted.

Further, amongst the political turmoil at the federal level, senior mining companies such as First Quantum have continued to put money into Salta. In 2014, they acquired the Taca Taca Project for roughly $500 million; not a small amount of money.

Finally, with all things considered and you contrast the political risks against the upside potential in the newly formed AbraPlata,  I think the political risk associated with Argentina is acceptable.

Concluding Remarks

AbraPlata Resources presents an attractive investment proposition as demonstrated by its MCAP; the investor has a high potential for success versus the risk associated with the company.

Here’s a summary of AbraPlata’s upside potential:

• Good management – supported by Altius Minerals, SSR Mining and Sprott Asset Management
• MCAP is currently valued at roughly 10% of 2018 PEA on Diablillos
  • After-tax NPV@7.5% of US$212 million, After-tax IRR of 30.2% at US1300/oz gold and US$20/oz silver
  • Indicated Resource – 80.9 Moz @ 93.1 g/t silver and 732 koz @0.84 g/t gold
  • Potential to improve NPV through resource expansion at depth and along strike
  • Potential to drastically reduce initial CAPEX by changing the mine plan to an underground operation

• No value given to its Chilean Project Portfolio – Arcas Copper-Gold Project, Maricunga Gold Project and Peineta Gold-Silver Project – All are JV-ready opportunities.
  • The prospect generator business model has the JV partners fund the exploration of the projects – drastically reducing the risk associated with exploration.
  • If you consider that many prospect generators, albeit with JV partners in place, have, in many cases, MCAPs of CAD$30 million alone, AbraPlata’s current value proposition is very good.
• Roughly $3 million in cash

No investment is without risk, including an investment in AbraPlata. Given the upside potential that I see in the company, however, especially in a rising precious metals environment, I believe AbraPlata is in for a dramatic market re-rating once the merger is complete.

I’m an owner and will continue to be a buyer of AbraPlata on weakness in the weeks ahead, as they set forth on what should be an exciting fall of exploration at Diablillos.

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I have NO business relationship with any of the companies discussed in this article – Altius Minerals, Aethon Minerals, AbraPlata Resources. I do own shares in Altius Minerals and Aethon Minerals.

Gold continues to march its way upward, breaking US$1,500 /oz and setting all-time highs in numerous other currencies, including the Canadian and Australian dollars.  While this is music to the ears of the gold producing companies around the globe, the rest of the world is bracing for turmoil.

Tensions in Asia have hit new highs with the protests in Hong Kong appearing to escalate. Hong Kong’s airport has been shut down, and the Hong Kong people have taken to the streets waving the American flag and singing its anthem; a sight I wouldn’t have believed had I not seen the video clips.

China is not only fighting to maintain its control over Hong Kong, but continues to fight the Americans over trade. In my opinion, the longer this goes on, the worse it is for the global economy, as China remains an integral piece of the financial puzzle.

To add further complexity to the global marketplace, the U.S. Federal Reserve cut interest rates by 0.25%, signalling weakness in the U.S. economy. The currency wars continue, as they inch closer to fiats intrinsic value of 0.

While I can’t predict the ebb and flow of any commodity, I think it’s safe to say that the world is, unfortunately, ready for higher gold prices and, with it, we are most likely to see some type of climactic event which will trigger a reset for the global economy.

Now that seems like a gloomy outlook, but on the bright side, while that scenario may be inevitable, it doesn’t mean it’s imminent. Secondly, as an investor, I think you have to ask yourself, ‘how can I profit from a world which is in financial turmoil?’

First off, I should rephrase my question, as it most likely isn’t a case of how to profit, but more how to maintain what you have, given the circumstances.

Buying physical precious metals is definitely prudent and, given the attention high gold prices bring to the precious metals companies, investment in the best junior resource companies should prove to be very profitable.

In my opinion, equating future high metals prices with investment in junior companies is a recipe for inevitable failure, however, given that the majority of the market works this way, I expect to see irrationally high junior company valuations in the not-too-distant future.

Last week, I visited 3 junior gold companies that are all situated in close proximity to Val d’Or, Quebec. For those who aren’t familiar with this area, Val d’Or is famous for its historical gold production, as this eastern portion of the Abitibi Greenstone Belt has produced roughly 70 Moz of gold throughout its history.

All 3 companies appear to give the investor good risk to reward potential, in a gold market which is just starting to heat up.

Let’s take a closer look at the details of my trip.

Enjoy!

Day 1 – Osisko Mining’s Windfall Project

For all intents and purposes, the Osisko story starts back in 2004 with the acquisition of the Canadian Malartic site. Founders, John Burzynski, Sean Roosen and Robert Wares, used an innovative geological analysis model to analyze Quebec’s publicly available geological data (SIGEOM). The data revealed that the Canadian Malartic site had the potential for an open pit mining operation, which prompted the team to acquire the site.

Seven years after acquisition, in 2011, Canadian Malartic poured its first gold bar, and 3 years after that, it was acquired in a friendly transaction by Agnico Eagle and Yamana Gold.

Today, Osisko Mining, the company run by this mine-building team, is focused on developing the Windfall Project, which is located in the Abitibi Greenstone Belt between Val d’Or and Chibougamau in Quebec.

On August 6^th, via helicopter, I had the chance to visit Windfall. Here’s a breakdown of what I saw while on site and a few notes on the direction of the company as they push toward the completion of 1,000,000 metres of drilling.

Osisko Mining (OSK:TSX)

MCAP – $965.7 million (at the time of writing)

Shares – 273.2 million

Cash – $300 million in cash and cash equivalents

First, that isn’t a typo, Osisko is at or quickly approaching 1 million metres of drilling on Windfall. If their 3.5 km exploration hole, aptly named ‘Discovery 1,’is successful, there may be even more to come, as the deposit potentially just got a lot bigger.

3.5 km is an incredibly long hole, the longest that I have ever heard of in hard rock exploration, and I believe this is a reflection of the team which is driving the development of Osisko. Burzynski, Roosen and Wares have a vision of what Windfall could be and aren’t held back by the usual difficulties of junior resource companies – I’m mainly referring to money, here.

Osisko has raised around $400 million dollars over the last 4 years through charitable flow through financing. Charitable flow through is raised at a premium to the market share price. In Osisko’s case, the last financing was done at 1.8 times the market price.

The premium is a huge advantage for the company and its shareholders because it’s less dilutive, by almost half, than if they had to raise the cash at market prices.

Discovery 1

Why plunge the roughly $1.0 million, 3.5 km hole into the ground? There are a couple of reasons, and I believe it’s important to touch on them as they speak to the speculative upside potential in the share price.

First, in exploration drilling below the known zones, that is, at depths below 750 m, they discovered the Triple 8 zone, which hit some great intervals of gold, highlighted by 28.3 m of 20.4 g/t Au, 13.7 m of 17.4 g/t Au and 12.5 m of 6.3 g/t to list just a few.

Along with these high-grade gold discoveries, they also encountered andesite porphyry and garnet and biotite alteration, which is associated with high heat, ergo they might be getting closer to the intrusive heat source.

Second, discovering gold mineralization at the bottom of this 3.5 km hole will play a huge role in the layout of a future mine.  Most importantly, it would dictate if and where a shaft would be sunk to most efficiently mine the deposit.

Osisko’s geological model for the deposit is supported by the Triple 8 zone discovery and has clearly given the company’s leadership a good view of the upside potential to justify the risk of coming up with nothing.

Additionally, it should be noted that there are other examples of archean gold deposits that plunge to extremes depth, none further at the moment than Agnico Eagle’s La Ronde mine, which is currently mining at 3100 m vertically below surface.

Discovery 1 has a lot of potential; it could arguably be a game changer for the Windfall Project as there is a chance that this already large gold deposit could get much bigger. In my opinion, the only risk is the roughly $1 million it cost to drill the hole, which, to a team who seemingly is a magnet for cash, doesn’t seem like as big of a risk as it would be to most junior companies.

Bottom line, at the very least, Discovery 1 should provide Osisko’s geologists with plenty of structural data on the very deepest parts of this system and, if they are so bold, will give them a good map for another shot at the prize.

Underground at Windfall

The highlight of the entire site visit tour was going underground at Windfall. It was a first for me and something that I will never forget!

We suited up in our PPE – steel-toe boots, safety glasses, hard hat + ear muffs + head lamp, coveralls, gloves and belt, and proceeded to load up into the truck which would bring us to a depth of 300 vertical metres.

8 of us were in the back of the truck, making it a cozy, hot trip down the ramp, which, I might add, was much steeper than I imagined when we started the journey.

Upon exiting the vehicle, however, it was well ventilated and cool at our first stop, where they happened to be core drilling. Being underground may not be for everyone. Heck, it may not be for me in any capacity except for a 20-minute tour, but I’m really glad I had the chance to do it at least once.

Windfall PEA Highlights

After-tax NPV@5% – C$413.2 million

After-tax IRR – 32.7%

Pre-Production CAPEX – C$392.3 million

Base case at US$1300/oz Au and US$17.00/oz Ag

A PEA on Windfall was completed last summer and released to the market. Currently, Osisko is in the process of completing a Feasibility Study (FS) on Windfall and, I believe, will show a big improvement on the NPV of the project.

One of the reasons I believe there will be an improvement is as follows:

• Removal of the triple cap on grade, which cascades from 60 g/t, to 30 g/t, to 15 g/t on certain portions of the deposit.
  • A 5500 tonne bulk sample of Windfall’s Zone 27 returned a grade of 8.53 g/t, almost 2 g/t more than the 6.76 g/t used in 2018 PEA.
• The Triple 8 Zone was discovered roughly 750m below the surface, extending Windfall’s known mineralization much deeper than the existing resource. As mentioned earlier, not only was high-grade gold encountered, but also mineralization, which indicates proximity to the intrusive heat source for the whole system.
  • I believe a bigger gold resource, while being much deeper, will add to the overall value of the project.

Concluding Remarks

The investment case for Osisko Mining is compelling, as I have a high degree of confidence that the management team will be successful in constructing Windfall into Quebec’s next gold mine. The only questions I have are related to how much upside potential they can create leading up to a construction decision.

As I covered in this article, there are a number of factors that I think will make Windfall more economically appealing in the months ahead, but how appealing will be answered by the drill bit leading up to the end of the year.

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I have NO business relationship with Osisko Mining, nor do I currently own any shares.  However, all of my expenses for the site visit were paid for.

I’m constantly searching the junior resource sector for companies whose share price is trading for less than their value. In January of this year, I became an investor in Amarillo Gold, a junior company which I believe is trading for far less than their value.

A couple of weeks ago, I had the chance to travel to Brazil and see Amarillo’s flagship Mara Rosa Project, which is located in the northwest portion of the State of Goias.

Rafael Silveira, Myself, Frank Baker

The site visit was highly beneficial because it confirmed for me why I’m invested in Amarillo and why I believe it will be Brazil’s next gold mine. My reasons are as follows:

• The Amarillo management team is well suited to moving Mara Rosa to and through construction, as their pedigree reveals a history of developing projects in Brazil. From the CEO to the team located in Brazil, each member has been in the mining industry a long time and has a specific skill set which is applicable to the development of Mara Rosa.
• The Mara Rosa Project is advanced with an updated Pre-Feasbility Study (PFS) completed in the fall of 2018. The PFS revealed an after-tax NPV@5% of $US 244.3 million at $US 1300/oz gold, which means, at the time of writing, with a MCAP of less than $30 million CAD, the company is currently trading at less than 10% of its PFS after-tax value.
• Expansion of the resource – There is a realistic probability of expansion of the Posse Deposit resource at depth and to the northeast. Examining soil sampling, geophysics and historical drilling, the northeast portion of the property looks particularly interesting to me, given its size. Drilling isn’t a priority at the moment for the company, but could spell more upside potential in the future.
• While a controversial figure, Jair Bolsonaro will bring about a positive economic change to Brazil. This is already evident with the pension reform bill which is moving through the Brazilian government’s approval process, as I write. Ultimately, I believe Amarillo’s current price to value proposition is well worth the risk.
• The town of Mara Rosa and its people, from what I could tell, view the construction of the mine positively and look forward to the jobs that it will bring. There are many active and former mines in the northern region of the State of Goias, making it a great spot for development.
• Takeover Candidate – while I believe Amarillo is currently a takeover candidate, I believe that upon the completion of the Definitive Feasibility Study (DFS) it becomes much more appealing to senior or mid-tier mining companies, as the DFS will bring more confidence and validation to the economics of the project.

Amarillo isn’t without risk; I believe there is at least one hurdle which the company must overcome in order to be fairly valued by the market. That hurdle is the metallurgy of the Posse Deposit, which has been a major focus for the company since they purchased the deposit from Western Mining in 2003.

While the mineralization is complex, I believe the company is on track for proving up and optimizing the metallurgical process that is needed to economically extract the gold from the Posse deposit ore.

In my opinion, Amarillo Gold is trading for less than its value. I was a buyer at 20 cents and believe a re-rating in the share price is just around the corner.

Without further ado, a look at why I am a buyer of Amarillo Gold.

Enjoy!

Amarillo Gold

MCAP – $28.8 million (at the time of writing)

Shares – 140.8 million

FD – 185.6 million

Cash – $3.0 million (as of June 30, 2019)

Insider Ownership – 10%

Institutional Ownership – 60%

Bolsonaro’s Affect on Brazil

In the fall of 2018, I wrote an article on Brazil and why I’m optimistic about its future. My thesis was primarily based on, at the time, presidential candidate Jair Bolsonaro winning the election and taking control of the country.

For those who are unaware, Bolsonaro was victorious and is now the President of Brazil.

So now, roughly 9 months later and with the basis of my thesis fulfilled, what do I think about Brazil and its future, now having spent close to a week there? Am I still optimistic?

Determining the answer to this question has been much harder than I would have guessed prior to my trip. I believe Bolsonaro will have a positive effect on Brazil’s economy, because he is seemingly dedicated to minimizing the amount of corruption in the government and to appointing leadership within it based on merit, not to fulfill a favour or bribe. This will have very positive effects.

During my trip, I actively engaged as many Brazilians (who spoke English) as I could to learn about their views of Brazil, mainly where it is as a country and where it’s headed under the leadership of Bolsonaro.

Interestingly, much like Trump in America, Bolsonaro has a polarizing affect on people; they either love him or they hate him. Even some of the Brazilians who said they voted for him, hate him. I found this particularly interesting and wanted to know why.

 Most often, I was told that there wasn’t anyone else to vote for and, bottom line, government corruption has to be reduced for Brazil to be successful.

Of the younger generation, let’s say under 30, I met only one person who thought that Bolsonaro was good for the country. The rest hated him and said that he is going to destroy it as he takes away some of the services and “privileges” that many of the Brazilian people have come to rely upon.

Further, the same younger generation yearns for former President and now convicted criminal, Lula Da Silva, who is currently in jail for his involvement (while President) with Operation Car Wash. In my opinion, this is truly bizarre, but goes to show you that people only see what they want to see.

There is much more to this discussion, but I will leave it here because it’s out of the prevue of this article. My conclusion on Brazil is this; I believe Bolsonaro will have a positive effect economically on Brazil, which, ultimately, should make it a more desirable place to do business during his reign.

What I have seen, however, only strengthens my thought that it takes multiple generations or hundreds of years to change a culture and, therefore, while Bolsonaro will have an impact during his term, it will be minimal and short lived, as I do expect to see a return to a left-leaning government in the future.

With this said, in my opinion, investing within a “risky” jurisdiction is always a matter of a risk adjusted price to value comparison. Meaning, am I getting enough upside potential to warrant investment?

Additionally, remember that there is risk in every jurisdiction, even the ones that are widely thought to be tier 1 locations for mining investment. I will quote Rick Rule, CEO of Sprott U.S. Holdings, who recently said to me,

“Mostly the controllable aspect of political risk is price and probability…I would argue with you right now that the People’s Republic of British Columbia, which is regarded as a superb place for politics, is extraordinarily risky. The BC provincial legislature is a joint venture between the Socialists and the Greens. Not exactly mining’s best friend… Yes, Brazil has a long standing history of formal corruption. I would ask you what the difference between a campaign contribution and a bribe is.” ~

Therefore, with regards to Amarillo Gold, in my opinion, there’s enough upside potential to warrant investment in the company, as it’s currently trading at less than 10% of its updated PFS after-tax NPV of $US 244.3 million.

Amarillo’s Leadership

Amarillo is led by CEO, Mike Mutchler, who is a mining engineer by trade. Mutchler’s experience in the sector relates well to the needs of Amarillo, as he is an experienced mine builder. Most recently, Mutchler was COO of Largo Resources, which built a vanadium mine in Brazil.

Although he hasn’t been a CEO, his skill set and education, in my opinion, should be the perfect recipe for what Amarillo needs to be successful in completing their FS on the Mara Rosa Project and, most importantly, making it Brazil’s next gold mine.

Next, we have Roland Uloth, who is Amarillo’s Executive Chairman. Uloth has extensive experience within the business world, with the last 20 years focused on the mining sector. Notably, Uloth has been a key executive with both River Gold Mines and Wesdome.

Additionally, I think it should be noted that Uloth has been a major buyer of Amarillo stock on the open market, as the SEDI insider buying report is littered with his purchases. According to SEDI, Uloth currently owns over 6 million shares, excluding warrants.

Finally, and arguably the most important member of the Amarillo team at this juncture, is Arao Portugal, who was just officially named Amarillo’s Country Manager. Country Manager isn’t a common position within a junior mining company, but makes complete sense in this case.

Portugal brings a unique set of skills and experience to Amarillo, which I believe are vital to the overall success of the company as they look to attain their final 2 permits – the Installation License (IL) and the Operation License (OL).

There are a few more important players on the Amarillo team: Frank Baker – Metallurgist and Project Manager, Luis Carlos F. Da Silva – Geology Manager, Alexandre Elisel and Rafael Silveira – Geologists.

Mara Rosa Project

The Mara Rosa Project encompasses roughly 60,000 ha and sits just a few minutes’ drive from the centre of the town of Mara Rosa, which is located in the northern portion of the State of Goias.  This region of the State is very familiar with mining, as there are a number of former and currently operating mines in the region.

Most notably is Lundin’s Chapada copper-gold Mine, AngloGold Ashanti and Kinross’ Serra Grande Gold Mine, and Anglo American’s Barro Alto nickel mine, to name just a few. The point is, with these mines being within 100 km, the people of Mara Rosa and the surrounding area are very familiar with mining and the benefits that come with it.

Amarillo’s Main Office and Core Shack – Located in Mara Rosa

As well, given the amount of mining in this portion of the State, infrastructure is good; in particular, power is readily accessible with a sub-station within 4 km of the Mara Rosa Project. The hydro power in this area is supplied by the 450 MW Serra Mesa Hydro Electric dam.

Pre-Feasibility Study Economics

In September of 2018, Amarillo released an updated PFS on Mara Rosa and revealed some very robust economics.

Contractor Mine Scenario

Gold Price Assumption – $US 1300 per ounce

After-tax Net Present Value (NPV) at a 5% discount – $US 244.3 million

After-tax Internal Rate of Return (IRR) – 50.8%

CAPEX – $US 122.9 million

AISC – $US 655 per ounce

Reserves (Proven and Probable) – 1.087 Moz of gold

Resources (Measured and Indicated) – 1.3 Moz of gold

Satellite Image of Mara Rosa Project

In my opinion, the Mara Rosa Project has great economics, with good downside risk protection in terms of the gold price. Robust economics at the PFS stage of development is a really good sign, as there is a higher degree of confidence that the Project can deal with issues that may arise given the rigorous analysis which is yielded by the DFS.

Site Visit – July 2019

My trip to Mara Rosa, Brazil from Toronto was very straightforward. I flew overnight from Toronto to Sao Paulo, which is approximately a 10.5 hour flight. To note, Sao Paulo’s Guarulhos International Airport has seen some great upgrades since I was last in Brazil in 2011. I’m guessing that the 2016 Rio Olympics brought about  this overhaul.

Next, I had a short 2 hour flight from Sao Paulo to Brazil’s capital, Brasilia. Interestingly, after doing a 17.5 hour flight from San Francisco to Singapore in April of this year, I found these flights to be easy!

Brasilia Airport – Domestic Terminal

From Brasilia, a company representative picked me up at the airport and we headed northwest to the town of Mara Rosa, which is roughly a 4.5 hour drive. The drive between Brasilia and Mara Rosa is pretty good considering the amount of heavy truck traffic those roads appear to receive.

Rest Stop Along the Road Between Brasilia and Mara Rosa

Along with the multiple 2 lane highways that head north out of Brasilia, there is also a railway which runs right beside the Mara Rosa Project. Rail is a great way to reduce the amount of truck traffic, however, it sounds like this railway isn’t used to its full extent, which is too bad as it would save the roads and, ultimately, make them safer for commuters.

2011 View from Sugar Loaf Mountain – Rio de Janeiro

My previous trip to Brazil was spent in and around Rio de Janeiro, which is much different than what I encountered in the capital region. Rio is a very mountainous and lush environment, which clearly gets an optimal amount of sun and rain, as it is a veritable jungle surrounding you as you drive into Rio.

Future Mine Site in the Distance

By comparison, the Federal District of Brasilia and the Northern portion of the State of Goias is much different. In terms of topography, it is much flatter, drier and open, with farmers’ fields lining the highways. The region, however, does have a rainy season where the rain fall is very heavy, which allows for the endless farmers’ fields and well-established jungle-like vegetation.

Northeast Corner of the Posse Deposit

NOTE: The area surrounding the town of Mara Rosa is known for its production of turmeric spice. While walking the property, one of the geologists pointed out some turmeric bulbs lying on the ground. There are fields of these plants, their bulbs are harvested, dried and ground into a powder, which is then packaged and sold in grocery stores. Farming is the major industry in this part of Brazil and is what currently drives (economically) towns such as Mara Rosa.

Expansion of the Posse Deposit

As per the 2018 updated PFS, the Posse deposit has 1,087 koz of proven and probable gold reserves at an average grade of 1.42 g/t. While this is great, more ounces would be even better and, given what I saw onsite and reviewing historical exploration data with the geological team, there’s reasonable probability that the Posse Deposit could be extended at depth and to the northeast.

Reviewing some of the past geophysics on the deposit, you can clearly see that the anomaly, of approximately twice the size of the existing deposit, extends out to the northeast. The focus of previous drilling campaigns has been on the main deposit, however, there is historical drilling data on a few holes that have been drilled along the northeast extension.

As you can see in the image above, there hasn’t been much step out drilling, but what has been done has returned some decent hits. I believe it will be well worth the time and money to see if it’s something of significance.

One other note, while an extension to the northeast of Posse would be great, under the current Preliminary License (LP), the seasonal creek that cuts perpendicularly across the strike of the northeast extension would prevent Amarillo from expanding their current pit to include the new discovery.

However, the company does have the option to apply for modifications to their existing LP, which, if they choose to, could include the temporary re-routing of the creek so that this northeast area is available for mining.

Seasonal Creek in the northeast of the property

Tailings Dam

The tragic failure of Vale’s tailings dam in the neighbouring State of Minas Gervais resulted in the death of 300 people. Talking to many mining engineers, the design of the dam that failed has long been known to have some major weaknesses and, thus, in my mind, was preventable.

Moving forward, similarly designed tailings dams can be upgraded to prevent this from occurring again in the future. It sounds like the Brazilian government, however, is going a step further and will announce the banning of all tailings dams in future construction, regardless of the design.

In my opinion, this is a knee-jerk reaction to an issue which is solved through proper engineering and, most of all, the diligence of the companies that operate these mines and tailings facilities. Banning the construction of this integral part of a mine is crazy.

In saying this, there are alternatives to the traditional tailings facilities and, with this in mind, Amarillo’s leadership has decided to proactively pursue one of these alternatives given the potential direction of the Brazilian Government.

Reviewing the location of Tailings Mat Storage

So how does this new approach affect Amarillo’s mine plan and economics? That’s a great question. First off, the company is pursuing a horizontal filtration technology which is proven to reduce the moisture content of the tailings. The end product of the process yields what the company reps were describing as tailings mats.

These tailings mats are still required to be stored in a lined storage facility, meaning the basis of construction for the original tailings dam will still be used to dry stack the mats. The company reps tell me that this change in process shouldn’t cause any issue with their already issued preliminary license (LP).

In all, the cost for the filtration system is roughly $US 10 million in CAPEX dollars and is estimated to require another $US 1 per tonne in operating cost per year over the course of the life of the mine. I haven’t added this new cost to my discounted cash flow model yet, but given the economics of the project, I’m guessing this won’t be a huge issue.

Archeology Testing

Standard practice in Brazil is to conduct archeological studies on the properties that are moving toward construction. This process requires a certain amount of area on a property to be studied for historical significance.

During my visit, a team of archeologists was on site performing the study. For someone who finds these studies really interesting, it was great to have the opportunity to see part of the process in person.

At the dig site I visited, they had just discovered some remnants of bowls and an area which had  been used for fires at some point. In the image below, to the right of the teal pan, the bowl artifacts have been outlined in small white pins. These artifacts will be removed from site and stored in a museum.

While the archeological study is not over, it is expected to have minimal to no impact on the Mara Rosa Project construction plans, which is good to hear.

Metallurgy

As I mentioned in my intro, the metallurgy of the Posse Deposit is most likely the largest hurdle to the success of Amarillo moving forward. I am, however, personally very encouraged by what I see in the testing the company has performed to date, and believe that the metallurgical testing performed for the FS will turn the tide, in terms of how the market views the risk associated with the economic extraction of the gold.

There’s much to cover with regards to the metallurgical processing of the Posse Deposit mineralization, so I’m going to cover this in a separate Part 2 of this article.

Concluding Remarks

Currently, Amarillo Gold is selling at a fraction of its updated PFS NPV, which, I believe, gives an investor plenty of upside potential given the risk associated with the company.  Amarillo’s focus is completion of their DFS, which will pave the way for the remaining permits and, ultimately, the construction of Brazil’s next gold mine.

Stay tuned for Part 2 of my Amarillo Gold Site Visit article, where I will cover the Posse Deposit’s metallurgy and why I believe the company is on the right track to put this risk behind them.

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Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. Currently, I do own Amarillo Gold Corporation stock.

All Amarillo Gold Corporation analytics were taken from their website and press release. Junior Stock Review has NO business relationship with Amarillo Gold Corporation. Amarillo Gold Corporation did pay for travel expenses for the site visit.

For those who didn’t catch my last newsletter, I have been travelling in Asia, specifically Singapore and Hong Kong. In Singapore, I attended and spoke at Mining Investment Asia and, in Hong Kong, I attend Mines and Money Asia.

The trip was fantastic, I’m eagerly awaiting my next trip to east Asia!

More specifics on my trip in the coming weeks, but for now, some thoughts on the market and what I am buying at the moment.

Enjoy!

Thoughts on the Market

Over the last month, readers have continued to ask me where I think the junior resource market is headed and if I think that the adage, “sell in May and go away,” is the mantra that investors should use in 2019.

Firstly, where do I think the junior resource market is headed? Simply, I don’t know, no one does. The stock market is a complex beast with many factors affecting its direction. However, I know that isn’t necessarily the answer most of you are looking for, so I will add some colour, purely for fun and entertainment.

I continue to believe that gold is a must-have insurance policy, because it appears to me that things are only becoming more complex within the global economy. In my opinion, gold remains the best way to protect your wealth as we head toward major monetary changes in the future.

I will add to this; I view a rising gold price with trepidation because, to me, this is signalling a growing uncertainty within the world, pushing us closer to this major change. I believe you must ask yourself, ‘what does the world look like if the gold price is US$10,000 per ounce?’ My guess is, ‘not good.’

In terms of the base metals, I continue to be long-term bullish on their demand as the human race continues to consume goods at an ever-increasing rate. Further increases in demand, however, don’t necessarily mean that the price of the base metals will go up.

If I were to pick a metal that I believe has a good chance of going up in price, it’s nickel. There are a number of reasons why I believe this could happen and, if you want to hear them, please check out my presentation from this year’s VRIC. If you have more in-depth questions, let me know.

Now, for the junior resource companies; for those who have listened to or read my work previously, you will know that I don’t invest in junior companies because the price of the underlying commodity with which the company is exploring is going higher.

By following a mantra like this, it forces you to stick with the best of the best companies and, thus, protects your downside risk. If your stock picks rely on a rising metal price, I assure you it’s only a matter of time until you lose money, because no one can predict where metal prices are headed with any consistency.

Sell in May and go away? Personally, I don’t put much stock into seasonality type theories like this and stick to fundamental analysis to determine my buys and sells in the market. In the long term, I think the vast majority of investors would be much more successful if they ignored market commentary such as this, as again, who can predict the future with any consistency?

Second to that, while many of the junior resource company share prices have fallen over the last year or so, there are many which have stock charts that reflect a much brighter story. The companies which have bucked the trend in most cases are exploration companies, because discovery pays no matter where you are in the cycle.

Additionally, there are some stories which are run by some very talented management teams, and the cream always rises to the top!

Companies I am Buying

Irving Resources (IRV:CSE)

I mentioned Irving in my tax loss buying / 2018 year in review article in December. Irving is 1 of 2 junior companies exploring for gold in Japan and, at the moment, have the drills turning at their highly prospective Omu Gold Project in Hokkaido.

The stock price has doubled since December as a function of the build up for drill results and with the newly announced strategic financing by Newmont. Additionally, Irving has released pictures of the drill core from their first 2 holes.

Along with the pictures they have provided some explanations of what they are seeing in terms of alteration in the drill core, thus far. Check out their webpage for more details.

Personally, I’m really encouraged by what I have seen, especially the results from hole #2, which appears to have hit the top portion of the boiling zone of this low sulphidation epithermal target.

Is it a buy here? I think it depends on your risk tolerance.  Currently, the MCAP is sitting around $100 million, with a portion of that value being derived by the gold they have in the ground in the form of the past producing underground mine within the Omu property.

Besides that, the valuation, from what I can tell, is solely based on the speculative upside potential in this low sulphidation target they are drilling at Omu which, I think, at this point, is warranted.

I bought more stock around $1.70 when I saw the news release with the core photos because I thought they looked very similar to the Hisikari core photos which I had looked at months ago.

For perspective, Newmont bought in at $2.20 a share, but given the size of Newmont and their outlook for what Omu might mean to them in the future, the entry share price isn’t necessarily their primary concern.

For individual investors, however, it can mean a lot, as a miss on the first drill results and the share price will likely be cut in half, especially in this market. In saying this, I believe Irving will give me multiple kicks at the can, even if these first assays don’t return good results.

For those with a healthy appetite for risk, therefore, the current price really isn’t that bad given what the upside potential may be. I, however, would be more comfortable looking for an entry price below $1.90.

Drill core has to be sent offshore for assay, therefore, we are still 4 to 6 weeks away from results, and with this in mind, there may be a chance of weakness in the share price.

FPX Nickel Corp. (FPX:TSXV)

The best bang for your buck in terms of nickel juniors out there. Current share price is at $0.12, and considering the metallurgical optimization on the project and a fantastic solution to their debt issue, there is deep value here.

Check out my articles and presentations to see why I believe the future is bright for FPX.

Maritime Resources (MAE:TSXV)

I was an investor in Anaconda Mining for a long time and believed that the proposed merger of the 2 companies last year would have been fantastic for both sets of investors. That, however, didn’t happen for a number of reasons.

Today, Maritime is under new management and appears to be progressing in the right direction in terms of moving its Hammerdown project toward production.

Recently, they raised more than $6 million dollars at $0.10 toward the development of Hammerdown, with both infill and exploration drilling in the plans.

In October 2017, I was able to visit Rambler Mining’s Nugget Pond mill, which, in Hammerdown’s PFS, is the site for processing its ore (under a tolling agreement). Having seen Nugget Pond’s gold circuit, I can attest to it not being a turn-key operation. Money will need to be spent to bring the gold processing equipment back up to operational condition.

Personally, and this is complete speculation on my part, I think it’s more likely that we will see another attempt at the merging of Anaconda and Maritime.

Appreciation in the share price of Maritime could be a major catalyst for talks, as a merger of roughly equals may be an easier sell to Maritime shareholders this time around.

I was a buyer at $0.09 and see a lot of expansion potential at Hammerdown, with the added bonus, in my mind, that there could be a strategic merger in the future.

Commander Resources (CMD:TSXV)

In my decision to invest in Maritime, I came across the fact that Commander owns a royalty on Hammerdown, which, in my estimation, is worth a few multiples of Commander’s currently paltry MCAP.  Keep in mind that without Hammerdown going to production, the royalty is worth nothing.

In addition, if you dig further into Commander, you will see that they have equity positions in both Maritime Resource and Aston Bay. Collectively, these positions, last I checked, were worth around $800K.

Last spring, Commander completed a $2.5 million financing, which has been burned down to $1.5 million as of PDAC.

At the moment, therefore, you can almost buy Commander for the value of their cash and equity positions, mix in the potential of the Maritime royalty and your downside potential is minimal, in my opinion.

I was a buyer at $0.095.

Aethon Minerals (AET:TSXV)

Currently, Aethon’s MCAP is roughly around their cash value. With news on the horizon, I think there are good things to come for Aethon.

Concluding Remarks

While the majority of investors might decide that they know where the market is headed and sell in May, I’m happily buying companies that are selling for less than their value, and have catalysts towards price appreciation.

A few good articles are coming your way in the coming weeks, stay tuned!

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own FPX Nickel Corp., Irving Resources, Maritime Resources, Commander Resources, and Aethon Minerals stock. I have NO business relationship with of the companies mentioned in this article.