Introduction

This is the second instalment of the review of how valid Crux Investor's recommendations were following the review of the plans and prospects of companies selected as subjects for Analyst’s Notes. The publication dates of four Analyst’s Notes that are reviewed here span from August 2022 for Eskay Creek to October 2022 for Arizona Metals. It means that almost 1½ years have passed since the most recent article, which may be enough time to judge whether the Analysts got it right or wrong. 

Eskay Creek

Analyst’s Notes Summary

In August 2022, Crux Investor published a report on Eskay Mining Corporation (“Eskay”) (TSX.V:ESK) (OTCQK:ESKYF) (FRANKFURT:FN7), a company exploring British Columbia with a focus on the Eskay Creek Mining Camp. Eskay Creek was a famously high-grade precious metal mine. The core strategy for Eskay and other companies working in the area is “to find another Eskay Creek.”  

Eskay is a company that has been actively exploring the area for many years with little excitement for the share price. This changed when Dr Quinton Hennigh joined the company, after which positive press releases about the number and size of new “discoveries” were made, all of which showed great similarity to Eskay Creek. However, the reported assays were less impressive than those reported by Skeena Resources (“Skeena”) the company that explores extensions to the historic Eskay Creek mine. 

Crux Investor’s review of exploration activities during the decade before the 2020 field season, which included several drilling campaigns, showed that results were inconclusive. On arrival, Dr Hennigh ran a press release in July 2020 that laid out the 2020 exploration programme. This programme included airborne geophysical surveys to generate targets for drilling. The first drilling results were already in by September 2020, but with grades much lower than at the historic Eskay Creek Mine. A total of 20 holes tested two targets, TV and Jeff, which were classified by Eskay as “discoveries”, and the company strongly suggested that these were similar to Eskay Creek. 

From a review of the drilling results during the 2021 field season, Crux Investor concluded for the TV target:

• Eskay Creek presented an illustration for the borehole intercepts that included holes that were at an angle almost perpendicular to the section. This gave an unrepresentative view of the true thickness of the drilled deposit.
• Intersections with grades exceeding 1 g/t AuEq define a strike length of at most 150 m at TV.
• The reported grade for borehole intersections was consistently around 2.55 g/t AuEq. The average width of 47 m was not representative as most holes were drilled at a very oblique angle to the strike direction. Intersections in the holes drilled perpendicular to strike averaged 10 m. The holes numbered 51, 54, and 59 at TV that defined “true thickness” best, clearly indicate major width variation over short distances.

From a review of the 2021 drilling results at Jeff, Crux Investor concluded that there was little merit in continuing drilling of this target as intercepts were narrow and with subeconomic grades.

At the publication date of the Analyst’s Notes on Eskay Creek there were no results for the drilling, except for geophysical and geochemical soil surveys for target definition. The company planned to focus on TV-Jeff once more, but also had a few new targets. In particular, the Scarlet Ridge area was highlighted, where two “additional feeder zones” had been identified. Pictures were presented that showed impressive gossanous outcrops of stockwork and replacement sulphide mineralisation. Crux Investor, however, cautioned that such outcrops can be the result of sulphide-rich deposits without much in terms of economic mineral content.

At the share price of C$1.81, Eskay's Enterprise value of C$336 million was remarkably similar to that of Skeena Resources (C$427 million), which had released a positive pre-feasibility study and could boast reserves of 3.99 Moz at an average grade of 3.4 g/t Au and 94 g/t Ag. The report, therefore, concluded that “should one want to have exposure to Eskay Creek-type mineralisation, there is no contest; Skeena is the superior choice by far.”

Subsequent Developments 

On 1 September the company started maiden drilling at Scarlett Ridge as part of a total 2022 drilling programme involving 30,000 m. The drilling at Scarlet Ridge must have been very disappointing as no results were published and it hardly features in the plans. More was made of drill results at a target called Tarn Lake, which is located west of Scarlet Knob across the Bruce Glacier. 

The two targets that feature most prominently are TV (again) and Cumberland located 4.5 km south of TV.

Figure 1 shows a plan with borehole traces for TV, extracted from the original Analyst’s Notes dated August 2021 (at the top) and a similar plan included in the press release dated 23 February 2023 with the traces of the old holes as thin lines and the traces of the new holes as thick lines. What is immediately obvious is that the footprint of the area drilled hardly increased. The holes with the warmest colours for drill intersections are TV22-97 and TV22-99, but these are testing grounds already previously drilled and add little to the understanding of the deposit. Again, these are not drilled perpendicular to the dip direction; therefore, any width provided overstates the true thickness.

In discussing the results, Eskay presents a few parallel cross sections over 200 m strike, of which Figure 3 reproduces the two most northerly, which are 50 m apart. The sections also indicate how little holes 97 and 99 add to the understanding and potential resources of the deposit.

The text accompanying the illustrations concludes: “Drilling in 2022 expanded the footprint of the Upper Massive Sulfide Zone northwards and down-dip with respect to 2020-2021 drilling, giving this zone minimum dimensions of ~100 m along strike, ~150 m down-dip to the east, and a true thickness of ~ 5-10 m. The footprint of the Stockwork Zone was expanded down-dip to the east, and up-dip to the west with respect to 2020-2021 drill holes, giving this zone dimensions of ~175 m along strike, 170 m down-dip, and a true thickness ranging from ~50-100 m.

To Crux Investor, the presence of “an Upper Massive Sulfide Zone” and “Stockwork Zone” is far from evident from the cross sections, and the dimensions are overstated.

Eight drill holes were completed at Cumberland during the field season. Figure 4 shows a plan with borehole traces (Top) and a cross-section looking along strike (bottom). Given that the coordinates are only 20 m apart, the eight holes test a very small block of ground. Crux Investor again observes how wasteful the drilling was, giving very little ‘bang for buck’. 

The market has not been impressed by performance as is shown in Figure 4, which has the share price trend since 15 August 2022.

The graph shows a steadily declining share price until May 2023 when it reached a price of C$0.55, before climbing back to C$1.29 on 24 June 2023. On 10 July 2023, Skeena acquired five mining claims for C$4 million, of which C$2 million was paid immediately, and the balance was deferred, payable in two further instalments. In addition, Eskay retains a 2% net smelter returns royalty. The price rise may be related to this, as it would have helped to avoid an imminent cash raise. The higher price did not last long, as the financial situation deteriorated to such an extent that the cash balance had dropped to C$0.65 million by 30 November 2023. Unless Eskay can convince shareholders to chip in again soon, the company will be in trouble. This explains the share price on 18 April 2024 of C$0.375.

Crux Investor notes that, for some reason, the latest financial statement available is for the quarter ending 30 November 2022. This means that the 2023 financials have been removed from both the company website and the SEDAR website. Their website is considerably out of date in many sections!

Cobre

Analyst’s Notes Summary

On 30 August 2022 an Analyst’s Notes was published on Cobre Limited (“Cobre”), an Australian Securities Exchange (“ASX”) listed company with the symbol CBE. The company was exploring stratiform copper prospects in the Kalahari Copper Belt in Botswana, which holds a substantial tenement area of almost 9,000 km² in four blocks.

The Kalahari Copper Belt deposits in Botswana are located within the Ghanzi-Chobe Fold Belt, a 140 km-wide zone of deformed metavolcanic and metasedimentary rocks, which forms part of the late Proterozoic, Pan African Mobile Belt. The geological model for the area is that it was a basin formed through rifting along faults that strike NE-SW and within which sediments were deposited, first of a shallow marine environment (the Ngwako Pan formation) followed by sediments of a deeper marine environment (D’Kar Formation). The exploration target is the contact zone between the Ngwako Pan (deposited under oxidising conditions) and D’Kar Formation (deposited under reducing conditions). The change in redox condition is typical for stratiform copper deposits such as the Kupferschiefer in Europe, which has been a major source of copper, and the Central African Copperbelt, which is an even larger source of copper. Cobre is, therefore, chasing a very attractive target in terms of size. With the exploration successes of Sandfire at its T3 Motheo Cu-Ag deposit and Cupric Canyon’s Zone 5 Cu-Ag deposit, the belt has yielded economic projects, and the Cobre tenement areas must be considered a good address.

Within the extensive tenements, the target horizon has hundreds of kilometres of strike, partially because of folding. At the time of publication of the Analyst’s Notes, 57 drill targets had been defined through geophysical and soil geochemical surveys. The one that received the most attention was within a block of ground referred to as the Ngami block. Four diamond boreholes had been drilled at the publication date, all visually intersecting copper mineralisation. The company used handheld X-ray Fluorescence (“XRF”) at 25 cm intervals to get copper grades and arrived at grades between 1% and 1.5% over attractive widths. Crux Investor took this as “proof of concept” of the target. Whereas Crux Investor itself cautions that XRF readings cannot be given the weighting of laboratory results, it did rely too much on these readings in its recommendation. 

At the time of publication, the diluted enterprise value was US$68 million, at a share price of A$0.567. This was followed by the observation that “a number that would dramatically change even with moderate further exploration success”. And that “Crux Investor considers Cobre an attractive, albeit speculative, investment.”  

Subsequent Developments

In October Crux Investor was forced to issue an update about Cobre as part of the next Analyst’s Notes with an apology for getting it so wrong. As we often say, when the data changes, it is ok to change your mind. Laboratory results for three holes were much lower and the proof-of-concept idea went out the door. It meant that the company was back at early-stage exploration with all the negative implications for the risk/return equation. Early-stage exploration plays are like betting in a casino and such companies are not usually the subject for Analyst’s Notes.

In the February 2024 corporate presentation, the company included a slide (see Figure 5) with borehole locations at the Comet target in the Ngami Block and the full set of drill results demonstrating that the intersections have grades consistently around 0.5% Cu.

A grade of 0.5% Cu is uneconomic when mined conventionally. Management is now promoting an in-situ leach approach for it, which they partially motivate by the “ore body”, a term that may not be used when economic feasibility remains unproven, having fracture zones parallel to the mineralisation and being encased on both sides by impermeable rock. The presentation refers to Excelsior Mining (“Excelsior”) as an example of such a project quoting a return, which was never realised and ignoring the fact that its Gunnison project is a complete operational and financial disaster. In the latest press releases dated 26 February 2024, Cobre dropped references to Excelsior and now quotes Taseko’s Florence Copper project in Arizona as an example. Crux Investor, however, records that this project progresses extremely slowly, demonstrating the difficult and risky nature of in-situ leaching to extract copper.

At least Cobre carries out field tests to validate their assumptions, something Excelsior did not do. 

In October 2023, the company announced the results of bottle roll tests on composite samples, with recoveries of 77.4% from high-grade material and 71.9% from low-grade material when adding a combination of ferric sulphate and chloride to the slightly acidic leach solution. Furthermore, increasing the solution's temperature from ambient to 70°C significantly increased Cu extraction, with both composites reporting a final copper recovery of 97.8%. In addition, such a solution would allow for the recovery of silver, but no numbers were provided.

Figure 6 shows a longitudinal section at the top, with an injection well indicated by a star at A-A', several monitoring wells to determine any leakage, and an extraction well indicated by a star at B-B'. 

The bottom illustration in Figure 6 is an isometric view of the well configuration at A-A’ showing that the injection well is planned subparallel to the mineralisation. Should extraction be successful over 1.5 km distance, it will be an impressive confirmation of the validity of the approach. Usually, the well field configuration is much narrower. 

On 26 February 2024, Cobre announced the “successful Phase 1 hydrogeological tests” results which according to the company:

• these verified the presence of an enhanced permeability zone within a representative portion of the copper mineralized compartment; and
• The production well drilled down the main mineralised fracture zone intersected (open-ended) 78 m @ 0.59% Cu, “demonstrating the continuity and depth extent of copper mineralisation at the target”.

Cobre will now start a second phase of long-term pumping and injection tests to evaluate aquifer characteristics over a greater distance.

Apart from the Comet target shown in Figure 5 at the Ngami Project, Cobre explored other targets along strike and at the southern limb of the structure. The company also extended activities to the Kitlanya West block, which involved mostly soil sampling and bedrock sampling below the sand cover using reverse circulation drilling. A few potential fold limb and plunging fold hinge targets were identified, in particular the Tlou target which is a double plunging structure (i.e., dome-like). Figure 7 shows the location of identified targets.

On 31 December, the cash balance had dropped to A$1.9 million, which is perilously low considering the cash burn of almost A$1.6 million during the quarter. A cash raise can be expected in the near future despite the announcement at 24 January 2024 that BHP would provide USD$0.5 million in return for having access to all exploration information and pre-emption rights on the Kitlanya West project until the end of 2025. 

Figure 8 shows the price performance since the Analyst’s Notes on the subject on 30 August 2022.

The graph shows the price fall since the Analyst’s Notes report date. The market clearly rates the chances for exploration success and suitability for in-situ leaching as low. Crux Investor can only endorse this. We got excited too early and got this wrong. Mea culpa!

Sabina Gold and Silver Corporation

Analyst’s Notes Summary

Crux Investor published an Analyst’s Notes on Sabina Gold and Silver Corporation (“Sabina”) (TSX:SBB)(OTC:SGSVF) on 28 September 2022. 

The company owned the well-advanced, high-grade Back River gold project in Nunavut, Canada. At the publication date, the project was fully funded and scheduled to start production early in 2025. Total open pit reserves contained 1.67 million ounces (“Moz”) grading 5.27 g/t Au, which are later supplemented by underground ore containing 1.91 Moz at a grade of 6.76 g/t Au. There was also much upside, as considerable Inferred Resources have been identified containing more than 4.0 Moz.

Despite disagreeing on the suggested mining cost rate of C$82/t for underground mining Crux Investor found Sabina to be good value, even after adding 35% to the operating cost. The valuation of C$914 million for the stressed operating cost case compared to a market capitalisation of C$548 million at the prevailing share price of C$1.00. Long-term shareholders must have felt aggrieved at the time as the cumulative funding raised since 2009 was C$786 million, well above the market capitalisation. 

Crux Investor concluded that “Sabina represents asymmetric risk with limited downside and plenty of upside.”

Subsequent Developments 

It did not take long for Crux Investor’s opinion to be endorsed by B2Gold Corporation (“B2Gold”), which made a bid on 13 February 2023 for all Sabina’s shares in an all-paper transaction placing a value of C$1.1 billion on Sabina, which was a 45% premium to the closing price of Sabina at the time the non-binding offer was signed.

The acquisition of Sabina made a lot of sense for B2Gold. It has several quality operations, but these are all in high-risk jurisdictions in Africa and the Philippines. By far the most important asset is its Fekola mine in Mali, which is probably also the worst jurisdiction. Using paper underpinned by the high-risk African mines, it acquired a high-grade mine in one of the best global mining jurisdictions. There was project execution risk associated with Back River, aggravated by its difficult climatic and isolated location, but B2Gold could rely on its extensive mine construction experience. 

By the time the takeover was finalised on 24 April 2023, Sabina’s shares had delisted, and the shares were trading at C$2.12. 

Arizona Metals

Analyst’s Notes Summary

The Analyst’s Notes on Arizona Metals Corporation (“AMC”) (TSX:AMC) (OTCQX:AZMCF) was published on 14 October 2022. At the time, the company owned two projects in the USA, one of which was the Sugarloaf Peak gold project, which was clearly of low priority to management compared to their Kay Mine. AMC had caught the attention of Crux Investor after consistently reporting long intervals of high-grade copper and zinc assay with good precious metal credits. For example, reported results not long before publication date included 100.9 m at 2.5% CuEq, 61.4 m at 3.5 g/t AuEq and 46.2 m at 3.9 g/t AuEq in three separate holes.

However, when Crux Investor started digger deeper into the data the following became evident:

• The NI 43-101 notes that the geology is complex and structurally controlled, and describes the mineralisation as forming in “generally cigar to tabular shapes that pinch and swell” with “Sulphide lenses are likely to be affected by steep- plunging tight folds, with the lenses being thinned and boudinaged in fold limbs and thickened in fold hinges”;
• A review by Crux Investor of the drill hole results confirmed very large variations in mineralised widths.
• The limited number of drill platforms available forced the company to drill wastefully, often intersecting the deposit under oblique angles, both in terms of strike and dip. The reported intersection widths were, therefore, much longer than the true width.
• AMC provides a single longitudinal section and a single cross-section for their results. These illustrations superimpose several cigarlike bodies, presenting them as one much larger body.
• When reviewing the reported boreholes with wide intercepts on the longitudinal section, Crux Investor found that these were all within a much shorter strike length than the overall outline in the longitudinal section. Figure 9 shows three blocks between the annotated thick lines within which wide intercepts are concentrated.

• The metallurgical processing of massive sulphide material often proves problematic and the little information available for Kay Mine pointed to potential problems:some text
  • a very fine grain size down to 25 μm and minerals intimately intergrown requiring much grinding, 
  • There is no obvious relationship between gold and copper or zinc grade, implying that not much gold would be recoverable from Cu or Zn concentrates.

To put the Enterprise value of AMC in perspective Crux Investor once again compared this to that of Skeena Resources, another company that was exploring and developing a massive sulphide deposit in North America. As AMC was valued at C$479 million, compared to Skeena’s C$456 million, there was a clear mismatch considering that Skeena had open pit reserves of 3.85 Moz at 4.0 g/t AuEq based on a Feasibility Study that estimated after-tax NPV5 to be C$1.4 billion.

Subsequent Developments 

In October 2022, AMC received permits for two new drill pads, located approximately 1,200 m west of the Kay Mine Deposit. These new pads will allow for testing of the Western Target, while also allowing for drilling of additional coincident anomalies located between the Central and Western Targets (refer to Figure 10 for their location relative to the Kay Deposit).

Drilling at the Central Target failed to find anything of economic interest and at the Western Target only “anomalous trace elements” were encountered except for hole KM-23-113, which intersected 3.0 m with 3.2 g/t AuEq. 

AMC also tested ground hundreds of metres north of the Kay deposit, but which yielded only narrow intersections with unimpressive grades. 

As the exploration of satellite deposits only gave very disappointing results, AMC would intersperse such results by drilling the Kay deposit, targeting the hinge zone for good headlines. For example, in January 2024 a news release had the headline “Arizona Metals Intercepts 65.6 m at 3.5 g/t AuEq”. Inspection of the longitudinal section showed the pierce point to be around 15 m away from a previously drilled hole and in a block of ground drilled like Swiss cheese. Meanwhile, the target areas indicated as red outlines in Figure 9 remain untested. 

Figure 11 shows the share price performance on the Toronto Stock Exchange (“TSX”) since the Analyst’s Notes publication date. After an initial uptick to reach C$4.85 in May 2023, the share has been on an almost consistent downward slide. With the first borehole results for the Western Target announced in April 2023, this could possibly explain the reversal. As it stands now the fortunes of the company are fully linked to the Kay deposit only.

On 22 January 2024, the company announced its intention to spin out a company holding the Sugarloaf project and another company holding a 2% net smelter royalty (“NSR”) on any potential future mineral production at AMC’s Kay Mine Deposit, as well as a newly created 2% NSR royalty on all future potential mineral production from any new deposits discovered. From the graph, it seems that the announcement did not excite the market.

With 116 million shares outstanding, AMC's market capitalisation is C$246 million. This drops to a diluted Enterprise Value of C$221 million, mostly due to very generous net current assets of C$29 million. The most comforting aspect of AMC is that it will not need another capital raise for a long time. However, with the total lack of exploration success since October 2022, the company is fully valued. 

When Crux Investor initially reviewed AMC, the company could boast about very attractive drill hole results, which were present in fold hinge(s) over a rather narrow strike length and several parallel targets with the same geophysical expression as the Kay deposit. These targets have provided very disappointing results. The status of AMC is a one-deposit company and much of the exploration upside premium had dropped out. The company is in a very early development stage without even a mineral resource estimation for Kay. 

At an Enterprise Value of C$221 million, the company compares expensive to New World Resources (“NWC”). NWC is also active in Arizona but has declared mineral resources of 11.4 Mt grading 2.10% Cu, 4.97% Zn, 0.89% Pb, 0.36 g/t Au, and 32.0 g/t Ag at the Antler deposit. The company expects to issue a feasibility study during the first half of 2024. In addition, it has numerous undrilled targets in the vicinity of the Antler deposit. The Enterprise Value of less than A$88 million for NWC equates to C$72 million, or 33% of the valuation of AMC. Crux Investor, therefore, concludes that AMC remains overvalued.

Investment Return Since Publication Dates

Table 1 shows the returns made on the various shares since the publication date using the prices quoted on the TSX and ASX.

The table shows the total return and the compounded annual return. In green are the numbers where Crux Investor got it correct, and in red are the numbers where we got it wrong. Even if the in-situ leaching tests show that copper can be economically extracted and the Cobre share price recovers to a level above A$0.51, Crux Investor cannot take credit for this as our initial call was based on totally different premises.

As stated in the previous Update Note, the compounded return is held for the full period until 18 April 2024 and should be considered a minimum return. In reality, a reasonable investor would have disposed of the share much earlier after it had become evident the bet was on a losing horse. Similarly, a reasonable investor would have disposed of Cobre shares much earlier.

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