Set Up By Frank Giustra For Exploration Success: Fiore Exploration

Pampas El Penon; drilling

Introduction

With the recovering metals- and commodity sentiment in 2016 (although the Trump election (unexpected by many) and last rate hike were negative for gold and silver so far), a lot of influential groups and individuals in mining are setting up new ventures since the end of 2015 to position themselves the best they can for possibly the next big bull market in mining. One of these individuals is one of the most successful mining titans of our time: Frank Giustra. Having founded 5 (multi) billion dollar resource companies (for example Pacific Stratus Energy, the predecessor of Pacific Rubiales Energy, and Wheaton River, predecessor of Goldcorp and Silver Wheaton) and a multi billion dollar film studio (Lionsgate), he became a billionaire himself because of it. That wasn't it, as Giustra did some remarkable things before he started founding companies himself.

When he was with Yorkton Securities, an investment bank, he funded some of the most lucrative deals in the history of mining, as he did the first financing of Robert Friedland's Diamond Fields. This was right before Diamond Fields discovered Voisey's Bay nickel deposit, seeing shares soaring from a few pennies to C$174 after a bidding war between Inco, Teck and Falconbridge, which Inco won at a hefty final price tag of close to C$4.3B. In short: Giustra seems to know where to be at the right time. As Giustra sees potential everywhere at the moment, a myriad of shells and projects has been turned into new companies, some of them already quite successful (Lithium-X, Cannon Point, Japan Gold, Fiore Exploration). Frequently you see money, good management and good projects go after the big and successful players in this business, as chances on success are above average. With Giustra it's no exception, and with the junior being discussed here it's the same.

This company is Fiore Exploration, which Giustra set up to be a world class explorer. He even named it after his mother, which means a lot for a Canadian with Italian roots. This single detail made me invest in the company alone, as it is likely to see Frank Giustra going to great lengths to honor his mother.

Fiore Exploration was launched after it acquired the Pampas el Penon gold project in Chile from Arena Minerals (AN.V) and Sociedad Quimica y Minera de Chile (SQM). This property has all the right features you would like to see in a first exploration-stage land package, and unlike so many other exploration stories, the acquisition of the Pampas el Penon project was already accompanied by a valid (and actually very likely) exit strategy, as senior gold producer Yamana Gold (AUY.TO) is producing gold and silver just a few kilometers to the south, and is in need for more mill feed as its operations are running inefficiently at the moment. However, management isn't betting on just one horse, as I will explain later on.

All presented tables are my own material, unless stated otherwise.

All pictures are company material, unless stated otherwise.

All currencies are in US Dollars, unless stated otherwise.

 

2. Company

Fiore Exploration is a Latin America focused gold explorer, owning the prospective Pampas El Peñon and Cerro Tostado gold and silver projects in Chile, which cover land in the same geological environment as Yamana's flagship El Peñon mine. Fiore Exploration's objective is to acquire undervalued exploration and development-stage mineral assets in mining friendly jurisdictions in the Americas. Chile is one of the best Latin American jurisdictions, with a ranking of 26 out of 109 jurisdictions according to the 2015 Fraser Survey of Mining Companies. With global mineral exploration budgets at less than half of their 2012 peak, Fiore sees a great opportunity to acquire world-class assets across a number of mining-friendly jurisdictions. The fall-off in exploration spending has also drastically reduced exploration costs, and made high-quality exploration staff and contractors readily available for the first time in many years.

Fiore has raised C$16.2M since August 2016 which is very impressive for a starting junior, resulting in a cashed up treasury of C$13.5M. This is instrumental to take full advantage of the earlier mentioned possibilities in acquiring assets and hiring high-quality people.

The company has a very seasoned mining executive at the helm: CEO Tim Warman, geologist . He has a habit of showing up at key times at some of the most prolific projects in the industry. Currently he is a director of Continental Gold (since 2010), in the recent past he was President of Dalradian Resources, which is developing the Curraghinalt gold project in Northern Ireland, from 2012 to 2015. At Dalradian, Mr. Warman was responsible for all operational aspects of the company's exploration, permitting and development activities.

Previously, Mr. Warman was vice-president, corporate development, of Aurelian Resources Inc., where he supported the exploration team in Ecuador, initiated and managed early-stage development studies, marketed Aurelian to international investors, and played a significant role in successfully negotiating the $1.2-billion acquisition of Aurelian by Kinross Gold Corp. The Board of Directors is packed with industry veterans like Pirooz, Tallman, Pokrandt and Liland. Giustra is the (financial) force in the background who can also open a lot of doors if needed, and Paul Matysek has been added as an advisor, and as he is a rainmaker in his own right, I believe Fiore to have an excellent group of people, capable of making the best decisions at all times, attracting capital and quality assets at will.

Fiore Exploration  has 101.3M shares outstanding (F/D 108.5M), with Frank Giustra and Brian Paes-Braga as a major shareholder (about 17.5% combined). The cash position is estimated at C$13.5M, with no debt. The current share price is C$0.38, resulting in a market cap of C$38.5M.

Share price; 1 year time frame  

As gold went down after October, so did Fiore as a gold exploration company. A bit of tax loss selling might also kick in here (usually the peak is around mid December), and the recent rate hike had a negative effect on gold as well. Fiore’s share price has also been under pressure because the 26 cent placement was coming out of lockup in the first week of December. It does look like some participants in the first private placement took some profits off the table, but this actually is a blessing in disguise for potential new investors.Technically it seems the worst is over now, and with a lot of activities behind the scenes and drill results coming up soon, I view this as an attractive opportunity to get in low. After all, you can now buy stock at a 30% discount compared to the price level of the last private placement (at C$0.55), and liquidity levels will increase as more shares come into the market. Let's see if the timing of this article turns out to be a good one in a year from now. For now, it's time to look at the first and flagship project of Fiore, Pampas el Penon.

3. Pampas el Penon project

The Pampas el Penon (PEP) property is located in Chile’s Antofagasta region and currently consists of 13 mining concessions with a total surface area of 3,400 hectares (34 square kilometers), located on the road which is running straight towards the Escondida mine which is the largest copper mine in the world.

Even though certain Chilean projects can be a logistical issue, the PEP project is actually very easily reachable as the Pan American Highway coming from the port city of Antofagasta is passing by pretty close to the property, and the 140 kilometers from Antofagasta could be completed in just 2.5 hours on paved roads.

Location Pampas El Penon, Chile

Pampas El Penon hasn’t always been the center of attention for gold and silver exploration, and as SQM is more a non-metals mining company, it first focused on finding nitrates and iodine on the property, and the first batch of RC holes in the previous decades had no intention to focus on discovering precious metals.

It was only in 2010/2011 SQM had another look at the property, ad decided it could be a good idea to explore for gold and silver, and a total of 26 holes have been drilled. Unfortunately none of these holes contained any gold or silver values, but the assay results did show anomalous values for arsenic and antimony, which are well-known pathfinder elements for possible gold mineralization. As the average depth of the holes was very short (less than 70 meters), there’s a good chance SQM just didn’t drill deep enough.

The current drill program will undoubtedly complete some deeper holes as the gold and silver mineralization is very likely located deeper than where SQM had been scratching the surface. This doesn’t mean SQM has ‘failed’; the Chilean company was just looking for other mineralization rather than gold and silver, as precious metals most definitely aren’t part of the company’s core business.

And finally, keep in mind the Pampas el Penon concessions are mining concessions, and mining on those concessions is already permitted. This will reduce the permitting risks considerably, and could substantially reduce the potential timeline between designing a mine plan and the commissioning of the project, which is another advantage of this property.

Outline Fiore claims

The good relationship between Giustra and Arena Minerals CEO Randall allowed Fiore Exploration to get directly in touch with SQM, with whom Arena Minerals entered into an option agreement on  the Pampas el Penon property.

Fiore issued 9.55 million shares to Arena Minerals and an additional 5.35 million shares to SQM to earn a 100% ownership of the Pampas-project, after completing an additional C$750,000 cash payment and spending C$1.83M before the end of July next year. Fiore has plenty of cash on hand to make the cash payments, and the 8,000 meter drill program that is currently being wrapped up will already take care of a large part of the required exploration expenditures.

Issuing 15 million shares to strong hands actually is a really cheap way to get your hands on a very promising drill-ready project.

Fiore Exploration was able to raise a ton of cash when it announced the original acquisition of Pampas el Penon. A first placement raising C$5.2M was closed simultaneously with the transaction, as just a few months later, Fiore closed an additional placement, raising no less than C$11M by issuing 22 million new shares at a price of C$0.55/share.

It was encouraging to see the two main people behind Fiore Exploration, Frank Giustra and Brian Paes-Braga, both participated in this most recent placement which could be seen as a sign of confidence. Remember, both gentlemen currently own 17.5% of Fiore’s total share count (on a combined basis) which counts as significant skin in the game in my book.

Anomalous Arsenic and Antimony results encountered during historic drilling by SQM

The total cash inflow of C$16M was very useful as it allowed Fiore to immediately start their exploration programs, based on the company’s own interpretation of the property, and after a careful analysis of the data gathered from the previous exploration efforts by Arena Minerals and SQM. The historic exploration efforts predominantly consisted of mapping, sampling and trenching, and Arena/SQM had identified three areas with favourable geochemistry which were subsequently validated as high priority drill targets.

The program will be completed any day now and we expect to see the first assay results by the end of December, or early January 2017.

The three priority drill targets are located in the immediate vicinity (the AV West concession is less than one kilometer away from Yamana’s existing Augusta Victoria mine, where the company has been mining ore from an open pit as well as an underground mine. Having high-priority exploration targets close to an existing mine is a ‘plus’, but there’s a very good reason why Yamana will be watching all future developments from very close by.

Yamana's likely reason of interest

Even though the El Penon mine has plenty of resources (a total of 2.5 million ounces of gold as well as 77 million ounces of silver in all categories), the issue with the mine has a different cause. Yamana’s El Penon mine opened in 1999 and has been in production ever since, with ore being fed to a processing plant with a total capacity of 4,200 tonnes per day.

Unfortunately Yamana hasn’t really been able to maximize the throughput of the plant. Yes, in the third quarter it was able to process an average of 4,110 tonnes per day, but that was only due to Yamana tapping into its stockpiles, as the total amount of ore mined during the third quarter was just 3,714 tonnes per day, a shortfall of 500 tonnes per day to nameplate capacity.

The low mining rate wasn't really a one-time event. In the first nine months of the year, the total amount of ore that has been processed was 1.06 million tonnes (3,900 tonnes per day), whereas the total amount of ore mined was much worse, at 3,555 tonnes per day. This is still a major improvement compared to the 3,227 tonnes per day in the first nine months of last year, but it’s pretty obvious the mining rate at El Penon can’t keep up with the capacity of the plant, which is running at just 85% of its capacity.

Production data El Penon; source: Yamana Q3 Report

Having a relatively large plant, but being unable to run it at full capacity, creates inefficiencies in the production process and actually increases the production costs per produced ounce of gold and silver as the fixed costs now have to be spread over a lower production.

Yamana Gold realizes this is a big issue and has kicked off several large exploration programs in the El Penon region. And yes, those exploration programs have been successful as they identified several new vein structures, but the key word in all exploration updates is the fact all these discoveries were narrow vein discoveries. Although these veins tend to have a higher average grade, they also contain fewer tonnes which might exacerbate the current mine production shortfall compared to the size of the processing plant.

Vein structures El Penon; source: Yamana corporate presentation

The simple fact the plant is already running below capacity, and the fact the new discoveries seem to contain fewer tonnes than expected, increases our theory that Yamana’s El Penon mine would benefit tremendously from gaining access to additional mill feed. This would allow the company to increase the total amount of ore that will be milled in any given quarter, and create optimized operational efficiencies.

As the surface infrastructure is already operating, Yamana doesn’t need a huge orebody to benefit from synergy advantages. Developing a new zone would be pretty cheap, and depending on the depth of the mineralization, Yamana could actually develop underground access to Fiore’s El Penon west concession should Fiore be able to make a decent discovery there.

I'm pretty sure that Yamana Gold is watching Fiore Exploration very closely, as its large, ongoing 100,000 meter expansion drill program looks like a desperate sign it urgently needs to find new ore zones.

4. Cerro Tostado project

Even though ( according to CEO Warman) Yamana Gold has been trying to get the Pampas el Penon project from SQM, it was Arena who succeeded because they had better local guys, and hired an apartment across the street of the relevant SQM office at the time, apparently forcing the issue in their advantage. In turn, Fiore who was able to secure ownership of Pampas el Penon afterwards, as Fiore had an excellent working relationship with Arena Minerals, whose CEO Will Randall in turn has an excellent working relationship with SQM.

Location Cerro Tostado; source: SQM website

Just a few weeks ago, Fiore entered into a Letter of Intent with SQM to acquire the full ownership of the so-called Cerro Tostado project, which is located right next to the main zone of Yamana Gold’s El Penon mine.

The Cerro Tostado project consists of a 1,500 hectare land package divided in five concessions, all within a 12 kilometer radius from the El Penon mining operation. Perhaps even more important is the fact the Cerro Tostado project seems to be lying more or less on strike with the currently known mineralized zone at Yamana’s project:

Cerro Tostado claims

The concessions are also right on the extension of the Fortuna mine, and a previous drill program executed by SQM has encountered some very high-grade mineralization. Even though the drill program was pretty small (less than 2,000 meters were drilled in 17 holes), the most important drill result was very likely the 10 meters of approximately 8 ounces of silver, and this grade is pretty much in line with the silver grades on Yamana’s project.

Of course, more exploration efforts will be needed, but the first indications are confirming the land package  contains all the right characteristics to discover more gold and silver mineralization. The property has never been a real priority for SQM, but now Fiore will be calling the shots, the project will probably get the attention it deserves.

To earn a 100% stake in Cerro Tostado, Fiore Exploration is required to make a total cash payment of 1.26M USD and spend 2.25M USD on exploration in the first five years after signing the definitive agreement. SQM will also be compensated with half a million shares of Fiore Exploration, and it will also be awarded with a royalty payment on the production of precious metals.

5. Future acquisitions

When talking to CEO Warman, it became very clear that Fiore is very busy assessing new acquisitions, and they are in advanced stages of negotiations on various projects, in various stages. The intriguing part to me was that they are also contemplating projects with deposits which have NI43-101 resource estimates being done on them.

If Warman succeeds in acquiring such a deposit, it would be high quality and the terms would be attractive, then Fiore elevates from very promising early stage explorer to deposit owner, and could see an immediate re-rating if justified. It will be clear that there is much more going on than just a drill program, and it could be very value-accretive as well.

6. Conclusion

Good people, good projects and money follow the rainmakers in mining, and Frank Giustra is one of those. An excellent team has been set up, C$16M has been raised in a few months,  the PEP properties have been acquired right in front of Yamana who wanted them badly, drill results are coming up soon, and several other acquisitions are in the pipeline.

Should Fiore be able to outline a viable ore body at PEP, there are several valid exit strategies on the table. The most likely outcome would be an acquisition of the PEP property by Yamana Gold, which is semi-desperate to find more ore which would allow them to run the mill at El Penon at full capacity. Assuming that Giustra, Warman and Matysek don't build a company to flip it very quickly for a modest gain, especially when Giustra named it after his mother, my guess is just the PEP property will be sold in an outright buyout, and the remaining assets etc will be spun out, or more likely only the PEP property will be sold for cash, reinforcing a possible war chest of Fiore, enabling them to buy top notch projects. However, Fiore could also decide to develop the project on its own, and negotiate a toll milling agreement with Yamana Gold, as the latter has the excess capacity anyway.

Fiore Exploration offers you exposure to an excellent district play in Chile, and this is only the beginning, as the company is aggressively looking around in all of Latin America for interesting acquisitions. There is no shortage of strong backing and excellent management, so Fiore could really be poised to become one of the premier exploration plays on the Venture in the not too distant future.

I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website www.criticalinvestor.eu, and follow me  on Seekingalpha.com, in order to get an email notice of my new articles soon after they are published.

Disclaimer:

The author is not a registered investment advisor, and currently has a long position in this stock. Fiore Exploration is a sponsoring company. All facts are to be checked by the reader. For more information go to www.fioreexploration.com and read the company’s profile and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.

Pampas El Penon West

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