Chairman Terry Lynch on the Chilean Metals (TSX-V: CMX) Story: Active Exploration Drilling Combined with a Royalty on a Teck Copper Project

October 20, 2017

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is Chairman of Chilean Metals (TSX-V: CMX)(OTC: CMETF), Mr. Terry Lynch. Mr. Lynch had been CEO of privately held Nevada focused Relief Gold. He also had been a Director and later CEO of TSX-listed Firstgold Corp. He assumed the CEO position after the company had run into financial difficulty bringing its Relief Canyon mine into production. In addition, from 2005 to 2008, Terry was a partner with Kingsmill Capital Partners, a financial advisory firm specializing in advising public and private early stage growth companies. Prior to joining Kingsmill Capital he spent 15 years operating startup companies in industrial products, oil and gas, and media. Mr. Lynch, thank you so much for joining me today.

Terry Lynch: Happy to be here, Gerardo.

Gerardo Del Real: Well, Terry, thanks again. Chilean Metals is focused on exploration for copper and gold in Chile and Nova Scotia. Now the company has a significant land position in Chile, which of course is known for its large copper and gold deposits. I'd like to talk about the portfolio in just a bit, but first I'd love to learn a bit more about your background and how you got involved with Chilean Metals.

Terry Lynch: Sure. You know, it's one of those interesting stories you never thought it would happen to you but then it does. There you go. A good friend of mine who, he and his family are our biggest shareholders, was a significant shareholder at the company called International PBX. And International PBX is basically Chilean Metals. It's the name was changed as we sort of got in business. And he asked me to sort of help him out with his investments there. He had made an investment and then, you know, I made an investment, and then the existing management team that was running at the time had really good properties we felt had a great discovery hole, and had an opportunity to sell the company for a lot of money, and they didn't take that opportunity and sort of fumbled the ball a bit.

So we ended up having to do a proxy battle, get rid of them and sort of take over the operations. And you know, it's one of those be careful what you wish for, you might get it. So we actually inherited the business and of course ran into the teeth of the worst mining recession in history, and barely survived. We sold the one asset that we had most invested on, it was called Copaquire, to Teck for $3 million dollars US and 3% royalty, as sort of a survival move to survive the recession and kept the rest of the portfolio and, you know, sort of kept on going from there.

But that's sort of how I got involved in Chilean. It was at first as an investor and then as an activist investor and now it's as the five year manager trying to do the turn around and get our money back, and then some. So, that's sort of where we're at.

Gerardo Del Real: Excellent. Well it's an exciting time. We talked a bit off the air with copper at $3.15 and gold seeming like it's consolidating, getting ready to hopefully finally break out. It's an ideal time to be exploring in the parts of the world that you're exploring in. Can you tell me a bit about the team in place, because you've been able to put together a very, very accomplished group.

Terry Lynch: Yeah, we're really proud of our scientific team. In junior mining that's really what set you apart. You've got to have story tellers, I guess people that can talk and raise money, but if those guys aren't backed by and led by great scientific teams, it really won't matter, won't amount to much. So for us, we were very lucky in that when I got involved with International PBX, which became Chilean Metals, Ian Pirie, who was sort of the top operating guy at InMet and just retired, he knew Chile quite well and he recommended a geologist by the name of Chris Hodgson to get him to sort of assess the properties and help us out.

And so Chris came on as the lead geologist in Chile and Chris was responsible for finding the Santo Domingo mine in Chile that Farwest sold for $700 million dollars to Capstone Mining. So Chris is a very accomplished geologist, knows the area well, is fluent in Spanish and really sort of a tremendous field geologist. So he's our guy in Chile and he's the guy who identified Zulema property that's our lead sort of project in Chile, that we'll talk about at some point I'm sure. You know, having Chris on the team is fantastic and Ian as well.

And most recently, about a year and a half ago, we ended up doing effectively almost a merger, really with another company called Cogonov. And Cogonov was basically led geologically by the Minotaur exploration team and they have a really prominent Australian exploration outfit, most famous for discovering Prominent Hill. Huge project, 1%, 1 gram gold, billion tonnes. One of those, "Wow, unbelievable" discoveries. That basically made OZ Minerals OZ Minerals. I guess it was Oxiana at the time.

But anyways, that was a huge discovery. They’ve had a couple other discoveries though. So they had a theory about continental shelves coming together, and that this is where the crustal faults were formed, and this was a very productive site to be exploring, and so they looked around the world and, you know, all the places that had the major mineral discovery, but not in Nova Scotia, which is funny because I grew up in Nova Scotia and it seemed like a, you know when they initially came to me with this idea, I thought they were crazy. But then when I get into it, it sounded more and more plausible. Minotaur is I would say that the lead scientific mind on the Nova Scotia exploration activity which is exciting because we are about to start drilling and that in the next month, so we'll get into more of that I guess over the conversation.

Gerardo Del Real: Absolutely. Well, you mentioned the fact that you have great exposure for upside discoveries, or great upside with discovery exposure. Let's talk about the portfolio. Before that, I also want to touch a little bit on the fact that you have a very prospective royalty that was sold to mining giant Teck. And I'd like to get into that in just a bit as well.

Can we start with the Zulema project? Because I understand that the huge Candelaria project is the model for this particular project and any time you have an analog like that, obviously you're in elephant country. Can we talk a bit about the project?

Terry Lynch: You bet. You bet. There's no question that its basically about 20 to 30 clicks from center to center, our property to their property center, to Candelaria. That whole valley's got probably seven or eight big discoveries. You know between a 100 million tonnes to a billion tonnes. Candelaria is basically a billion tonnes, call it 1% copper equivalent to copper gold. It's been their operation for 20 plus years. Lundin bought it probably about two or three years ago, previously Freeport-McMoRan had owned it. I think Phelps Dodge maybe made the discovery. Basically it's an IOCG and what's interesting in that when discovered, as luck would have it, maybe on a bit of a fluke, Candelaria, the driller was supposed to stop at, I may get the depth wrong but the analogy is right, it was supposed to stop at 120 meters and he went into 150. And it was that last 15 meters when he finished that he clapped the tip of the Candelaria discovery and the rest became history, so it's interesting that area was basically sand, you know, it was a sand plane.

So the drilling was a bit tough and they went down through it and they made this discovery, and I think most of the exciting discoveries in Chile going forward will come in those types of environments because a lot of the exposed rock has been chipped and sampled and those easy sort of surface discoveries, for the most part, have been made. I'm not saying they won't make any, but I'm saying it's fairly odd to, you know, get them, but like in Canada when the new technology came in and people were able to start to look to the muskeg and the overburden and more effectively And I think the same thing that's happening in Chile now. More modern exploration techniques are being used to get underneath the sand and that presents its own set of challenges because it's caliche and it's not straight forward science, but it's a bit of alchemy, you know.

And so we started an exploration program on Zulema, I guess in January of this year and I guess almost 2,500 meters and I guess it would be fair to say that we found an IOCG, which is super hard to find. You know some interesting intersects, like 1 gram, 1%, but only for two metres. So the challenge has been that we didn't find the source, so now our initial drill program was built on sort of a 700 meter grid on the IP. And obviously we would have loved to have that first discovery hole in that first round of drilling, but the gods teased us. They didn't give us the pleasure we were looking for so what, in terms of talking to advisors and Minotaur, and talking to Lundin who have been very helpful, in terms of showing us what's been successful and they've expanded their deposit points successfully in Candelaria.

The exploration techniques they're using to sort of be successful, it sort of helped us and taught us some things, and we're going to employ them in this next round. So our next stage in Zulema, which is basically now that we’ve done the financing will start happening basically in the next couple weeks, is we're going to do a new geophysics program, shorten the grid probably from 700 to 200 meters and you know, try and pick up. Because you know, like I said Candelaria was initially I think 200 meter top to it, you know, so these things, even though become big underneath, the tops can be quite small, so it's very easy to get lost and we have a 45 hectare position there so it's a big property and we have to refocus our geological efforts.

Gerardo Del Real: Absolutely. Well, you also mentioned that you're active in your backyard, Nova Scotia, and you have a JV with a group out of here, the Tejas Group if I'm not mistaken. Can you give us the details and the potential there, because you mentioned how it made more sense to you the further you dug into it.

Terry Lynch: Yeah, yeah, it's funny because, you know, when you grow up in Nova Scotia, you know that it's cold and there's iron and there's been some smaller gold deposits like Atlantic Gold and stuff like that, and that's put together a nice little package. Now, but there hasn't been like a major porphyry or IOCG discovery yet. And so when they came to me with these ideas, I initially thought, "These guys, they're crazy.” But then you listen to the theories because it's like these are successful explorationists, so it's not like they fell off the turnip truck. These guys have had several Billion dollar discoveries.

So then you listen a bit more closely and say, "Okay, so let's check this out." I actually had a source because I went to the University at StFX and talked to some people in the department in mines in Nova Scotia, that were from StFX, and I said, "Hey, you know, all bullshit aside, you know, what do you think about these theories of these guys?" And they said, “Look, honestly, you know, there's no guarantees that you're going to make a discovery on that land. Well of course you have the pick of the litter, you guys chose that land after looking at everything else, so, you know, if your geologists know what they're doing, you've got the best of it buddy." He said, "I'll tell you what. The results of their work, we'd have to change the geological maps of Nova Scotia, because they were done wrong." They'd been done I guess by students or, you know, somebody with poor oversight back in the '50s.

Gerardo Del Real: Wow.

Terry Lynch: Just inaccurate and so now they've got brand new maps and the department of mines is very confident of the results of this new look and Nova Scotia's mineralogy that there's going to be a lot more exploration and there will be some discoveries, and some big ones. So, that's exciting. So, that type of affirmation made me think, "You know what? Maybe these guys are onto something.” And you know, this exploration team, that Minotaur had the idea was funded by Goodman, so these are really great names in mining and those guys are smart guys, they don't waste money. They do things based on good sound theory and so we're going to be the ones to get tested, so we've got a program that's going to happen in just a few weeks.

You know because capital markets are so desperately tough right now, we found out one of our projects called Bass River. It is the most advanced and ready to drill and we farmed it out to a private equity group out of Texas called Tejas. And Tejas is funding the first drill program, which is going to be probably between two and three thousand meters, depending upon, sort of how we are going on the program. And they'll earn 35% of the project. We're the operator of the project, so from our perspective it was way to have fully funded program in these tough times and gives us a great exploration window and if it's successful then that will be fantastic and obviously 65% is still obviously a material stake.

Gerardo Del Real: No, I definitely think it's a material stake and obviously shareholders have to appreciate the approach of trying to limit the dilution while still providing exposure and you know the potential for a discovery. Now, looking ahead a bit in the future, I mentioned the royalty, which could be significant because it has the potential to produce revenue in 2019 and potentially contribute to future exploration without any significant dilution. How important is the royalty hedge to the strategy for Chilean Metals?

Terry Lynch: Well, you know, I mean obviously it's quite important. Just so the viewers know, Copaquire is adjacent an existing producing Teck mine called Quebrada Blanca. And there's two phases to Quebrada Blanca. The current one, or they call it QB1 and QB2. So QB1, if you go to the Teck website, you'll see that they're basically going to be finishing production here in the first stages of 2018. And then, that was sort of a copper moly oxide factory was processing that type of ore and turning it into copper. And they would be generating in the peak of 2012 at $3.42 copper. They produced $696 million in sales. So obviously made a ton of money. So even like last year with over 230, 240 million, so even at lower production rates and lower production prices, it's still a monster and it produces a ton of cash.

So they're about to run out of ore. So they bought our project with a view that there was two exiting discoveries on Copaquire. One was more, I would call it moly based. It's copper moly, but it was, you know, a couple hundred million tonnes at 43-101 material. That was you know, done. And the other was more of a copper moly but more towards the copper. You know better, higher grades of copper. So both had tremendous upsides in terms of lots of land and potential but we spent $25 million dollars on it, or so, US. So it was a big exploration program for us but very expensive up there, so when like you're a little guy, like we are, or were at the time, operating up there, 350, 400 dollars a meter to drill, you know, that's big man's country. You really have to be optimistic in terms of how you manage it. We didn't do a good job of that. And that's sort of when I came in, but, you know, Teck has obviously good operating. They're up there, they know that job really well, probably better than anybody other than Xstrata I guess, who have another big mine right by there.

So when will Teck start producing from Copaquire? We don't know. You know, that's the honest truth but the practical reality is they're going to be out of ore now in the next year, and their QB2 project is going to take 3 or 4 years to build. So there's going to be a window where it’s like, "Hey, we got nothing going on. Our work force is going to go away, we've got these electrical power paid contracts that we'll have to keep on paying if we don't have something to do." It looks like on the surface of the math of it, you'd make a lot of money by mining our ore and moving it down there, so why wouldn't you do that?

So, now have they said they're going to do that? No. So, do we hope they will? Yes. The math suggests that that's a very probable scenario. Yes and you know it's question of when. You know, but the timing seems to be shaping up and as copper goes higher I got to believe that's a tougher thing for them to leave. You know they're focused on getting their final permitting done on QB2 and you know, I think that's imminent and as soon as that's done I think they'll start to free up man power to look to advance Copaquire. But that's my own belief but that's what we sort of expect.

Gerardo Del Real: Perfect, well, in the meantime, you positioned the company well. You've recently completed a financing. What does the current cash position look like, Terry?

Terry Lynch: So after the financing, right now, something in the $500,000, $600,000 range is what we've got. We just paid a bunch of prepaids so another couple hundred thousand there, so that's sort of where we're at. It's not a lot of capital, Gerardo, but it's sufficient for our next phase, which is what we've got. You know, it was a very expensive financing. It hurt. And I've been buying all the way through. I put another $75,000 in this round, and you know we did it above the market. You know, the market today is at seven cents and we did the thing at ten cents. Crazy undervalued price. And you know, there is obviously other bargains out there but we think ours in amongst the best, given what we've got going and the fact that it's funded. If you want to get in, get a ticket in the ring, you going to have to be in the market.

Gerardo Del Real: Absolutely. Absolutely. Now I always look at share structure. You mentioned that the deal was tough but it needed to be done. What does the share structure look like right now, Terry? You mentioned that you've been buying in the open market. What does that look like as far as insider ownership in the current structure?

Terry Lynch: I would say our Director group probably has about 15%. And then we've got like one core family that's not on the director's level but is very close with us and has been there in every way for us as a company. And they have probably another 17% or so. So there's a fairly good chunk that's concentrated and so that's sort of the structure. There's about, I don't have the Power Point in front of me, I think there's 85 million shares outstanding right now. Something of that order magnitude.

Gerardo Del Real: 85.8 it looks like. Yep.

Terry Lynch: Okay, 85.8, okay. For some reason my internet connection just died here just as I had the Power Point up but it's gone. You're traveling, you never know, you get these wonky Wi-Fi connections. At 7 cents, I don't know, that's like $6 million dollars in market cap. Man, you know when you've got such tremendous exploration projects on the go, and Nova Scotia project imminently drilling and then you got the royalty, just to give you a math on that royalty.

With a 3% royalty, but they have the right to buy 1% for 3 million. So, if it ever gets put into production, they'll 100% do that. So that's to think of the royalty as 2% plus 3 million. But 2%, as I said, the range has been between 250 and 700 million so call it 400 million in sales. 2% of 400 million, that's 8 million dollars.

Gerardo Del Real: Right.

Terry Lynch: Annually. Our market cap is seven. I mean how does that make sense? Even if it took one year, took three years. I mean, come on. It's crazy. You know, four months of time the way copper going, there's absolutely no chance this doesn't get produced, in my view.

Gerardo Del Real: Absolutely. No, I absolutely agree and I did pull that Power Point presentation up, so it looks like 85.8 outstanding, 101.3 million fully diluted and again, speaking to the opportunity, you are right at 52 week lows, despite the fact that copper's at $3.15 a pound and looks like it's just in the process of another healthy consolidation. Now, Terry, I know you're traveling. Let me say, thank you for your time because I know it took a little bit of work to get you on here, so thank you very much. Is there anything else that you'd like to add, Terry?

Terry Lynch: Obviously people sort of say when a stocks are at a low, it's like, why do I buy it at the low? I think because we were caught in this financing vacuum, the market just dropped on very low volume and it traded down. And so we did this financing, but now, we've got the money, we're going to do stuff. So I think for people that are listening, if you can get anything below 10 cents, it's a hell of bargain. I mean we think it's going a lot higher than that but I mean it's just one of those things. I think you have to have, obviously, belief in the copper market, I think, and belief in timing, but if you're in the speculative market, in terms of having some juniors in your portfolio, we think Chilean Metals is a very worthy candidate to be in there. And so, we've got no problems, hand in our hearts and saying, "You should buy something." Because we have.

Gerardo Del Real: Well, it's a high risk, high rewards sector and to put that into perspective a bit, just in February of this year, you traded as high as 32 cents, you're at 7 cents as we speak, so hopefully that provides some context. You obviously have some near-term catalysts, with the joint venture, with the drilling and then you got a call option on copper with the royalty with Teck, so I think all them offer a 6 million dollar market cap. There is a lot going on. Terry, I know you mentioned the drill program. There should be lots of news flow in the next month or two. Hopefully I can have you back on as some of that news is disseminated and reported on.

Terry Lynch: Okay, that sounds like that'd be fun. I'd like to do that.

Gerardo Del Real: Thank you very much, Terry.

Terry Lynch: Have a great day. See you, Gerardo. Cheers.

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