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Exploration Insights’ Joe Mazumdar Details the Success of His Top Pick Evrim Resources & Gives His Insight into the Base Metals, Gold and Lithium Markets

April 25, 2018

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is Co-editor of one of the best resource newsletters in the business, Exploration Insights – of course along with Brent Cook – Joe Mazumdar. Joe, how are you this morning?

Joe Mazumdar: Good, good. Thanks for having me.

Gerardo Del Real: Joe, you're also an economic geologist and the last time you and I spoke I had the pleasure of talking with you about your process when you're selecting a junior. The junior space being one of the highest risk, highest reward sectors out there. We talked last time about minimizing the risk and we talked about management teams, we talked about jurisdictions, and we talked about share structure, and I needed to have you back on. So thank you for taking the time.

I wanted to start by talking about how you maximized the reward. One of your more recent top picks is Evrim Resources. And if I'm not mistaken, we talked off air a bit, you own it about $0.28 Canadian. Brent Cook, has owned it at $0.10 Canadian, if I'm not mistaken, and the stock's currently trading at $1.40 on the back of some very impressive trenching results. I want to start by talking about the company and then if you can take me through the process, because this isn't a company that's new to the portfolio, and I want to talk about how you decide to stick out through exploration as opposed to cutting your losses and walking away.

Joe Mazumdar: Okay, so background. Evrim, EVM on the Toronto Stock Exchange Venture, they're a prospect generator. So the prospect generator model is all about tight share structure and using other people's money to basically advance your projects. And then, every now and then because you see so many projects, you might find one that you really like, meaning that you would actually fund it yourself. Because you're tight with your money, you have to talk to your board and you say, "Okay, this is the one. We've spent five years doing this and I found one that I really like."  And usually when we make significant wins it's usually because we've picked a prospect generator – which Kaminak Gold was originally and which also Reservoir Minerals was originally – and they found a project that they really liked and started working on that. And those were Timok in Serbia for Reservoir and the Coffee project for Kaminak. Those were good wins for us as well.

The idea that with a certain company like a prospect generator, and we own a few of these, and they have given us our best returns and our worst returns. So it's not the model that just automatically generates those returns. It's the people that are generating what I'd like to say is the product. And the product, really, are those assets that they're finding and delivering to either a producer to work on or they're generating royalties that they accumulate. There's examples of that with somebody like Almadex Minerals and also with Evrim.

So you're accumulating two things. One, assets and having other people work on them and potentially end up with a minority stake in those assets, which is not necessarily a bad thing, because we had a good win as well with Mariana Resources and Hot Maden. They had a 30% stake in that asset but that was bought by Sandstorm. So you can create a monetizing event even with a minority stake. The whole idea is to generate product, quality assets. So you need people that know how to do exploration, know what producers want.  Jurisdictionally, you want to be diverse. And that goes for Evrim as well as for Mirasol, they're both geographically diverse. You want to have multi-commodities, so you diversify your risk as well with commodity. They'll do copper, they'll do silver, they'll do gold.

And also, with respect to news flow, if you're somebody who's just in the Yukon, you might only have three to four months of news flow, whereas if you can diversify your portfolio geographically as well, you can work in one area and work in another area so you can maintain news flow. So you got to manage your business well. And I would say two of the ones that manage their business very well in terms of the ones we own would be Mirasol Resources, which is MRZ on the Venture, and Evrim Resources.

Gerardo Del Real: How important is it to be familiar with management? I know that you and Brent are very familiar with several people on the board of Evrim. Does that give you an increased amount of confidence to hold the stock from $0.10 to $0.28 to $1.40?

Joe Mazumdar: Absolutely. When you meet people and you understand what they're about and what they're trying to do and you can consistently see their actions reflecting that, you build even more confidence. You know they're doing the right thing. What I like about what happened with Evrim ... We had no idea that this would come out with this kind of intersections, we liked basically their model. We were already up more than a double before the intersection actually was announced. So we were doing well on Evrim as a top pick versus the market as a whole even before the intersection came out, just because of what they were doing. They were generating projects and they were doing deals. They made another deal on their Sarape project with Couer, which was a new development. They got First Majestic working on their Ermitano and other projects down near First Majestic's Santa Elena mine.

So, a lot of news flow coming from them and that was one of the big reasons that I thought of them as a number one pick in terms of our top picks because they had so much news flow coming out which was funded by their partners and up to 30,000 meters potentially of drilling coming. So here was a lot of news flow out of a company with a tight share structure that would basically, if something happened with anything on their projects, that would be quite a lift for the company. So that was one of the big reasons that we picked Evrim. It wasn't just, oh, we think Cuale's going to be a fantastic project. We like Cuale, but we also saw Sarape, we saw Ermitano, we saw a portfolio of assets that any one of them could deliver the goods on a tight share structure and potentially give us a big win.

Gerardo Del Real: Let's talk about that major catalyst. On April the 9th, Evrim released sample results of 193.5 meters grading 2.09 grams per ton gold, at the 100% owned Cuale high sulphidation project. The project is in Jalisco, a few hours away from where my family is from in Zacatecas. Can we talk about the trench results and then can we talk about what's next for the company? There was a subsequent release that was 106.2 meters grading 13.61 grams per ton gold. Again, they happened to be in that sweet spot where, although they're a project generator much like Almadex, they've found apparently a project that merits retaining that 100% ownership. And, of course, with the tight share structure that's where you get the leverage, right? Can we talk about what's next for the company and the project and what you'd like and what you see, maybe, as potential challenges there?

Joe Mazumdar: Okay, Cuale is what we call a high sulphidation epithermal prospect. Usually in Mexico you tend to get more of the low sulphidation epithermals or the intermediate sulphidation. You don't tend to see a lot of these high sulphidation epithermal deposits. But when you do see them, the ones that have been found, advanced and operated tend to make a lot of money. La India, Agnico's that they've purchased. Mulatos. Sauzal, I believe as well. They make good money for people, for producers. And so they're always on somebody's hit list to find, especially if they're oxidized near surface. Oxidation near surface means that it's amenable to open pit mining which is the cheaper form of mining than underground. And also, potentially amenable to heap leach processing which is cheaper than milling. So that means a potential low cost operation.

So right now, all that we've done right now with Evrim is basically found an area of a lot of clay alteration and we're finding these things called vuggy silica bodies that are carrying some really good grade. But what I like about it is that we're seeing big long intersections of almost 2 grams that open pittable is still very, very economic, especially jurisdictionally in Mexico as well. So we're already seeing that. Sorry?

Gerardo Del Real: No, please continue. I was going to add that that's important where you just mentioned the fact that you're seeing long intersections of the 2 gram a ton, which of course would be economic in this part of the world. I'd love for you to touch on that just a bit, why that's important, because I think people get caught up in the sexy headline of 106.2 meters grading 13.6 grams per ton gold, but if you actually break that down and you see where the bulk of that's coming from, you're getting a lot of the higher grade stuff concentrated in one area. But then what you see is long intervals of a gram and a half and two grams per ton. Is that accurate, Joe? Why is that important?

Joe Mazumdar: Well, it's important to that one 1 meter sample. We've seen this before where a 1 meter sample or a half a meter sample gets bulked out over the entire intersection, but when you look at it it's just that 1 meter that's carrying all the grade and there's nothing else.

Gerardo Del Real: Right.

Joe Mazumdar: So, basically it's not an open pittable deposit, it's more like a thin underground deposit and it just wouldn't work. So when we look at, and you have a cut-off grade in terms of what you think is economic. And if you look at something like Mulatos, I think they're cut-off grade for their heap leach is about a half gram. So that's open pit heap leaching.

So what I did was I just looked at the intersection, said, "Okay, here's everything over a half a gram," and then I said, "Let's do a top cut," which means that anything over this number is that number. So I looked at the long intersection from trench one, which was 193 meters at 2 grams. And then what I did was any sample, and there was a few samples over 5 grams that I used as the top cut, I could see that the 193.5 meters would get me 1.8 grams. So, the 1.8 versus the 2.09 grams per ton wasn't a big deal. A 10% change on that intersection. Where it was a bigger deal was the trench four where you had 106 meters at 13.6. On that one, you had several samples that were well over 25 grams, one sample that was over 350, and another sample that was well over 400 grams.

Gerardo Del Real: Right.

Joe Mazumdar: So people would look at those and go, "Wow. That must be carrying the entire intersection." But when you look at it, you apply a 5 gram cut off, you can still manage to get 106 meters of 2 grams. So even though it dropped from 13.6 to 2, which is an 85% drop, not insignificant but what you're left with is still very economic. And that's important. And so the gravy is the 1 meter or 1.5 meters at 400 grams that you could pick up every now and then. It's not what's driving the economics here, potential economics for this deposit, I mean to this zone and mineralization. So what we need to know is that what I would've been worried about is if everything else, if I did that 5 gram cut off, then I was left with nothing. That's what would scare me. But that's not the case with the high-grade trench four.

So we're still in early days. We're just hand digging trenches right now. Evrim still needs to do more rock chip sampling, more geophysics, and the geophysics is providing some analysis of what's happening at depth. What they tend to look for is what we call resistivity anomalies, and a resistivity anomaly is looking for silica bodies. And why are silica bodies important? It's because most of the grade in the trenches is coming from these vuggy silica bodies. So if we can find these kind of bodies at depth, that's a good thing. We don't know if the resistivity bodies are all vuggy silica bodies at depth, but that's what the drilling is going to prove one way or the other.

So now they've already designed a program about a million dollar budget US for 5,000 meters of drilling, so we'll see more trenching and more geophysics. The company's already got Canadian well over $5 million, so we know that they're well funded to do this. Now we wait for the results, and we are planning a site visit for later in May.

Gerardo Del Real: Excellent. Joe, how important is the social license and community relations to you when you go and visit these projects? We, of course, had the news I believe yesterday from Tahoe Resources where the La Arena mine is on general and indefinite strike. Alex Black, who ran Rio Alto, mentioned that they built and operated that mine for 6 years without a union on site. And, of course, now there's issues there with Tahoe and some of the personnel that's come in and apparently ruffled some feathers there in a very significant way. What do you look for in regards to social license and community relations when you go on these site visits?

Joe Mazumdar: Oh, it's absolutely fundamental. If you don't have social license to operate, permitting federally is really just an exercise. It doesn't really matter. I've seen a few projects where they had the permit, the environmental impact statement (EIS), and basically the federal government allowing them to basically execute their construction plan but there was no way they were going to get access to the project. And it was basically dead. So, social license to operate is fundamental. People who know how to do that are important, and people who step around it eventually ... The issue would be that ... We look at it from the company that would potentially acquire the project. None of the exploration companies we own we want them to actually turn around and become a development company and a producing company. We want them to get acquired.

We want that monetizing event and we want to move on. In order for that monetizing event to move on, we need not only the technical and execution risk to be something somebody can absorb and not to be a fatal flaw, but also, the execution risk with respect to actually permitting and building the project is obviously vital.  That's what the big company would look at, too. If they can see that this project is not going to be allowed because, oh, they don't want a tailings dam or they don't like cyanide so we can forget a heap leach, all that sort of stuff. They're going to look at that and they go, "Well, it's a nice project but we don't want to get involved." So that becomes a fatal flaw. You can have a very high-grade deposit that makes all the sense in the world, just look at Eldorado in Greece, and nobody wants it. It's basically dead money. Any kind of project with a fatal flaw becomes dead money.

Gerardo Del Real: And sometimes the people are the fatal flaw, correct?

Joe Mazumdar: Oh, yeah, absolutely. Well, let's say management is there to mitigate all the risks. The technical risks, the execution risks, the financing risks, social license to operate.

Gerardo Del Real: Right.

Joe Mazumdar: They're there to mitigate it. If they're not a good management team, their capacity to mitigate those risks is very low. That's why management's so important. They're the key to managing all these risks and if you don't trust them, and if you don't think they're qualified, then all those risks that happen for any project in the universe will not be properly mitigated. So even though it's a good project and even though it might be able to get the social license to operate, they might not do a good job of it such that even if they get taken over they might get taken over at a premium on a very low valuation because they haven't added any value. You got to look at companies with respect to how they're adding value and at what stage their comparative advantage to add value ends.

So I don't want to see an exploration company that suddenly says, "Well, if we can't advance this project or get somebody to acquire us, we'll develop it ourselves."  Well, no, because we know you can't do that. You're just saying that because you don't have any suitors. What we'd rather people did is know what they're good at and know their limitations. That way they do what they're good at and don't try to expand their skillset beyond what their capacity is.

Gerardo Del Real: Well put, well put. Joe, how do you view the base metal sector? Let's start there, and then I'd love to get your opinion on the gold space as well here in just a second. But, in regards to base metals, specifically copper and zinc, what are your thoughts there?

Joe Mazumdar: Okay, with copper I was just down at the CRU World Copper Conference in Chile just several weeks ago doing a talk. And with respect to exploration what struck me as very interesting was that the grassroots, which we hold very important with respect to finding new deposits, and new deposits are the ones that would get you lower cost quartile new deposits. In gold, we've seen a secular decline since 2003 to about 20% of all exploration gold is spent on grassroots. Whereas in copper, we've seen a rebound such that it's pushed off of 30% to 35% and going up again. And interestingly, copper exploration, two-thirds of copper exploration's actually coming from producers, from major producers who generate free cash flow and have no financing risk to fund it. Only 15% in 2017 of exploration was actually funded by juniors. So it sort of speaks to me of the fact that it's harder for us to find a lot of copper juniors with projects that potentially could be acquired because most of the majors are doing it themselves.

There are a few that like to acquire, like the Lundin Golds of the world and we've seen a Copper Mountain acquire a project in Australia near a place I used to work in Cloncurry. We've also seen an Australian company buy a Brazilian copper producer as well. So, we see some M&A happening. And also we've seen this other recently, just today or yesterday, was a Chilean company taking a stake in Minsur as well for a Peruvian project. So, we do see some M&A right now because as people look at what's happening with copper and what they currently have in their portfolio, maybe some consolidation makes sense. But I know that a big company like Rio Tinto, well over 70% of their plus $100 million dollar budget on copper exploration is just to grassroots. Because they understand that copper is a long cycle and you want to live through the cycles, and that cyclicality can be best absorbed by having lower quartile projects, and if you don't have them you got to find them.

Gerardo Del Real: Absolutely. Thoughts on the gold space, Joe?

Joe Mazumdar: On gold. Gold's been waffling around $1,300, $1,350. It can't seem to break through there, and we're fine with that because our focus is more on exploration, finding those assets that work and generate the free cash flow that producers want at these sort of flat gold prices. So where gold price is staying makes companies that generate projects that potentially can drive margins more attractive. So our focus on exploration remains valid right now. We're not buying leverage in terms of buying the company that with the $10 dollar change in the gold price they're going to stock's going to go up 20% or something like that. We're not buying leverage because we don't see how leverage ... with those kind of companies to actually it's a trading play, it's not a fundamental play with respect to actually getting acquired.

So, the gold space we're fine on the exploration side. Copper, again, because of its cyclicality we're sticking to exploration. On the zinc side, I see a little bit more tighter cycle on the zinc side and so definitely we want to find explorers that will find projects that will be on people's radar screens. So we own things like Tinka and also have taken a position in Fireweed Zinc in the Yukon. An infrastructurally challenged project but if they can find enough, that tonnage of zinc will stand out with respect to being a potential world class accumulation of zinc in a friendly jurisdiction.

Gerardo Del Real: Excellent. Joe, the last time you and I spoke we talked lithium a bit. Since then, Morgan Stanley issued a note which I, frankly, I called BS on, but it scared a lot of the speculators and some of the uninformed money in the space away. I'd like to talk briefly about your thoughts in regards to the note and what that's done or what the lithium sector in general, how it's changed since the last time we spoke, In your view, is it more of a stock picker's market or is that trend still your friend where you can just attach lithium at the end of your name and count on some decent gains here, year over year?

Joe Mazumdar: Yeah, so when we went into lithium originally, that was before the SQM deal with Corfo, the Chilean entity, with respect to the lease on the Salar de Atacama which is the lowest cost brine operation, lowest cost lithium production in the world. Once that capacity was increased from, I think, about 67,000 tons lithium carbonate equivalent up to 200,000 tons, depending on your demand scenario. If your demand scenario isn't as strong during that period to 2022, 2025, there's potential for the market to be balanced in the near term. So if that is the case, then the low cost part of the curve is important. And the low cost part of the curve is usually the brine operations. So, if you want exposure to lithium still, you definitely want to be more playing the alpha with respect to your stock pick rather than playing the entire sector, as you said, anything with a lithium in its name.

So, definitely what we're doing is trying to play the stocks that would still work in that kind of balanced environment. So, in terms of brine, we would go with people that are exploring on salars that we have known operations of brines. And they're doing the same thing, they're finding the same material. So that's why we own Advantage Lithium. I know that SQM is delaying the production timeline on their Cauchari-Olaroz joint venture with Lithium Americas but that, I think, is fine for Advantage because it allows Advantage to move up with respect to advancing their project. And I think if the lithium market is tight then consolidation of brine or salars make more sense not less sense, because people can lower their upfront capital costs and lower their operating costs. So, it makes more sense to me that we don't need potentially four companies operating on the Cauchari-Olaroz salar, maybe we only need a couple. So that would help with respect to our argument with respect to Advantage potentially getting taken out. So, that one I like in terms of that.

We own another speculative play which is more of a hard rock play which is getting more hurt because hard rock tends to be higher cost but, infrastructurally, it's not challenged and it's in the US. So that's one we'll hold for now, knowing that if the lithium market stays tight it might have more issues.

Gerardo Del Real: Excellent. Joe, thank you so much again for your time. Where can people find you and if they want to subscribe to the newsletter which, again, I believe is one of the best newsletters in the space, where can they find you?

Joe Mazumdar: It's www dot – I don't even know if you've got to do that anymore –Explorationinsights.com.  You can find us there. You can sign up for the free list and there's lots of free stuff on the website as well. If you want to subscribe, there's a subscribe button. We always look forward to getting new subscribers as well.

Gerardo Del Real: Joe, thanks again for your time. I appreciate it.

Joe Mazumdar: Thank you, sir. 

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