TSO fair value? Short term target 30c, medium term 60c!, page-291

I’ve decided to add LCL to my peer comparison today as I’ve seen a lot of people making very biased comparison with TSO in the LCL forum. How many times since being listed we observe TSO jumps 15-20% in a day? Only a handful! TSO slowly and steady climbed up to the current market cap. After each rally is a healthy pull back. Investors had all the time in the world to read, swallow and digest each and every company’s announcements. Understanding what the company is doing and why they should invest. No pump and dump or knee jerk reactions here. Therefore, I think it’s unreasonable to claim that LCL should deserve an equivalent or better market cap than TSO after just few DD assays! Disclosure: I hold both. LCL was on my watch list for a long time, I was waiting for a good entry price and when @Corgi tagged me there, I finally decided to grab a good parcel at 5.5c. Bought some more at the open a few days ago and now Im at a very good profit. However I do not plan to hold for long (>12 months) like what I’m doing with TSO. I will list my other reasons below.

TSO vs LCL

Firstly I have to say this: To compare 2 company is not an easy job, even for the experienced. We need to consider every single factors. Comparison basing on GRADE ONLY is shallow and can be very misleading!

I. Ownership: TSO 70% vs LCL 100%

This is one of the major bonus of LCL vs TSO.

Some argue that at 100% TSO should be at 104/70 x 100 = 148M. I’m sorry but market valuation DOES NOT work that way.

If TSO announces tomorrow that it has now owned 100% of El Zorro, I would not expect share price would be open at 34c.

On the 23rd of March, TSO accelerated to 70% ownership of El Zorro. From 51% to 70% is a 100 - (51/70) = 28% increase in valuation. SP prior to that is at 3c, so it should be 3.9c right after 70% ownership (according to the above theory). However, SP only rose 6.7% that day and then immediately drifted back to 2.5c. Why? Because the acceleration in ownership only showed the confidence of the Board in the project, but the ownership itself might already been priced in. Let’s have a look at the prospectus:

We could see that to have 70% ownership, TSO only need to pay a total of $200.000, and a $50.000 more to get 80%. This is not a JV with another mining company! The vendor would like us to meet the milestones rather than demanding a big portion of cash or shares. The question is how can we acquire the remaining 20% to own 100% of El Zorro?

Zeff has mentioned several times about his friendship with the team in Chile. In fact, the vendor did show his good will by letting us to have 70% of El Zorro 1 year prior to the date written in prospectus! I would not be surprised to see us accelerate to 80% earlier than the supposed date. The remaining 20% most likely will include terms to allocate some shares to the vendor and to meet new milestones, for example, getting finance and first gold pour.

II. Drilling assays

LCL assays showed thicker intercepts and mineralisation from surface. However, it’s difficult to compare a porphyry style of mineralization to an IRGS. LCL is going through the core of a porphyry ore body, while TSO is drilling through 14 faults with mineralized halo and connecting veins. Also, we need to put assays in context. I love what @lukedout said, “we are not only exploring, we are defining”. TSO could also archive a higher grade, thicker intercept and closer to surface if we drill straight into one of the high grade faults. But it is not what we are aiming to do at this stage.

I think it’s still too early to tell which system contains more ounces of gold. However, TSO with 44 diamond drills completed to date, is at a more advanced stage in defining their resource. If we use the model from @123david321 , we could see that TSO can provide more evidences to support the statement “This is a significant deposit”.

III. Mining jurisdiction

• In the Fraser list, Chile is a few classes apart from Colombia.
• Chile is the best performer in South America. Far more advanced than the runner-up which are Mexico and Peru. Colombia on the other hand has quite low scores.
• In the world, Chile outperformed ALL THE STATES in Australia (except for WA, probably the best region in the world), and most of US & Canadian States.
• In the interview MD Zeff was amazed with how good Chile is. “Once you got the permit, the next day you are already on the ground drilling. No additional paper work as what we are seeing in Western Australia”.
• Chile legislative regime is well known to be supportive towards smaller explorers and developers.

IV. Location: Again, location is vital in the mining industry

TSO:

• World class mining region
• Atacama Desert host a wealth of Gold, Silver, Molybdenum, Iron, Zinc and especially Copper!
• Escondida mining alone is responsible for 5% of world copper output. Collahuasi is the world largest copper mine. El Tienente is world's sixth largest copper mine.
• Pascua Lama is a world class Gold-silver-copper deposit: can produce 850,000 oz of Gold & 35 million ounces silver each year with a mine life of 25 years.
• El Zorro is 10km from Pan American Hwy & Pacific Ocean.
• Low altitude existing infrastructure (water, roads, ports & power), skilled workers and constructors.
• Cost effective exploration/mining all year round.

LCL:

• Cauca Valley, although is very rich in resources, has been struggling with drug gangs, riot police and deforestation.
• Remote location with under developed infrastructures.
• Frequent attacks by FARC and gangs groups, including kidnapping and sabotage.
• The government’s response has been to intensely militarise the zone

V. Management

• TSO: Tier 1, Exceptional team! Quoted from PAC partners “We are very pleased with the rapid progress the Tesoro team has made in such a short period of time. Management have repeatedly over delivered on the expectations and we see no reason to not believe they will continue to do so”. I believe all TSO holders have 100% trust in the management. Our trust was not earned by previous glory or fluffy announcements but by what the team actually did. It’s always easier to make excuse than to make progress and TSO board has been absolutely outstanding!
• LCL: Previous team had a bad reputation. The new team looks very strong. However, they need more time and they need to continue to deliver to gain trust.

VI. A bidding war?

TSO is very lucky to be surrounded by not only 1 but 6 giants gold producers

- Goldcorp (teaming up with Barrick): World No.1 Gold producer

- Barrick: World No.2

- Newmont: World No.3

- Yamana: World No.6

- Kinross: World No.7

- Anglo Gold: World No.8

LCL: here are the giants operating in Colombia and their story

Mining giants such as AngloGoldAshanti (JSE:ANG), Newmont Mining (NYSE:NEM) and B2Gold (TSE:BTO) have been in operation in Colombia for decades.

1. AngloGold Ashanti (NYSE:AU, ASX:AGG, JSE:ANG) has commenced its exploration activities in Colombia in 2002, and was instrumental in two significant discoveries, namely, La Colosa and Gramalote. Both projects are currently at the stage of advanced economic evaluation. Gramalote, a joint venture between AngloGold Ashanti Limited (51%) and B2Gold, and is expected to be AU’s first operating gold mine in Colombia. La Colosa meanwhile is the largest greenfield discovery made by AU.
2. Newmont Mining Corp (NYSE:NEM), has operations in Colombia through various acquisitions. The company acquired 19.9% stake in Continental Gold, Inc. (TSE:CNL) and its Buriticá project in Colombia through a private placement. The investment was to develop the Buriticá project into commercial production. This was followed by an option agreement with Miranda Gold (TSE:MAD) that allows NEM to earn an interest in Miranda's Lyra Project in Colombia. Upon successful completion of the Initial Earn-In, NEM and Miranda shall form a joint venture mining company in which NEM will have an initial 51% interest.
3. Gran Colombia Gold Corp (TSE:GCM) is the largest underground gold and silver producer in Colombia with several underground mines and two processing plants in operation at its Segovia and Marmato Operations. GCM is currently in the midst of an expansion and modernization project at its high grade, production stage Segovia Operations. The company has successfully implemented a number of cost savings initiatives, bringing its All-In Sustaining Cost to US918 per ounce in 2017 and expected to be below US950 in 2018. The company produced a total of 55,260 ounces of gold in the fourth quarter of 2018 (up 7% YOY) thus bringing the total gold production for 2018 to 218,001 Oz (up 25% YOY).

Please take note of the development phase and production output of the above companies.

Also please note that the presence of mining giants in the region is not a safety assurance. Unlike those giants, a junior explorer do not have the resources to follow law cases that can take years. They also cannot withstand a closure of mine or removal of permit. Companies with >10Bn MC and numerous working mines in Tier 1 mining jurisdiction are more willing to take risks in a country like Colombia.

VII. Production output.

DFS on paper are meaningless without an actual production output.

Multinational gold miners like AngloGold Ashanti Ltd, Eco Oro Minerals Corp, Red Eagle Mining Corp and Mubadala Investment’s Minesa have tried and so far failed to mount large-scale, successful underground projects in Colombia, stymied by a smorgasbord of legal, security, environmental and community relations problems. Here is a few example of large scale production on paper but failed to materialise:

1. ANGLOGOLD ASHANTI:

• AngloGold Ashanti Ltd was forced to abandon its $2 billion La Colosa mine after a 2017 community vote banned mineral extraction.
• The vote came amid a wave of environmentally focused anti-mining referendums that spooked investors. The constitutional court later ruled referendums cannot halt energy projects because the country’s subsoil is national property.
• In 2019, the company was forced by a local mayor in Antioquia province to halt a soil study at its Quebradona copper exploration, before a provincial environmental authority ruled work could continue.
• The company’s Gramalote gold project, which is in planning stages, could produce between 350,000 and 450,000 ounces per year, AngloGold says.

2. ECO ORO

• Canada’s Eco Oro Minerals Corp sued the Colombian government after its Angostura project in Santander province was cut in half by a 2014 constitutional court ruling that expanded wetland protections.
• The company is suing for $764 million in damages in ongoing arbitration. It has said it has already invested some $250 million in Colombia, including in Angostura.

3. RED EAGLE

• Vancouver-based Red Eagle Mining Corp had predicted its San Ramon mine, in mineral-rich Antioquia province, would produce up to 50,000 ounces of gold in 2018, but the company was forced to shutter the project amid a restructuring negotiation.
• In November $38 million of equity financing meant to enable an operations restart fell through and the company was served with a default notice.

4. MINESA

• Minesa, owned by the government of Abu Dhabi through its investment arm Mubadala Investment Corp, is waiting for environmental licenses for the $1 billion Soto Norte project in Santander province.
• The miner plans to eventually produce some 410,000 ounces of gold per year, but has struggled to develop positive relationships with the community around the proposed project.

5. Zijin

• The most recent mine that is about to open is Buriticá (Continental Gold sold to Zijin)
• After more than a decade of work, Continental was not able to begin production. The delay is due to the company’s high standards of social responsibility. Continental achieved this despite frequent socio-environmental conflicts in Colombia.
• Also, between 2012 and 2015, the presence of 20,000 informal miners in Buriticá triggered a deep social crisis
• Continental gold fell into a deeper crisis in 2018, when gunmenkilled four of its employees in two separate attacks.
• I’ve seen people posted that Zijin bought Buriticá (11Moz) for $1.1Bn. They assumed that EV/oz is $100/oz and used this number to compute for possible value of LCL. Sorry but I have to disagree on this. Why? Because Continental gold and LCL are at a 2 different stages of development:
• Continental spent a huge amount of money on 2 decades of exploration and to get all the necessary permits to mine.
• They also spent vast amount of cash and effort to gain support from the local community.
• Constructed a 110kv powerline for the project
• CAPEX for their 350koz/pa plant is close to $600M. The plant is nearly finished and ready to pour gold in Q2 2020.
• One should question why after 2 decades of pain, they decided to sell everything to Zijin when they are only a few months away from production, with a very favourable current gold price.
• Zijin is a state-owned company, it has a history of violating environmental regulations and threatening governments that make decisions contrary to its interests.
• It warned Papua New Guinea's prime minister that if their government did not renew the environmental licence at the Porgera gold mine, his country’s diplomatic relations with China would be affected.
• In China's Fujian province, one of Zijin’s copper mines poisoned the Ting River, with disastrous consequences for local communities.
• Buritica, once starts production, would be the first large scale gold mine in Colombia!

Meanwhile, let’s review the production output of all gold miners in Atacama. This is only gold, the production output of other metals such as Cooper are also shocking! Most probably this is one of the best mining regions in the world!

1. El Penon (Yamana): output is 252,000 ounces of gold/pa and 8.4Moz of silver/pa.
2. Norte Albierto (Barrick, Newmont): 23.2 Moz gold & 5.8 Bn pounds of copper.
3. Pascua Lama (Barrick): 21.3 Moz of gold and 676 Moz of silver.
4. La Coipa (Kinross): output is 690,000 ounces of gold/pa.
5. Salares Norte: output is 450,000 ounces of gold/pa.
6. Lobo Marte (Kinross): reserve is 6.4Moz of gold.
7. Refugio (Kinross): outputs is 260,000 oz/pa. Grade of 0.86 g/t for 3.5Moz of gold.
8. Caspiche: average grade of 0.55 g/t Au for 19.3 Moz of gold and 2.1 Mt of copper.
9. Cerro Casale (Barrick, Kinross): proven and probable gold reserves of 17.4 Moz as well as 2.5 Moz of measured and indicated gold resources. 4.3 billion pounds of copper.
10. Volcan (Hochschild): output is 287,000 oz/pa. AISC of US$586 per oz of gold.
11. Fenix (Rio2): Reserve can be up to 4-5Moz. Production target in 2 years is 250,000 oz/pa.

VIII. Exploration potential:

Although I would favour TSO in the long term, I believe that at this stage, LCL and TSO are somewhat equivalent in exploration potential. One picture speaks a thousands word @Hateful8

IX. Cost

• Reserve number and production output are meaningless if cost is not given
• TSO is an open pit with low strip ratio and low AISC.
• CAPEX is lower due to Tier 1 mining jurisdiction and superior location.
• Right now most people are assuming that LCL would also be an open pit. However, due to the environment and ethical issues, most mines in Colombia need to go underground.
• The construction of an open pit in this area is also unlikely as it would lead to massive deforestation.
• For an underground mine, the grades need to be higher, together with a higher CAPEX/OPEX.
• Please look back to the history of MNC and Minaflores to understand why it looks good on paper but since its discovery in 2017, MNC has failed to attract the attention of investors. Minaflores has potential but LCL needs to do a lot more work to resurface it.

LCL

TSO:

X. The Inherent Risks:

TSO: we could not see any road block from now to its first gold pour. The whole project was significantly derisked at all levels. (Please watch the most recent interview to understand more)

LCL:

The investment case for mining in Colombia has been considerably jaded due to regular news headlines on drug trafficking, armed conflicts between right-wing paramilitaries and left-wing guerrillas, policy uncertainty and infrastructure challenges.

Colombia has produced millions ounces of gold but 80% of them comes from illegal miners, according to recent data unveiled by the country’s government (2015)

Environmental & Ethical issues

• El Zorro is located in Atacama desert. Very low biodiversity and no community issues.
• Colombia on the other hand is one of the most biologically diverse countries on the planet and is home to more than 10% of the world’s plant and animal species.
• Gold mining lead to significant consequences for the country’s ecosystem and rural communities.
• 80% of the human rights violations that have occurred in Colombia in the last ten years were committed in mining and energy-producing regions
• The environmental degradation caused by mining in the fourth-most biologically diverse country in the world is extreme
• Highly toxic products, like cyanide, are used to mine minerals such as gold. These chemicals contaminate the land and water sources in the region, to the detriment of resident communities.
• Colombia recorded a 46 percent increase in the loss of forests in 2017 compared to 2016
• The Colombian government in 2016 introduced laws to prohibit mining operations at altitudes between 3,000 and 5,000 meters—from nearly 10,000 feet to more than 16,000 feet—and to protect the vital yet fragile high-altitude ecosystems known as paramos.
• Recently, after the destruction of the Amazon forest in Brazil due to fire and deforestation. International groups are putting pressure on the Colombia government to limit its mining activities.
• All foreign miners/explorers claimed that they were friendly and supportive towards the local community. However a recent survey revealed the opposite with the majority of local residents consider foreign miners as “evil”.

For loyal LCL holders: I’m not a down ramper and I do not want to get involved in pointless arguments. That’s why I did not post this on the LCL forum. Most of the stuffs above are just facts and are open for interpretation. IMO, LCL and TSO both have a great project with great upside potentials. However, I hope this would end the comparison between them because they are simply very different!