Chilean Metals Inc (CVE:CMX, OTCMKTS:CMETF) – Blue Sky In Chile / Cash Flow From Teck

Palisade Research October 17, 2017
Category: Research

Current Price: C$0.075
Shares Outstanding: 90.8 million*
Market Capitalization: C$6.8 million*
Cash: ~C$1.25 million*
*Post-financing

Chilean Metals has high-risk / high-reward potential in its project Zulema. The project is located just 30 kilometers away from Lundin Mining’s 80%-owned Candelaria project in Chile’s Atacama Province.

In 2016, Candelaria produced over 133,000 tonnes of copper at a cost of $1.20/lb. The copper-gold sulphide mineralization is generally referred to as iron oxide copper gold mineralization (IOCG).

Candelaria is a world-class project, and the world’s second largest IOCG deposit after Olympic Dam in Australia. The open-pit itself contains a reserve of 410 million tonnes of ore, grading 0.5% copper, 0.1 g/t gold, and 2 g/t silver.

The orebody is headlined by low costs, but is very difficult to find as it does not outcrop. In fact, it is overlain by 100-200 metres of barren siliceous hornfels and calc-silicate skarn.

Fortunately, all the smoke is there for Chilean Metals to find another ‘Candelaria-like’ deposit, with drilling already confirming that host rock, alteration and mineralization that fit the IOCG-style model.

Cash Flow On The Horizon

By itself, CMX would be a very high-risk investment. However, the company has mitigated some of the risk when it sold its Copaquire property to Teck Resources for $3.0 million, while retaining a 3% NSR on production. Teck has the right to purchase 1% of the NSR for $3.0 million, something we believe it will exercise.

Teck’s nearby Quebrada Blanca mine adjoins Copaquire. Quebrada Blanca is an open-pit operation that produces copper cathodes via processing in an SX-EW plant. Production is anticipated to continue until mid-2019, when the supergene deposit is exhausted.

To extend the life of the project, Teck is currently working the development of Quebrada Blanca Phase 2, which incorporates optimization and certain scope changes, including a revised tailings facility located closer to the mine. However, not only does this come with a hefty price tag of $4.7 billion ($4.0 billion to Teck and not including working capital and interest charges), Teck still needs to undertake a very rigorous permitting process.

Thus, Teck has stated it does not expect any sort of investment decision before mid-2018, with the best-case scenario of production commencing in late 2021.

The costs associated with shutting down Quebrada Blanca is exorbitant, and with Copaquire hosting the lion’s share of its deposit at surface, we expect Teck to work on the project as a bridge to Quebrada Blanca Phase 2, or as a sole back-up.

The project in itself is first-rate, in 2012, OZ Minerals joint-ventured the project to earn 90% by making cash payments of $90 million and drilling up to 30,000 meters. The JV was dropped primarily due to market conditions in 2013.

The Copaquire royalty has the potential to generate $3 million in cash in the near-term, with the chance of significant cash flow in the future.

Nova Scotia Exploration Potential

Chilean Metals’ first foray into Nova Scotia was in June 2016, when it acquired the Fox River property from Cogonov Inc. The project is comprised of 176 claims covering defined gravity anomalies and delineated VTEM targets. In August 2013, Minotaur Exploration identified 42 targets, nine of which were classified as high or very high priority.

In October 2016, Chilean Metals acquired three copper-gold projects, Lynn, Parrsboro and Bass River, from Cogonov. The three properties in central Nova Scotia are part of an IOCG regional exploration program.

The claims cover IOCG targets previously delineated by Minotaur Exploration along the Cobequid-Chedabucto fault zone. The fault zone is a 300-kilometre-long fault structure that hosts over 100 mineral occurrences, past-producing mines, and iron oxide, copper, cobalt, gold, nickel and barite deposits.

In 2012, Cogonov began work in Nova Scotia by flying an airborne magnetic and VTEM survey along the fault. Geophysics successfully defined numerous VTEM targets including Bass River and subsequently, the Castlereagh target to the northeast. Bass River was prospected in 2014, and drilled in 2015 where a lead, zinc, silver, mineralized system was identified.

In March 2017, Bass River was JV’ed to the Tejas Gold Company, where it can earn a 35% working interest by issuing 100,000 common shares of Tejasstock and to spend $400,000 in exploration work, including drilling on Bass River. In addition, Tejas is paying CMX a management fee of $5,000 per month over the duration of the work program.

In November drilling will commence on the Bass River anomaly:

CMX is currently doing a Pulse Electro Magnetic Survey over three primary targets prior to drilling commencement:

Moving Forward

CMX has found Zulema’s system, but not the source. After consultation with Lundin Mining and Minotaur Exploration (who are now major shareholders through the Nova Scotia transactions), the next stage will be a focused geophysics program. The original grid size was 700 meters, CMX plans on refining down to 200 meters in a three-staged program that will take two months to complete.

In the mean time, the JV at Bass River is currently drilling. This will provide potential catalysts until the CMX is ready to begin drilling again at Zulema, which we expect will be in the new year. Initial geological work is ongoing at the other Nova Scotia projects. The initial reconnaissance will allow CMX to attract potential suitors.

Palisade Global Investments Limited holds shares of CMX. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.

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