SOLG and the The Battle of Five Armies or How to train your Mining Major Dragons and the defeat of BHP

 

In the end it was a nail biting conclusion, but the highly anticipated AGM for SolGold was a success for the Board of SolGold (SOLG) and particularly Nick Mather as he entered battle against the combined forces of Newcrest, Cornerstone and the might of BHP the worlds fifth largest mining company by Revenue.

SOLG with friendly companies including Blackrock and DGR, along with many smaller investors who answered a call from the company voted for all the normal resolutions that the company put forward. This included keeping Nick Mather as a director and CEO and the allocation of over 50% of the current share capital to potential new investors.

SOLG is the largest explorer in the highly thought after Gold and Copper frontier of Ecuador. They have built up a successful partnership with the Ecuadorian Government and the peoples of Ecuador by investing heavily in local employment, local sustainability schemes and the careful stewardship of licenses. SOLG currently sits on a mountain of copper and gold. Literally and figuratively. With projects ranging from the advanced Alpala to the new sleeping giants of Porvenir. Only today it has announced 500m of further mineralisation on a new deposit 3 km away from Alpala, which had never been drilled before this month, which will likely add world class gold and copper mineralisation to an already embarrassing about of reserves. SOLG currently has the largest amounts of combined copper and gold reserves and potential reserves in the world, not currently owned by the world’s major mining companies. A single project such as Alpala when in production would be the worlds largest silver block cave mine, one of the top 10 copper mines and one of the largest gold mines in the world.

It is no wonder then that over the last few years, Newcrest and BHP have both invested heavily in SOLG with the aim of taking these reserves for themselves. BHP have already made an offer for the company and has been rejected. For the first time in it’s investment relationship with SOLG it is out of a standstill agreement and no longer has to vote with the Board of SOLG.

For what is still a small company, under one billion dollars Market Cap. Keeping the wolves at bay, when combined Newcrest, BHP and the small Canadian company Cornerstone own over 30% between them, was never going to be easy and so it proved.

SOLG faced an almost impossible task and hired Citibank to advise them on strategy, to prevent the company from being controlled by hostile forces.

The AGM itself was a rather dry affair like many AGM’s, however the resolution to keep Nick Mather in place was passed by 55% to 45%, with nearly 80% of all shareholders voting, quite an extraordinary turnout for a smaller Market Cap company. Also passed was a resolution allowing the Board of SOLG to place over 50% of the company through new share issues to interested parties to allow for both further exploration and the potential high Capex costs associated with projects such as Alpala.

The strategy to force out Nick and take control of the company was without doubt a monumental failure for Cornerstone, Newcrest and particularly BHP. SOLG recently launched a failed hostile bid for Cornerstone, which is heavily indebted to SOLG due to their arrangement. Newcrest has been openly disapproving of SOLG’s strategy to involve Franco Nevada on financing terms for Alpala, instead of further dilution of shares (primarily to them). For BHP through it was high risk strategy that ultimately failed.

BHP has long been the favourite to obtain SOLG and its world class mineral wealth. Since the ending of its standstill agreement, BHP had the choice of two strategies to either work with SOLG as a valued partner in the same way that Franco Nevada is now or become hostile and try to obtain control of SOLG by forcing its will on the smaller company.

Major mining companies thrive and increase their reserves often by working in a friendly manner with smaller explorers. It was therefore surprising that BHP was willing to risk it’s reputation in an all or nothing bully tactic to grab control of SOLG in a hostile fashion. It was certainly an indication of how much they want and are even relying on SOLG as its main contributor of Copper and Gold for the next 10-15 years. Such a tactic was high risk, high reward for BHP, but it has failed.

BHP now has three choices, either give up on SOLG and it’s copper and gold with it’s tail between it’s legs. Whisper sweet things to SOLG to try and reinstate it’s friendly relationship or continue it’s hostile approach and make a quick bid for SOLG.

Any bid from BHP has to be quick as the next defensive move from SOLG, now that it has permission to place shares, will undoubtably be an allocation of shares to another Major, maybe Franco or Chinese interest of around 10% with a standstill agreement, possibly tied into an offtake preference agreement. Such a move would give SOLG and it’s board further protection from anything but a premium hostile bid.

It is rare for an explorer to escape the grasps of a single major mining company, rarer still to escape two, but SOLG’s expert understanding of its share register and a high stake gamble has delivered the battle and an embarrassing defeat for BHP and Newcrest. Normally a CEO would not survive 45% of the shareholders voting against them, however this is not a normal situation and the remaining 55% of SOLG shareholders have no interest in giving their riches away cheaply.

Understanding SolGold’s Porvenir

 

After a change in how often regional exploration news is released, we have the first update on Porvenir for nearly a month. In that time and since my last update, SOLG have produced assays for the first 750m or so of hole 1. It has finished hole 2 to 1300m, observing mineralisation to 1200m. It has produced assay results for the first 500m of hole 2 and SOLG has started hole 3, drilling to 450m.

SOLG has deployed a second rig to drill pad 2 (250m WNW of hole 1) and started drilling hole 4 to 50m. It has also deployed rig 3 to drill pad 3 (200m S of hole 1) which is due to start hole 5 very shortly. In conclusion there has been considerable activity in the last month all with the aim of understanding Porvenir.

In the near future a forth rig is due to be deployed. Assays are likely to take a little longer. Ecuadorian exploration companies are currently looking at 5-6 weeks for assay results due to the impact of Covid and the amount of drilling currently under way.

 

Unfortunately for investors the aim of the exploration isn’t about finding the most gold and copper, at least not directly. Porphyry Copper Deposits (PCD’s) all share similar characteristics, each characteristic has a similar mineralisation theme, so understand this and you understand where the best grades are. You will almost certainly sample the best grades if all components are found.

As per the diagram above, the major components are:

The low grade core.

The side mineralisation stacks, sometimes breccia’s etc, high grade (normally the best grade, often called the mineralisation core)

The inner pyrite shell or high pyrite content shell

The outer pyrite shell or lower pyrite content shell – both components, inner and outer shell can be present or just one, they are sometimes referred to as a mineralisation halo around the core intrusion.

The peripheral zone or alteration zone, which is a leached zone of low-moderate or good mineralisation.

The PCD is a bubble of mantle which rises up to near the surface, the mineralisation is then pushed through veins away from the source intrusion, as the pressure subsides and it cools the mineralisation is left behind. The rate of cooling helps to determine the mineralisation present, hence the outer shell of quartz pyrite etc.

Porvenir hole 1, showed evidence of reworking (at least 2 major re workings), so you need to picture the cooling and retreat, then a fresh wave of mantle intrusion changing it all a second time (new veins, extra shell formation in different places etc), alteration of the structure etc. Then possibly a third.

So SOLG needs to find the intrusion, the shell and the alteration zone. It needs to understand how far down these extend and importantly how far out the alteration zone extends. To find the best grades it needs to discover the vertical edge of the intrusion.

Hole 1: Intersected a small portion of the Shell and some of the alteration zone. It also seems to have intersected smaller portions of the intrusion core, thiner tendrils, that are low grade.

Hole 2: Initially went through surface alteration, then the PCD high quartz shell, before entering the low grade intrusion core. We don’t yet know whether the drill has come out the other side of the core, as assays are down to 500m. However assays have clearly identified the core characteristic of a PCD.

Hole 3: Has one job, to sample and confirm the spread and extension of the alteration zone. It looks like it will be drilled to 900m or until mineralisation ends. The shallow dip of the hole is such that adding even 100m to the alteration zone, provides a large extension of the resource area. CUEQ% of .3 or .4% would be more than adequate to if it extends beyond 450m. The full 900m would be high end tier 1.

Hole 4: This has a more complicated job. It’s trying to find the WNW extension of the alteration zone for 200-400m. Then sample the thinner, higher quartz/pyrite shell on the edge of the intrusion 100-150m. Hopefully it will then sample the bonanza, top grades of the mineralisation zone 200-400m. Finally entering the intrusion core, potentially coming out from that.

Hole 5: Not much detail on this, but it looks to expand the alteration to the south, possibly looking to hit the main structure from a southerly angle.

There is more than a little guess work in the above, as very limited information has been given so far. What we can confirm is the presence of a PCD, we can confirm the .4% to .8% CUEQ% in some of the lesser mineralisation zones, which is exceptional and we can confirm a substantial structure of tier 1 potential. Holes 2-5 have been chosen to provide firm evidence of all the PCD components, with indicative grades along with a 1km by 1km by 1km footprint.

It is important to understand what each hole is trying to prove when assessing the success or failure of the results as they are released. Hole 1 and 2 have proved everything that has been asked of them so far, showing strong evidence of a substantial open pit, good grade PCD. This is the kind of project that Major’s will happily mine all day, lots of reserves on the balance sheet, steady predictable return and LOM measured in generations.

So the future looks bright copper and golden for Porvenir.