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Chilean Metals (TSX-V: CMX) CEO Terry Lynch Gives an Update on the Management Team, Phase One Exploration at Bass River Project, & Royalty at Teck’s Copaquire Project

June 18, 2018

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is CEO of Chilean Metals (TSX-V: CMX)(OTC: CMETF), Mr. Terry Lynch. Terry, how are you this afternoon?

Terry Lynch: Gerardo, I couldn't be better. Thanks for calling.

Gerardo Del Real: It's good to catch up. You know, it's been several months. It's been a busy several months behind the scenes. Some reshuffling of personnel and frankly, you moving and being very proactive to position the company for this, what I call a raging copper market.

I absolutely believe that despite today's pullbacks with the tariffs on China that the pullback's going to be a healthy consolidation. We have years and years of this copper bull market raging. I want to make note of some of the recent changes with the company. If you could just talk about the strategy there and the thinking behind it, and then we could definitely talk about all the exciting things moving forward.

Terry Lynch: Perfect. Yeah, happy to do that. Patrick Cruickshank and Gary Lohman are no longer officers of the company. We brought in Mick Sharry. Simply put, we just found there was a bit more conflict of interest in some of the things that Pat and Gary were – they're involved in another Nova Scotia play and not throwing shade on them, but we just didn't see that as a fit going forward. To their credit, they saw this issue, as well, and so we resolved it in a professional manner and they stepped aside.

That allowed us to bring in a friend of mine who I met when we were dealing in Copaquire in Chile with OZ Minerals. A fellow by the name of Mick Sharry. He's our President now and Chief Operating Officer and he's a top scientist. Mick is a PhD in geophysics and has also got a geology designation, so a rare combination and a very successful explorationist.

He's got three projects, either mines or becoming mines, in Mongolia and Cambodia. Significant mines, $100 million to a billion. Serious stuff in terms of capex. Super successful explorationist. He sort of brings it all together and he's done a very amazing job since he got involved with us in February. I think we appointed him in April, but he was working basically for free because of our friendship and knowing what was coming down since then. We're really got a good handle on this Nova Scotia story, which I think is going to be very exciting and I'm happy to talk to you about that.

Gerardo Del Real: That sounds excellent, Terry. Before we get to that, there's one more point that I'd love to touch on. You settled a previous debt. I think it was to the tune of about $230,000. I want to be clear about how important I believe the social license is, behaving with integrity in the communities that you're operating in. I want to commend you on that. Could you touch on that a bit and just update us on the status of that community relation?

Terry Lynch: Yeah. Obviously, there was some existing debt outstanding there and we really needed to clear that up. It's really important in this business. Your word is your bond, and if you break that, then you're really doomed. We've addressed that and with this raise, we basically will be debt-free and still with money for exploration capital. I feel like we've covered that off.

We've gotten, certainly in Nova Scotia here now, we've gotten the thing ship-shape and the good relations with the Department of Natural Resources. They've been very accommodating and very helpful in assisting us in this exploration program. The local prospectors and geologists here who had been very standoffish have, through Mick's stewardship and our sort of personal development over here in the last 60 days, have come around 180 degrees and are now being very supportive to the company's activities.

It's hard enough to find things in this business without working at cross-purposes with the people that are supposed to be helping you. I feel like we're now fully aligned and everyone's pulling in the same direction.

Gerardo Del Real: Well said. You mentioned the raise. You raised $1.65 million dollars. Let's get to the exciting part because that's going to enable you to, one, fast-track drilling and obviously move forward your Nova Scotia projects. You're currently drilling and looking over your initial project in Nova Scotia, which is the Bass River Project that I know you and Mickey are excited about. I know assays are coming here in the next month or two. Tell me about how are things coming along there.

Terry Lynch: We see this as a sort of a phased exploration program, so this is phase one. We drilled two exploration holes into this main target to get a feel for what we had there. We certainly have been able to test the target. We've got those assays now in the labs and we'll get some results in mid-July and we'll see what we've got. I think we feel like we've got good understanding of what's going on geologically.

The other thing we're able to do in this round is – Bass River is a fairly big project. I think of it as almost simply in an audience's mind as Bass River North and Bass River South. Bass River South is a project that we just acquired in the last 60 days. It was a project within sort of our land bank but not held by us. We made a deal with the prospector, a very fair deal. This project, what's unusual about it is it had 6 holes drilled in the mid-'80s, and the core of those holes were still being saved by the Department of Natural Resources, which was really fantastic for us.

Those core holes led to a bulk cutting sample on this property, where basically 1,000 tonnes was sampled, so not a small sample. What they were looking for, really, was an iron ore feedstock for Sydney Steel. This sample was basically 35% iron ore and quite good metallurgically and stuff. But most notably, it had 0.05% cobalt in the whole 1,000-tonne sample. If you do the math on that, that's about a $70 rock right now, so that would be an exciting number. What's more interesting is the observation that in the sulfides of this particular sample, the cobalt basically was up to 0.7%. 0.7% cobalt would be a $500 rock, super-exciting numbers.

Now let's be honest. This is an historic report done in the '80s and not 43-101-compliant at this point. What we did was we went and we sampled the cores and we've sent those in for assay. We'll get those results sort of in the same time frame. At the same time, we also observed that the previous drilling that had been done in Bass River by the predecessors before us, they – for some reason that we can't understand – hadn't tested probably the best rock in the whole drilling program, so we've assayed that.

We're got three exciting looks and we think we're going get some very valuable intelligence, and we're hopeful we're going get some grade and we'll see what happens with it.

Gerardo Del Real: You know, Terry, you are one of the few, or Chilean Metals is one of the few companies that's exploring for copper and also has a royalty hedge. For people that may be new to the story, it's an important part of the Chilean story. Can you explain what that hedge is? Because it's pretty significant, I think it's going to come into focus here in the next 12 months or so.

Terry Lynch: Yeah, it's pretty exciting. What's interesting is that, obviously, Chilean Metals is our name and of course we spent the last five minutes talking about drilling in Nova Scotia. People are probably scratching their head and saying, "Well, how does that fit?"

Obviously, the long story is that the continental shelf plates in both Nova Scotia and Chile. Whenever you have continental shelves meeting, crustal faults are formed and often fluids flow there and you get big porphyries and IOCGs and VMS deposits.

That's what we're looking for. That's the common thread between the Nova Scotia and Chile. In Chile, historically, the company had spent $25 million dollars or so exploring in a very interesting area in the high Andes, adjacent to Collahuasi, which is one of the biggest copper mines in the world, and Quebrada Blanca, which is Teck's big project in Chile that has been producing since, I guess, the '70s.

Basically, Copaquire had two substantial 43-101 resources. We sold it to Teck for $3 million US plus the 3% royalty fee three years ago now. Of course, the reason why Teck bought it was that they have their existing producing mine called Quebrada Blanca 1. And Quebrada Blanca 1 is basically a copper oxide mine with a moly contributor.

They're now developing Quebrada Blanca 2 and they’ve got a couple million dollars into it that it's going to be the copper sulfide mine with a moly contributor. While they were doing this, they acquired our Copaquire project pretty much in the teeth of the recession and we sold because that was a survival move. There was a couple hundred million tonnes in the one project and I think about a hundred on the other. It's a significant deposit and a lot of ground, so there's a lot of upside to it.

Teck has not advanced that forward and we were wondering why is that. A, the first reason was times were tough and Teck was obviously conserving its exploration budget. Just recently, in the last two months, Teck bought out its minority partner at Quebrada Blanca, a very wealthy Chilean family that had about 13.5% of the deposit. They bought them out for, I think, in the neighborhood of $160 million dollars.

What Teck had always said to us was that when they got their permit, and they expect to get their permit for Quebrada Blanca 2 at any time now, certainly by the end of Q3. They said, "Look, we need to get our permit. We were completely focused." And for obvious reasons. They've got $2 billion in it and about to put another $2 billion in, so the time cost of this project is enormous to Teck. They're saying, "Look, we're keeping all energy with the government focused on just getting the existing project permitted."

They had started this permitting process before they bought Copaquire, so it makes full sense to go through that process, get the grant, get shovels ready and start working, and then go forward. Now what's interesting is this whole revelation about buying out the minority partner sort of makes some sense in our minds now. That didn't happen overnight. If you were going to buy out your minority partner, obviously they're going to do what's right as a corporation.

They can certainly say by getting the permits approved, that's the right thing, but now they're a 90% owner and the government of Chile has the other 10%. So they've got complete inspiration to maximize the value of the property now that they've finished the buy-out. We think that's bullish for us and we think obviously the copper prices are bullish.

Teck, we would not think, would want to shut down that oxide mine and that's running out of ore, for two reasons. One, they're still making money on it. I think even in the last year, it was $240 million in sales. In peak, they were doing almost $700 million in sales, so it's a very big revenue contributor and profit contributor. Second is that they have a take-or-pay electrical contract that requires them to continue using the electricity or paying for it, like $6 or $7 million a month, even if they're not using it. So shutting the mine down doesn't stop that. Of course, they'd have to retrain all the labor that they'd have to lay off because they'd be gone on to other jobs before the other mine was built.

So there's a lot of motivation to keep that mine open and running. I suspect, and this is just me, that what happens is they get their permits and what Teck has said to us is, "Look, we'll get our permits, hopefully soon. When that's done, we need a quarter to assess how Copaquire could fit into the new mine plan."

I've asked them, they have a right to buy back one of the 3% royalties that we have on Copaquire for $3 million dollars. Obviously we would be prepared to give Teck some deal on that. That would be the best IRR we ever had if Teck bought that royalty because that would show the market that those royalties are going to happen.

Gerardo Del Real: Right.

Terry Lynch: So I suspect, I've asked Teck about that, and they said, "Let's have a quarter to assess how we could fit the project in and then let's talk." I expect probably Q1 of next year, something like that, is when we would probably have a conversation with Teck and understand when Copaquire gets producing. That would be who knows how quickly? Obviously, they'd have to permit the new pit and some logistics, so it wouldn't be a 3-month thing. It might a 12 or 18-month thing, but if it works that way, then you're looking at a multi-million per year pay-out of probably $5-10 million dollars a year. Our market cap when we did this financing was $2.75 million, so it's a pretty significant hedge.

Gerardo Del Real: That's a heck of a hedge, an important 12 months for the company. Terry, thank you so much for the update. I hope you can come back soon. I know you got assays pending here. Hopefully in the next month or two, we get those back and fingers crossed, as always, right?

Terry Lynch: Yeah, absolutely. Let's hope, nothing like a little good luck. You can have all the great science in the world, but a little luck is always appreciated.

Gerardo Del Real: Absolutely. Thanks again, Terry. Appreciate your time.

Terry Lynch: Cheers, Gerardo.

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