Xtract Resources - XTR's Eureka maybe I was wrong!

 

It’s no secret that I have attributed very little value to the African assets that Xtract Resources hold. I am a huge proponent of Bushranger and the potential of the porphyry asset;  it’s model, its attractiveness to large companies and its ability to be commercialised.

The biggest problem with the African assets, are the general lack of information in the public domain. They tend to be complicated both in ownership and geology. Valuing assets in Africa is very tricky due to uncertain political situations, and often hidden and surprising costs. Trying to commercial African assets is very challenging. Lumping all the African countries together in a single basket is maybe not the best country risk approach, there is certainly considerable difference in the country risk between Gambia and Nigeria or Botswana and the Congo. Regardless, there is still an African risk factor associated with the long potential LOM (length of mine) that this industry has.

Now, lets turn our attention to Eureka. Eureka is your typical African-AIM project. It has been mined previously using labour intensive, older mining techniques. The easy to extract and higher-grade copper has already been extracted. There is without doubt still mineralisation on the license, but we immediately have questions. How much is there? Is it going to be patchy? What will the costs be? Is it worth the effort? Simply we do not know.

I don’t invest in these kinds of scenarios for all the reasons above, the risk reward just isn’t there. The risk is that we will only find bits of copper, that it will be a pain to extract, that the costs will just keep going up. The reward is limited, some profit can be made. Profits large enough to overcome the costs of director wages, AIM admission etc are tricky. For a private investor owning the resource, the risk might well be worth it; as a shareholder in an LSE listed company the answer is normally, no.

That doesn’t mean that the African assets that Xtract holds are a problem. They require minimal capital expenditure and if they do go on to be mined, will probably be neutral to the company overall. With luck they might contribute money to the company, not enough to sustain a large share price, but enough to be a welcome contribution.

To be a real driver of the share price, any of the African projects needs to become something it currently is not. It needs to be transformed. So, is Eureka on the verge of being transformed?

Eureka is not a porphyry like Bushranger, it does not have a central intrusion, with a quartz outer shell. With layers of onions and vast alteration zones. Eureka is a far more localised breccia, a fractured mineralisation of small veins, created by a rising magma outlet. Leaching of minerals then pushes it wider through a mish mash of small fractures. Grades can be anything from 0.1% to 20% copper. The biggest problem with these kinds of deposits is the consistency. It looks like the near surface breccia that existed in the nape of the fault was largely mined out. Around this was a layer of lower mineralisation, some of which is still intact.

The area for mining is roughly 150m long and up to 40m in width.

 

Open pit exploration has pushed the mineralisation in a thin band NW up through P3, giving a shallow 5m depth at 2.65% copper. In 2020 Xtract produced a small 3D model of the mineralisation.

 

The above is an IP anomaly map of the key license area. IP anomalies are NOT the be all and end of exploration. If only it were that easy! Mining exploration companies like to make out it is. They all put out the maps, as evidence that they have between 100-200 tier 1 mining assets…The truth is that IP anomaly maps by themselves are just geological guides, they show magnetised areas which 90% of the time are barren of any kind of valuable mineralisation. Even if they are loaded with copper or gold, they give no indication of how much. To make much sense you need trenching and sampling to find moly, copper, gold etc near surface (an indication that they are sourced from an anomaly). To make matters worse, porphyries might be in the centre surrounded by positive anomalies, whereas a breccia might exist on top of one. Without information to back up the IP anomaly maps, preferably drilling but at least very extensive trenching I tend to ignore them.

Eureka, certainly this far, is a simple breccia (magma event) oxide deposit sat atop a positive anomaly. An IOCG – an oxide and sulphate system would also tend to follow the positive IP anomaly.

Moving forward to the latest results. They show that to the SE of the main deposit, the mineralisation tails off. This is expected. The IP anomaly shows the highest gradient towards the SE and the shallowest gradient to the NW. This would indicate the mineralisation/magma rose up from the NW moving SE as it hit the surface. The natural conclusion would be that the mineralisation would therefore get deeper as we move from the deposit to the NW. At this point a standalone small breccia would see limited mineralisation to the NW. However, mineralisation – particularly at depth in the NW, would indicate the source flow that created the breccia is still in situ.

The diagram below, shows the IP anomaly and where the current open pit sits, at the top of the anomaly at surface. In my opinion the drilling results indicate a joint deeper flow rising up, topping out at surface with the current open pit. The green is the possible extent of the mineralisation, probably down to 300m depth if the IOCG is loaded. To my knowledge no exploration has explored this potential.

Conclusions. Drilling showed the original open pit to still contain high grade 3-20% copper, probably enough for 3-5 years, as it extends with 10-25m of overburden to the NW. Drilling to the NW seems to indicate that the source flow and subsequent breccia events do exist as hoped. Deeper drilling will be needed, but if sulphides are found and an IOCG is confirmed it would provide higher copper grades are turn Eureka into a potential strategic resource, with a LOM of 20-30 years (some 10-30 times its current size). A LOM of this size WILL attract majors even in Africa, particularly given Eureka would be a working mine and the IOCG would be a massive extension.

This update for Eureka, ticks off a couple of boxes. It is still Africa. It is still a risk. However, for a smallish company like Xtract it is looking far more likely to add considerable revenues, if they get the sample production flowing later this year. It has also ticked the beginning box of a much deeper, strategic IOCG. A deeper hole (probably to 150m or so) would prove this. IF and it’s still an IF, this is the case it could prove to add almost as much value to Xtract as Bushranger.