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Stock to Watch: Spotlight on Sonoro Metals

Equity, special situations, event driven

· gold,mexico,stocks
  • Drilling under way to define & expand areas of known gold mineralization at Cerro Caliche, Sonora State, Mexico;
  • Singapore-based financial advisory services firm engaged to advise on a planned debt financing for the construction of a pilot gold operation at Caliche;
  • Company fast tracking planned pilot operation’s development;
  • Management has discovered and developed similar gold deposits in the immediate area;
  • A second project the San Marcial project has potential for a large tonnage, low-grade, oxide gold resource, amenable to an open-pit, heap-leachable operation similar to Caliche;
  • Company’s strategy is to generate cash-flow while accelerating growth by acquiring exploring and developing areas of known mineralization in the area.

1. Caliche: a company-maker

Last years’ acquisition by Sonoro Metal’s of the historic Cerro Caliche gold concessions which cover numerous artisanal workings, was the first step in setting the company on a path that is intended to turn it into a high-growth, revenue-generating gold mining junior. Phase 2 drilling is underway at the Caliche, just as the company is expected to complete, in the coming weeks, a 43-101 compliant resource estimate on a small portion of the mineralised area that was partially outlined in Phase 1. The intent is to develop a pilot gold operation from part of the resources defined in the estimate and use a portion of the expected cash flow to develop the rest of the mineralised zone together with other high impact projects.

2. High odds of success: long list of successful discoveries and mine developments

Critically, the technical team, which spear-headed the Caliche acquisition and are managing its development are among the area’s most knowledgable explorers and mine developers. Sonoro’s VP Exploration, Mel Herdrick’s previous venture was Pediment Gold, where similar to Caliche, he took historic data at the San Antonio and La Colorada concessions and ultimately identified and developed gold resources at each, leading to Pediment being acquired for $137 million. Herdrick also acquired the Chipriona (Agnico Eagle) and the Los Pinos where he identified its potential to become a significant mine. Agnico Eagle expects the deposit to produce 165,000 ounces this year. As important, Sonoro’s operations manager Jorge Diaz, has spent the past few decades taking mineral deposits to production. He oversaw the design and construction of various Los Pinos-scale developments in the region, including the Mulatos, San Antonio and the La Colorada mines, while he operates his own open-pit, heap-leach plant near Quiriego. Between them we can count a total of seven major gold deposits that they either discovered or developed - meaning that luck was a small component - more likely their success comes from a combination of skill, tenacity and an intense and probably unparalleled knowledge of the area’s geology and history.

3. John Darch: ‘financier with a heart’ comes out of retirement for Sonoro

During the 1990s and up until 2006 John Darch was better known as the visionary behind the Crew group of companies and Asia Pacific Resources. While under his direction Crew Resources developed Greenland’s first gold mine while diamond mining in Botswana and was the first company to privatise a major copper deposit in Zambia. His acquisition of 50% of South Africa’s Metorex (for around $20 million) for was prescient as the entire company was eventually bought for $1.2 billion. His Asia Pacific discovered a massive potash deposit in Thailand which once in production would ultimately put the country in a position to be the third largest potash producer in the world. Following Asia Pacific’s sale in 2006, to one of Thailand’s largest conglomerates, Darch retired from the mining world, and instead focused on reversing the fortunes of an impoverished hill tribe in Thailand called the Akha. He did this by incubating what was a struggling community-owned coffee growing and marketing business – injecting millions while turning it into a major grower and globally recognized coffee brand called Doi Chaang. Fresh from Doi Chaang, Darch is out of retirement and aims to make Sonoro Metals his next major success.

4. Sonoro to avoid share-dilution by fast-tracking development of pilot gold production

From his past performance it’s clear Darch knows a great opportunity when he sees it, together with how to fund (he’s raised hundred’s of millions for projects similar to Sonoro) and make them successful. Darch also knows its critical to not dilute shareholder value by constantly raising money by issuing shares. In Crew’s case it was Metorex that funded much of what the company accomplished. For Sonoro Metals, the strategy is to fast-track the company’s Cerro Caliche development so that a planned pilot gold operation can fund with no share dilution its development of the rest of the Caliche and other high-impact projects.

5. Singapore-based InProved takes lead in Sonoro’s planned gold-backed debt security

Sonoro’s enlisting of InProved, a Singapore-based financial advisory services firm specializing in structuring non-recourse debt for the Energy and Resource sectors is a first step towards Metorex-like self-sufficiency. InProved’s Founder and Managing Partner, Huan Johnson Koh, who is a Member of the Australia’s Institute of Minerals and Metallurgy, and a Chartered Engineer is to lead the financing initiative which will work in tandem with Sonoro’s technical team and other outside engineering groups as the company completes the pilot operation’s pre-feasibility and financing phase. Interestingly, Koh approached Sonoro, not the other way around, when he concluded that the potential was growing that Caliche project could quite reasonably support a profitable gold operation, in what is a well-known low risk-environment, making it an ideal candidate for a gold-backed debt security, funded by pilot gold production.

6. InProved debt financing intended to eliminate share-dilution

InProved specialises in commodity off-take agreements and metals’ backed debt (with a defined asset and management/technical ability, but prior to expected operating revenues) that do not meet the criteria of the larger lenders. The InProved structured debt is to fund the development of the pilot operation, together with the drilling necessary to define a compliant resource for the Caliche’s known areas mineralization. The first road show for the financing is planned for late May. It is important to note that it is expected to eliminate any need for financing through to the commencement of the pilot operations together within the first year of operations.

7. Private placement to fund Phase 2 over-subscribed, but not increased

Sonoro completed a Private Placement of $650,718 to continue with Phase 2 of the Cerro Caliche program which consists of 5,500 meters of in-fill and expansion drilling in known mineralised areas and is expected to be completed by this July 2019. The current phase is based on data from prior operators Corex Gold and Paget Southern, along with the data from Sonoro’s 2018 Phase 1 exploration program which has identified an initial unclassified resource that the company expects to expand. The financing was oversubscribed but consistent with Sonoro’s strategy of minimising share dilution, its size was not increased. Management’s expectation is that as the Caliche is further developed, a combination of higher share prices and the planned completion of InProved’s debt security will greatly reduce any need to issue shares.

8. Phase 3: in-fill and expansion drilling expected to commence this fall

Phase 3 is expected to commence this fall and is expected to be the final phase for the definition of the Caliche’s resources. It is projected to take 5 months and consist of 7,000 meters of in-fill and expansion drilling in known mineralised areas. The goal of this phase is to bring previously outlined resources into conformance with measured and indicated tonnes of resource qualification that allow mine planning for a larger scale gold deposit. At this point gold producers may find acquiring the Caliche an attractive proposition although because of its planned revenue generating production, Sonoro should not be under any pressure to sell it.

At this point gold producers may find acquiring the Caliche an attractive proposition although because of its planned revenue generating production, Sorono should not be under any pressure to sell it.

9. Strategy: generate revenues, explore, develop and at the right price, everything is for sale

Cash flow from the Caliche is also intended to put Sonoro in a powerful bargaining position should one of the area’s midsized miners want to buy it. Two of Agnico Eagle’s mines, La India and Pinos Altus run out of ore within the next 5 years making the company a front runner. And once the pilot operation is underway Sonoro should not need to finance, or sell, just as its cashflow continues to allow the company’s acquisition and development of other projects. This should put it in a very strong bargaining position.

Management sees the company as consisting of an ideal group of talented and proven individuals, all focussed on the same goal of maximising the value of Sonoro’s two existing high-impact assets, while continuing to build a pipeline of additional high-impact projects. For this reason, while selling the Caliche once its resource is developed is a principal goal, paying a portion of the proceeds out to shareholders and then continuing to grow the company with the rest is also a likely outcome.

10. San Marcial company builder #2 will be the next project to be explored and developed

Company geologist, Mel Hendrick, believes Sonoro’s second Mexican project, San Marcial, may also have a large tonnage, low-grade, oxide resource, amenable to an open-pit, heap-leachable operation with potential similar to Cerro Caliche. The crucial exploration phases which are expected to commence in 2020 will be designed to test Mel Herdricks prognosis with a goal of establishing a significant mineable resource attractive to a major operating company.

11. Management Motivated

Mel Herdrick and Jorge Diaz are material Sonoro shareholders thus demonstrating a level of commitment that compounds the value of their knowledge, experience and intent to identify and acquire additional projects for Sonoro. John Darch and Sonoro’s CEO, Ken MacLeod together own approximately 20% of the company’s shares. All of its directors are shareholders.

12. New appointments position Sonoro to acquire and finance major assets

With the appointment of John Darch as Chairman and Neil Maedel as Executive Director, Corporate Finance, the depth of knowledge and experience of the Sonoro Executive team has been considerably enhanced. CEO and President Ken MacLeod also has an extensive multi-decade history of resource development. Collectively, they have a 100 plus years track record of success structuring, financing and operating resource companies in diverse regions of the world. Together, they have raised well in excess of $500,000,000 to fund their respective companies over the past 35 years.

13. Realistic Management

Sonoro has two exceptional assets (Cerro Caliche & San Marcial) with additional prospects to be potentially acquired in the near future. Sonoro’s business model is to maximize the value of its projects to where they become an acquisition target or are developed further as operating mines in a joint-venture. As of now, unlike many junior mining companies, Sonoro Metals’ executive has a clear vision and a realistic roadmap forward, and as major shareholders they are sensitive to both the abilities and limitations of the company and the critical need to avoid share dilution.

14. Near term catalysts: initial 43-101 resource completion, marketing in China, drill results

An additional motivation for Sonoro’s decision to limit the recent Placement’s size was that it expects the release of a nearly completed NI 43-101 technical report to attract additional investors to its market, leading to higher share prices. On its heels there is also the ongoing Caliche drill program, with its focus to expand the area of mineralization and test newly prospective zones. The Caliche’s most notable area is the lightly drilled El Colorado zone where 12.19 meters at 11.3 g/t AuEq., was intercepted during Phase 1. More El Colorado-like results could easily provide a major catalyst to Sonoro’s share price.

As phase 2 is executed, another share price catalyst comes to the fore late May. This is when a China-centric marketing program begins in conjunction with an InProved investor road show in Singapore, Hong Kong and mainland China. The road show’s goal is to introduce Sonoro to significant China-based investors. Part of Sonoro’s investment opportunity is its tiny share float and market capitalisation ($6 million) compared to say an end-of-story Pediment at $137 million. The reality is that Sonoro’s share market’s volume and value, is unlikely to accommodate most Asians that may wish to buy shares, rather than bonds. Should Sonoro’s share price be high enough, the company could contemplate a small equity financing to get strategic investors started – especially if the intention is to expand Sonoro’s network of major shareholders which are committed to assist in the company’s development.

Whether it’s drilling results, the resource report or the beginning of the Sonoro/InProved campaign to finance and build a large Asian shareholder base, Sonoro’s highly accomplished team is just getting started, and as a consequence its reasonable to expect a steady stream of positive, share-boosting catalysts to occur, both in the coming months and years

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