In a recent interview, I outlined the criteria I use in picking natural resources stocks, including high-quality assets, a technically-competent and shareholder-friendly management, and an adequate margin of safety.
Rarely does a stock meet all three of these criteria. The vast majority of stocks cannot withstand scrutiny; they usually fail one, two, or even all three criteria.
In this article, let’s examine ATEX Resources Inc. (ATX.TSX-V)(EAT3.FSX)(ECRTF). As will be demonstrated below, I believe that the serially-successful ATEX team has acquired a copper-gold project of exceptionally high quality, and that the project can deliver enormous returns, as exploration progresses and upon proper promotion.
Valeriano
The Valeriano property comprises 15 exploitation and 2 exploration concessions covering 3,705-ha in an area that is some 3,800-4,400 masl. Valeriano is located 125km southeast of Vallenar of Atacama Region, northern Chile, with good road access and available water. It is contiguous to and enclosed within the advanced El Encierro copper-gold project of Barrick (GOLD) and Antofagasta (OTC:ANFGF)(Fig. 1).
Valeriano optioned
ATEX entered into an option agreement with Sociedad Contractual Minera Valleno on August 29, 2019, to acquire a 100% interest in the Valeriano copper-gold property by paying US$12.0 million, issuing 2.0 million units of ATEX, and incurring work commitments of US$15 million over four years. The property is subject to a 2.5% net smelter royalty payable on any metal production.
The option term was subsequently extended to five years due to the Covid-19 pandemic, at a cost of US$250,000 payable on August 29, 2021.
- The US$12.25 million payment includes US$200,000 upon signing, US$300,000 upon the commencement of drilling, US$250,000 payable on the second anniversary of signing, US$3.5 million on the second anniversary of signing, and US$8.0 million on the fourth anniversary. Half of the US$3.5 million may be paid in ATEX shares at the option of ATEX and half of the final US$8.0 million payment may be paid in ATEX shares at Valleno’s option.
- The option agreement was originally acquired from Valleno by SBX Asesorías e Inversiones Limitada, a third party. Under a transfer and assignment agreement, some US$150,000, 2 million ATEX units (one common share and one full warrant exercisable at C$0.40 for four years), and a NSR royalty of 0.25% are payable by ATEX to SBX.
ATEX is supposed to earn a 49% interest by September 1, 2023, by spending US$15.0 million (US$10.0 million during the first two years, including 8,000m of drilling), and to earn a 100% interest by September 1, 2025, by spending $5.0 million over the final two years (Table 1).
Historical exploration
Valeriano was initially explored by Phelps Dodge (FCX) in 1989‐1991, and Barrick in 1995‐1997 for near-surface oxide gold mineralization, which drilled a total of 12,577m in 47 relatively shallow holes. After having optioned the property in 2010, Hochschild Mining (OTCQX:HCHDF) drilled additional 14,270m in 16 holes in the subsequent three years. Hochschild intersected 848-1,194m of porphyry-style mineralization grading 0.54-0.73% CuEq in three deep holes, thus confirming the existence of a vertically-zoned hydrothermal alteration and mineralization pattern.
In September 2020, ATEX released the maiden NI 43-101 compliant mineral resource estimates for the Valeriano project based on historical drilling (Table 2).
- The gold oxide epithermal deposit is estimated to contain 584,684 oz gold and 2.65 Moz silver in the inferred category, for a total of 621,539 oz AuEq at 0.561 g/t AuEq in 34.4 Mt.
- The copper gold porphyry deposit is estimated to contain 1.77 Mt of copper, 1.84 Moz of gold, and 8.62 Moz of silver, all in the inferred category, for a combined 5.07 Blb CuEq at 0.77% CuEq in 297.3 Mt.
2020-2021 metallurgical test work
ATEX also conducted initial metallurgical test work beginning July 2020, using drill core from previous drill programs.
Some 13 bottle roll leach tests achieved average gold recoveries of 70.8%, suggesting the oxide gold mineralization at Valeriano is amenable to heap leach, pending further detailed metallurgical test work using samples provided by the 2021 drilling program.
2021 exploration
In February 2021, ATEX commenced the mobilization of drilling and related support equipment to the Valeriano project, aiming to expand the existing near-surface oxide gold resource and convert some of inferred gold resources to the measured and indicated categories. Although 3,000m reverse circulation drilling program was originally planned, the company ended up drilling 1,708m in 12 reverse circulation drill holes, including ten drilled into the gold oxide deposit. These holes returned intervals of >0.2 g/t gold mineralization hosted within the volcaniclastic upper unit, including 40m grading 1.25 g/t gold and 4.06 g/t silver and 50m grading 0.68 g/t gold and 2.18 g/t silver (Fig. 2).
During surface mapping, ATEX discovered the so-called GBV zone, a new zone of gold mineralization comprising mineralized grey banded-quartz veins that cut brecciated rhyolite.
- Trenching through the GBV zone returned significant intervals of gold mineralization, including 0.80 g/t gold over 60m.
- One drill hole, reaching a depth of 72m due to technical reasons, returned 36m grading 0.49 g/t gold and 0.41 g/t silver.
New porphyries were identified on the surface, implying the occurrence of a new mineralized cluster that is higher in the sequence (Fig. 2). This is not only confirmed by the relogging of historical drill holes but also evident in historical geophysical surveys (Fig. 3).
On January 6, 2022, ATEX said two diamond drill rigs would be mobilized in mid-January 2022 to drill 6,000m to further test the historical intersection of 1,194m at 0.73% CuEq. The drilling program will be finished in March 2022, with assay results expected probably in April or May 2022.
Upside and risk
The upside
The Valeriano porphyry deposit is not shabby at all when compared with other copper porphyry projects in the world. That 0.714% CuEq over 1,194m reported by ATEX ranks comfortably among the global top ten intersections of the last two years, including the best holes of Solaris Resources (OTCQB:SLSSF), Regulus Resources (OTCQX:RGLSF), and Aldebaran Resources (OTCQX:ADBRF).
The Valeriano porphyry deposit may prove to be considerably larger than the 5.07 Blb CuEq of inferred resources as reported in the 2020 technical study. Firstly, the presently-defined deposit is known to be open in all lateral directions and down-dip. Secondly, the new porphyry target identified in the southeast suggests that multiple phases of porphyry intrusions may have occurred, which bodes well for finding significantly more resources. ATEX plans to conduct detailed geophysical surveys on the new target so as to formulate a drilling program.
- As for the moderately-sized oxide gold deposit, some may even say the management under then chairman and CEO Carl Hansen was misguided; it should not have focused on infilling the oxide gold deposit in 2021. Incorporating the 2021 drilling results, ATEX will update the mineral resource estimate. However, the new management team under chairman Craig Nelsen and CEO Raymond Jannas seems to be pivoting towards the porphyry deposit.
For all the above upside, ATEX Resources currently has a paltry enterprise value of US$30 million on a fully-diluted basis. The in-situ mineral resources are only valued at US$0.0059/lb CuEq, substantially below industry transaction metrics, suggesting deep undervaluation.
- Prior to the latest private placement financing, ATEX had 36.68 million common shares, 31.37 million warrants, and 2.99 million options. After it, ATEX had 96,475,261 shares, 91,166,333 warrants, and 4,185,000 options.
- As recently as end-October 2021, ATEX traded as low as C$0.10 per share. No retail investors could have foreseen what was to transpire since then. Entering November 2021, some guys got wind of certain mining magnate to participate in an upcoming brokered private placement financing, and decided to bid the stock higher and higher. By November 15, 2021, when the company actually announced the private placement financing to raise C$7.4 million, the share price was already at C$0.30, and on December 7, 2021, three market days after the financing closed, the share price reached as high as C$0.53.
- The participating mining tycoon turned out to be Pierre Lassonde, who took 10.03 million shares and as many warrants, becoming a 10.19% shareholder, while Nelsen took 3.51 million units at C$0.1425 per unit. Amazingly, ATEX has stabilized around C$0.40 since then.
The risk
Investors have been wary of the political risk associated with Chile. An updated mining royalty bill was passed by the Lower House in May 2021 and is now in the Senate for debate, with the timing and the final terms of the new royalty uncertain. A constitutional assembly elected by the Chilean people is drafting a post-Pinochet constitution. Leftist millennial Gabriel Boric defeated far-right candidate José Antonio Kast on December 19, 2021, becoming Chilean president.
As I said in a recent article of Chilean political risk,
“However, as compared with failed states such as the Kyrgyz and Tanzania that confiscated mines operated by foreign companies, the Sahel countries where mining workers were killed by terrorists, or some developed countries where it takes decades to permit a mine, Chile may not be that bad a jurisdiction after all, even with higher royalty. Increasing state take seems to become a global trend as metal prices rise. By the time this round of state take hike is done, Chile may once gain end up being an extraordinarily attractive mining jurisdiction.”
As an exploration play, the share price of ATEX is largely independently of the copper or gold prices. The stock has been fluctuating within the C$0.10-0.40 range in the last three years, reacting little to the copper or gold prices (Fig. 4). The primary driver of the share price is expected to be news flow generated by the exploration program.
Drilling deep holes into the Valeriano porphyry will be extremely costly. However, getting Lassonde’s endorsement should help immensely in future financing. Besides, the exercise of warrants and options, all of which are now in the money, should add considerably to the company’s coffer.
ATEX trades on TSX-V with sufficient liquidity. It also trades on the OTC-Pink board, with thin liquidity.
The management
The ATEX team consists of a number of serially successful entrepreneurs.
- Chairman Craig Nelsen founded Metallica Resources and led the company for close to 20 years advancing the El Morro discovery. He was also involved in the discovery and development of Pascua-Lama (Fig. 2), Cerro San Pedro in Mexico, and Cerro Corona in Peru.
- CEO Raymond Jannas has been associated with Nelsen for a long time. Jannas headed teams that discovered Pascua-Lama, El Morro, and Cortadera in Chile.
- Carl Hansen, who was replaced by Jannas as CEO and by Nelsen as chairman, remains a director, joined by Robert Suttie (accountant), and William Jung (accountant), besides Nelsen and Jannas.
- Hansen, together with Albrecht Schneider, co-founded Andina Minerals and Atacama Pacific Gold, which discovered a number of precious metals deposits in Chile including Cerro Maricunga (now Fenix of Rio2). Schneider chairs the advisory committee that also includes Kevin MacLean (CIO, Star Royalties), Antonio Ortuzar V (lawyer), Jeff Palmer (accountant), Hans Rasmussen (SVP at Coeur Mining; formerly CEO of Colombia Crest Gold – the predecessor of ATEX – until 2013).
The management, board, and advisory committee own a 22% interest in the company, giving them substantial skin in the game. They have participated in recent financing rounds.
Investor takeaways
ATEX seems to check a lot of boxes:
- The Valeriano porphyry deposit already has 5.07 Blb CuEq, which may be substantially expanded with further exploration drilling. An intersection of 0.714% CuEq over 1,194m should impress any mining investors.
- The management team is serially successful and has substantial skin in the game at ATEX.
- Although it has quadrupled since November 2021 from the oversold bottom upon Lassonde being reported to have become a shareholder, the stock is still a great value relative to the enormous upside potential hidden in the porphyry deposit.
- A 6,000m drill program is underway. The news flow therefrom may catalyze the share price substantially higher in the next few months.
In view of the extremely attractive risk-reward profile, I have opened a starter position in ATEX. Depending on the news flow of the 6,000m, two-rig drill program that was scheduled to begin in mid-January and finish by March 2022, I plan to add to the position prior to the assay results. With my fingers crossed, an opportunity may appear in early April 2022 when the hold period for the 59.8 million units from December 2 private placement ends.