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1/11/17

Regarding Almadex (AMZ.v) and its ‘El Cobre’ project (from IKN399, last weekend)

Here's a short piece that made last weekend's edition of The IKN Weekly, IKN399 dated January 8th. At that time Almadex (AMZ.v) was a $1.65 stock and here we are, three days later and 17% lower. The only edit is the removal of the names of the two copper stocks I currently own.

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Regarding Almadex (AMZ.v) and its ‘El Cobre’ project
Since August last year (get used to referring to 2016 like that) Almadex Minerals (AMZ.v), the spin-out of Almaden (AMM.to) (AAU) and run by the Poliquins, has been returning assay results from its El Cobre project in Veracruz State, East coastal Mexico. Here’s an example (12) of one of the earliest NR in the series (I think) dated August 8th and this NR (13) will take you to the latest release that’s headlined this way:

Almadex Hits 240.00 Meters of 0.22% Copper and 0.50 G/T Gold Within 646.38 Meters of 0.15% Copper and 0.30 G/T Gold Which Also Includes 469.00 Meters of 0.18% Copper and 0.38 G/T Gold in Hole EC-16-017 at the Norte Zone

With “El Norte” referring to one of the targets inside the larger ‘El Cobre’ project. AMZ at El Cobre is a project I’ve kept one eye on these last few months (though you’ll note without even mentioning it so far, let alone buying any shares, so when reader PB shot over this mail on Friday...

“Care to comment on either your blog or in the Weekly regarding Almadex's new drill results?  My main concern regarding this project is that it is in Veracruz and I remember Goldgroup Mining's success with Caballo Blanco.  From the property descriptions provided by Almadex (about 75 kms northwest of the city) and Candelaria Mining (65 km northwest of the city), they could be as close as 10 kms to each other.  Thanks.”

...it nudged me into making a first comment about the project. So here we go:

1) Yes, I’m concerned about its geographical location as well. PB noted the “success” of Keith Piggott and Goldgroup at Caballo Blanco (he was being ironic) and the way the project was shot down for environmental and community protest reasons (and by the way, Candelaria Mining is untouchable today for the same reason), but we also need to note that Almaden sold Caballo Blanco to Goldgroup. At El Cobre, the Poliquins know exactly where they are.

2) Up to date the assays widths have been very good, there’s obviously a large mineralized body, but for my taste it’s a long way from being a orebody and the main issue is that of grade. It’s a little early to be accurate about overall grades there, but taking the assays so far, averaging out, being reasonably generous to the upside and sticking a thumb in the air, I’m going to assume at this point an average grade of 0.2% copper and 0.3 g/t gold. Sorry folks, that’s not enough to float my boat for a non-surface sulphide mineralization and to illustrate that here’s a simple table (stuck together in about ten minutes) using those grades, reasonable-to-generous recoveries (90% Cu, 75% Au) and a range of metals prices to give a “what’s that rock worth?” spreadsheet table:

AMZ.v: El Cobre rock worth/tonne at various mkt prices (U$/mt)
Assuming avg grade of 0.2% copper, 0.3 g/t gold, 90% Cu and 75% Au recoveries
Gold/oz U$
Copper/Lb U$
2.00
2.25
2.50
2.75
3.00
1000
15.17
16.16
17.16
18.15
19.14
1100
15.89
16.89
17.88
18.87
19.86
1200
16.62
17.61
U$18.60
19.59
20.59
1300
17.34
18.33
19.33
20.32
21.31
1400
18.07
19.06
20.05
21.04
22.03
1500
18.79
19.78
20.77
21.76
22.76
source: IKN calcs from AMZ data

3) I’ve picked out the U$2.50/lb copper and U$1,200/oz result for reference purposes (a “rock worth” of U$18.60/tonne) but even at U$1,500/oz gold and U$3.00/lb copper the numbers involved aren’t that great. Now I’d agree there are a few mines in the world today that can run super-low opex and make money on that kind return per tonne, but they’ve been built already and the capex is paid off. In today’s environment those grades make margins too skinny for capex and opex combined, it’s way down the pecking order for copper or copper/gold projects, in short it doesn’t work.

So why care? For one thing, at its current C$73m approx market cap it’s getting a lot of valuation for what, so far at least, is a pretty mediocre return. That implies AMZ is getting speculative holders who are betting the company finds something better at the project as the drill program continues, which fits in with the message in the latest NR that, “...the Company interprets that a distal and high level portion of a porphyry system with significant gold values has been intersected”. In other words, AMZ and its backers are betting that 1) they haven’t found the best-grading guts of this system yet and 2) they can find it. Which is fine, well and good but as things stand today this company and its stock is not for me. Instead of betting on AMZ and that two-fold risk of whether they find economic higher grading rock, I much prefer to bet on (two names removed) because I know they have higher grading rock. As the market has baked in plenty of positive assumptions here, there looks to be plenty of downside risk already in AMZ and the comparative value isn’t good. Now yes, for sure they could hit the jackpot and announce a big bad 1,000m of 0.7g/t gold as the first hole of this year’s campaign and if so, there’s many multiple of upside in the game and that’s why I have my eye on the stock. But it’s watching brief only at this time, because in my opinion (two names removed) are clearly better propositions on what we know today.

Bottom line: AMZ looks expensive on what we know today, plus there’s the potential of difficult environmental and community relations further down the pipeline, but it’s by far from a lost cause because there’s plenty of exploration potential and you never know, they may be able to deliver on their theory, drill into the main porphyry and suddenly hand over world class results to the market, instead of the mediocre ones we’ve seen to date. AMZ is on watching brief, but at today’s prices I’m not a buyer.