On April 20, Centenera Mining Corp. (CT:TSX.V; CTMIF:OTCQX) reported a strong partial drill hole result at its Esperanza copper-gold porphyry project in San Juan Province, Argentina. Excitement over this assay was running high. Management believed that the core looked good, so they rushed the top 166 meters (166m) to the lab.
Sometimes when expectations are elevated, actual news can disappoint. . .not in this case! The plan was to punch down to 500m, but drilling difficulties ended the hole at 387m. Esperanza remains open at depth and in all directions.
Mineralization was excellent through the 166m mark. On May 8, Centenera put out the full drill hole assay, covering 387m (from surface). Before jumping into the details, let me put into perspective the historical work that Centenera has access to. Prior drilling returned the following highlights:
Mineralization outcrops at surface with a pyrite halo extending over a 1,400m x 850m area, drill holes generally intersected mineralization at surface and the deposit is open in all directions. The majority of holes terminated in mineralization, the deposit is open at depth. Several holes demonstrated increasing grade with depth.
These are solid numbers: The best interval was 88m weighing in at 0.69% copper equivalent (Cu eq). The goal with this year's drilling is to find more results like these through prudent step-out drilling. When exploring porphyry targets, one needs to find both wide intervals—100+ meters—plus high-grade—say 0.60–1.00% Cu eq.
Having said that, the depth of a porphyry target matters a lot. All else equal, at and near-surface deposits can be viable at lower grades because prestripping (mining waste rock, or overburden, to reach an orebody) is expensive and time-consuming. That's why this first full assay from Centenera's 2018 drill program is so exciting; a wide interval, plus a strong grade, plus continuous mineralization from surface.
Drill hole 18-ESP-025 collared in mineralization that continued to the bottom of the hole at 387m (hole abandoned due to drilling difficulties). Mineralization remains open at depth.
There are a number of porphyry exploration and development projects around the world with 0.30–0.40% Cu eq orebodies. The lower the grade, the smaller the margin for error, and the greater the need for abundant size. Centenera's May 8 announcement places it well on the way to establishing economic grade. Now it's a matter of delineating a large-scale deposit. A surface expression of 1,400 x 850 meters is a good start.
The east-west cross-section shows complete results from 18-ESP-025 and a few previous drill holes. The exploration vector to higher grade Cu and gold (Au) is interpreted to be west, where two targets are highlighted. All drill holes are open at depth, and there's significant untested ground to the west & east. In the image, green = Cu grade and red = Au grade.
By large-scale I mean >3 billion pounds Cu eq. This year's drilling will be testing for bulk tonnage potential. Readers please note, the company might not be able to identify that large a number in a maiden resource estimate, but perhaps management can do so over time.
According to the company, drill hole 18-ESP-025 would have ranked #3 among top global Cu intersections drilled in Q1/2018 (intersections ranked by Cu portion only, x interval width in meters). Despite a very promising Cu-Au project, and several other properties in Argentina, Centenera's market cap remains at CA$10.2 million / US$7.9 million.
The above ranking is of projects where Cu is the primary metal and does not take into account other commodity credits. For example, Esperanza has meaningful gold credits that are not included. In addition to being at surface (versus an average depth to the top of interval of 437m), the Esperanza project is in a favorable mining province in Argentina, in fact the single best province—San Juan (as measured by the latest annual Fraser Institute of Mining Survey).
A 0.40% Cu eq. NI 43-101-compliant resource estimate would mark a robust outcome. Although there's limited evidence of large scale to date, management's goal is to find at least 500 million tonnes of mineralization (by no means a sure thing). Five hundred million tonnes at a grade of 0.40% would equate to nearly 4.5 billion Cu eq pounds. Management's stated goal for its projects is to "drill, add value and advance to JV or sale."
I expanded the above chart from a prior article I did on Centenera Mining to include higher grades along the left side. This does not mean I believe an overall mineralized grade will be up to 0.70–0.75% Cu eq, but in a constrained open-pit scenario (a subset of the entire deposit), perhaps a Cu Eq of 0.40%+ could be achieved.
Centenera has several catalysts worth watching for. First and foremost: another drill result in June. That hole was completed to a depth of approximately 450m. Also, a possible update on its 100%-owned Organullo epithermal gold project in Salta province—the best province in Argentina.
A study conducted in 2012 (using historical drill data) resulted in potential tonnages & exploration target grades of gold. These potential exploration target quantities and grades are conceptual in nature; insufficient exploration and geological modelling has been done to define a mineral resource.
The conceptual (initial) target is between 600,000-960,000 ounces gold, grading between 0.92-0.94 g/t Au. Management acknowledges that Organullo will require a lot of drilling.
Another important catalyst is the upcoming closing of Centenera's CA$3 million capital raise. Once fresh capital has been banked, investors will stop worrying about that perceived overhang.
In the second half of 2018, there's a decent chance cash burn will decrease as management finds partner(s) on one or both main projects. Partnerships typically involve giving up partial ownership in exchange for being free-carried (partner pays 100% of project costs) for a number of years, through key exploration and possibly development milestones.
It's not hard to speculate on prospective partners. For instance, here's a list of 20 companies that are major or mid-tier copper and gold miners and project developers, with assets in Argentina and/or Chile, Peru and Ecuador. The top nine players by market cap would probably not look at Centenera without evidence of the possibility of finding >10 billion pounds Cu eq. The bottom three are small compared to the others, but could certainly come up with a relatively modest amount of upfront funding required to get the Esperanza project into robust, active exploration.
I believe that Centenera Mining's valuation at CA$10.1 million / US$ 7.8 million is too cheap given the portfolio of projects and properties in Argentina that it owns or controls. Savvy natural resource stock investors point out that there are dozens of copper-focused porphyry targets in the hands of juniors that have >1 billion pounds Cu eq. That's true, I'm tracking about three dozen.
However, there are red flags associated with many of these other prospects. For example, several projects are in higher-risk (than Argentina) or even dangerous jurisdictions in countries including the Philippines, Russia, Mongolia, Indonesia, the Democratic Republic of Congo and Namibia. Even Peru, the second largest copper-producing country, a jurisdiction with at least five major copper projects held by juniors, is facing increasing challenges on the community relations front.
And the largest copper-producing country by far, Chile, has prospective projects at elevations above ~4,000 meters, which introduces a whole new set of risks, expenses and challenges. In part due to high altitude, Chile is also much more sensitive to water issues. I've been told that Chile has become considerably more expensive to operate in than other South American countries.
Other potential red flags: Some projects have preliminary economic assessments or preliminary feasibility studies with very mediocre to poor economics; capex figures that are twice or more the size of a project's after-tax net present value (NPV), or internal rates of return (IRRs) below 15%, assumed copper prices above US$3/lb, payback periods >6 years, grades <0.35% Cu eq, and strip ratios >3:1.
Finally, infrastructure and project logistics: Bulk mining operations require favorable access to transportation options, roads, rail, ports, power, water, a reliable work force and mining services / equipment providers.
Centenera Mining's Esperanza project is probably in the middle of the pack on this score compared to the three dozen global juniors I'm tracking, but better than that among assets in South America due to its being in San Juan province and having a very low strip ratio and high grade. Esperanza is just 35 kilometers from power lines and enjoys year-round road access. But we still need to see further evidence of large-scale potential. . .
Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis, and he is a Chartered Financial Analyst (CFA). He holds an MBA degree in financial analysis from New York University's Stern School of Business.
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Charts and graphics provided by author.