Wednesday, March 8, 2017

Copper-Gold Explorer Needs Some Luck

At the PDAC, I had a nice chat with Terry Lynch. He's the Chairman of Chilean Metals (TSX-V: CMX). This is a copper-gold explorer with some juicy potential upside.

Chilean Metals is focused on drilling its Zulema property, located in a rich mineral belt in Chile.  There is gold, too. It's also barren, rainless, and looks like the surface of the moon, but you go where the metals are, eh?

It has another property to the south called Palo Negro ("Black Stick"). This is very prospective as well.

Chilean Metals found a nice copper-molybdenum project before. It sold that project, Copaquire, to Teck Resources. In return, it received $3 million and a 3% Net Smelter Return (NSR) royalty on any production from Copaquire.

Copaquire is near another working Teck mine called Quebrada Blanca ("White Ravine"). Teck is fast running out of mineable ore at Quebrada Blanca. The odds of it bringing Copaquire into production are fast improving.

That's important, because Terry Lynch guesstimates that the royalty on that property would work out to between $6 million and $8 million per year.

Chilean Metals recently had a market cap of just $8.47 million.

There's some "wow" factor for you.

You can watch Terry tell that story, and more, in this video interview we did on Sunday at the PDAC ...

Teck has the right to buy back one third of the royalty at any time for $3 million. For reasons I'll explain, I think Chilean Metals would like that deal.

Terry explains that Chilean Metals has yet another interesting property. It's called Bass River, it's in Nova Scotia, and it has one heck of a metallic anomaly on it. Chilean Metals didn't want to dilute its stock to raise the cash for drilling, so it farmed out the project to someone else.

That someone else is a private company, Tejas Gold. Tejas will have 14 months after signing of a JV Agreement to earn a 35% working interest in the joint venture. To earn the interest Tejas has paid a non refundable deposit of $25,000, issued 100,000 common shares of Tejas stock and agreed to expend $400,000 in exploration work including drilling on Bass River.

If Tejas spends the money by June 30, its participation rises to 40%.

That's a good way to do some drilling when you don't have a lot of money. Chilean Metals does want to drill its Zulema property in Chile. So, it issued 4,070,680 common shares at C$0.15 per share to raise $610,602.

No one wants to issue shares at C$0.15 per share. So, money is tight for Chilean Metals. It has other debt, too. 

Importantly, Chilean Metals recently added a debenture of $210,000. It's due October 31 2018. 

From the press release
The terms are as follows: 14% interest annually in arrears at loan repayment, secured on a pari passu basis with the previously granted debentures ($150,000 Face Value of debentures currently outstanding) by the shares of the Company’s Chilean subsidiary that contains a 3% royalty.
Dang. So that royalty isn't free and clear.

Here's the bottom line for me: Chilean Metals has some interesting projects, and royalty potential. It is hard at work, trying to find a big ore body at Zulema. But it sure looks like the market is betting that Chilean Metals is going to run out of money before it gets lucky.

Let's look at the chart ...

You can see that the stock recently gapped lower. This is due to drill results. Terry says the market misinterpreted those results. 

To the stock's favor, volume remained light, and did not confirm the breakdown. This is a light-volume stock anyway. So don't read too much into volume.

Finally, looking at RSI at the bottom of the chart, we can see CMX briefly entered oversold territory. It is now trying to rise from that. 

It should be good for a bounce. And if the market is wrong about luck not favoring this plucky explorer, this stock could blast higher on good drill results.

I'm not a buyer because A) it's outside of my risk profile and B) I found SO many good companies at PDAC. But those who don't mind a heady mix of risk and reward -- and a heck of a potential royalty, considering this company's tiny market cap -- might want to take a closer look.

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