Palisade Research - Wed, Apr 5, 2017

Ex-Goldman Sachs Mining Fund Manager Bets Big On Mexican Gold Junior - Source Exploration (V.SOP; SRXLF)

picture of cloud covered mountains

Source Exploration (CVE:SOP, FRA:4QW1, OTCMKTS:SRXLF)

Current Price: C$0.27
Shares Outstanding: 26.3 million
Market Capitalization: C$7.1 million
52-Week Range: C$0.02-C$0.37
Cash: ~C$1.2 million
Total Liabilities: ~C$0.8 million

At 24 years of age, Matt Geiger is one of the brightest and youngest minds in the resource space.

In 2011 he dropped out of the prestigious Wharton Business School to build a Silicon Valley start-up with a class-mate. To date, the duo has secured $10 million in funding. Concurrently, Matt launched a resource fund, raising several million dollars to pursue investments in the junior mining space. He is now Managing Partner for MGJ Capital, a deep-value, resource-focused investment partnership with 20+ LPs. His background gives him a unique and diverse set of skills pertaining to early stage ventures, and his track record speaks for itself.

MJG Capital returned 95% last year, net of fees, and Matt says that performance has accelerated further in 2017. The aggregate of our team is similarly young, but we look at Matt as a prodigy. When he turns over a stone and finds something, we pay attention. And that is exactly what happened when he brought Source Exploration to our attention.

The Background

Source Exploration is an exploration company that was not immune to the bear market. In fact, the company was in worse shape than most when the owner of its flagship option passed away in 2016 , placing the project into probate and into the hands of a Mexican court. Source Exploration was on the cusp of its maiden resource, but could only watch as its market cap deteriorated.

Fortunately for us, Source has made it through the recession and the courts, and could not be cheaper! The company has recapitalized and brought new leadership aboard. Having just closed a $1.85 million financing, the company is now on course to unleash its maiden resource estimate. We have studied the geology and drill holes; this resource will be BIG.

In the end, we made the decision to invest half a million into the company.

Why A Former Goldman Sachs Superstar Invested & Joined The Board

Joining us in this investment is Ali Zamani, current Managing Partner of Overlook Investments LLC. Mr. Zamani began his storied career as an M&A investment banker at Dresdner Kleinwort Wasserstein, in the O&G and utilities group. Afterwards, he joined Goldman Sachs' elite Principal Strategies Unit from 2004 to 2012, managing the firm's proprietary investments in publicly-traded mining and materials companies.

At its peak, Ali was responsible for $700 million of the principals' own funds. He eventually left to create his own hedge fund and to manage his own private investments.

Being immersed in metals and mining for the majority of his career, Ali developed his own thesis and has determined now is the ideal time to invest in gold. Debt levels have reached relative post-WW2 levels, with no secular catalysts to pay it off. During the 1950s, the United States was the world's only superpower, with untouched infrastructure to manufacture and export goods. Baby boomers have created an ideal situation for themselves, with lowered taxes and throttled pensions, leaving the younger generation to fend $500 billion in deficits per year. If you would like to hear more about his thesis, click here to listen to the full interview.

The day of reckoning is approaching, and Ali believes the FX trade of the century will be the tipping point to finally derail the markets and send people rushing to gold. The cost of carrying money is increasing, with many countries already having negative rates on the short-end. With the US debt spiralling out of control, eventually this America will have to succumb to the same fate.

Thus, gold is Ali's preferred investment; and while gold's rise may be slow, now is the time to accumulate. Ali looks for four important traits in an gold explorer: scale, grade, management, and jurisdiction. Here is why Source Exploration checks the boxes and then some:

#1 - Scale - The Hunt For Aztec Gold

The Las Minas project located in the state of Veracruz, Mexico, and hosts near-surface, gold-silver-copper skarn mineralization, as well as high-grade gold-silver epithermal veins. The project is made up of six mineral concessions covering 1,620 hectares, and is littered with small, past-producing mines and untested targets.

topographic property map showing the Las Minas project in Veracruz Mexico
(Source: Corporate Presentation)

The Las Minas area has a rich history of exploration and mining, dating all the way back to the Aztec Empire, where artisanal miners paid taxes to the Emperor with gold. The area remained active even after conquered by the Spanish, and all the way to the Mexican Revolution. In fact, between 1870 to 1910, the area was home to thirty small, high-grade mines producing ore ranging from 20-40 g/t gold and 15-30% copper.

After the revolution, the area became dormant. In 1970, the Mexican Government reassessed the area, concluding that the district had potential to contain 80 million tonnes of skarn averaging 1.89 g/t gold equivalent.

In 1996, the concessions were optioned off to International Northair, where the company carried out an extensive sampling and mapping program. The campaign yielded 583 samples from 2-3 meter channels from outcrops and old mine workings, and delineated several large zones, grading 1.0-5.0 g/t gold and 0.5-2.0% copper. The average from all samples was 1.70 g/t gold and 0.39% copper or 2.37 g/t Au Eq.

In 2007, Chesapeake Gold Corp acquired the concessions and continued with exploration. The company was able to identify 25 alteration zones that hosted skarn mineralization with significant gold, with silver and copper.

Las Minas Today - Million Ounces & More?

Source Exploration Corp. optioned the property in late 2010, and for the next four years raised over $11 million to delineate targets and drill out the property.

Presently, the project has over 16,400 meters of drilling, and has delineated high-grade zones at El Dorado/Juan Bran zones and Santa Cruz. Source Exploration has explored six mineralized areas covering 270 hectares.

property map showing where holes were drilled
(Source: Corporate Presentation)

Previous drilling at El Dorado-Juan Bran has found a mineralized zone measuring 420 meters and extending more than 600 meters down-dip, with thickness varying from 6 to 82 meters.

longitudinal property map showing drill zones relative to the canyon floor
(Source: Corporate Presentation)

The above map is a longitudinal section, oriented east to west. It depicts the El Dorado/Juan Bran zone relative to the canyon floor with Santa Cruz zone occupying a higher stratigraphic structural level. This section shows that the zone is still open to the south.

Source Exploration has just commenced a 2,800 meter in-fill and step-out diamond drill program at the El Dorado/Juan Bran zone, and the company plans on expanding the zone and completing its maiden resource. The planned step-out drilling will further test the downdip extension of the zone.

satellite image, VTEM or areomag? of property likely showing mineralized anomolies
(Source: Corporate Presentation)

The majority of the infill program will occur at El Dorado/Juan Bran, where a recent drilling program encountered widely-spaced step-outs, with every hole containing mineralization. The width of the zones and the number of high-grade intercepts are indicative of a potentially large and well mineralized system. Here are some highlights:

El Dorado/Juan Bran - Recent drilling linked the shallow dipping zone with earlier drilling completed further to the south. The drilling intersected the mineralized zone over an interval extending approximately 650 meters down dip.

LM-15-ED-20 - 22.0 meters grading 2.00 g/t Au Eq, including 3.38 g/t Au Eq over 12.0 meters; and 4.67 g/t Au Eq over 8.0 meters

LM-15-ED-21 - 14.0 meters grading 4.01 g/t Au Eq, including 5.17 g/t Au Eq over 10.0 meters; and 5.89 g/t Au Eq over 8.0 meters

Santa Cruz

LM-15-SC-15 - 121.3 meters grading 1.91 g/t Au Eq, including 2.03 g/t Au Eq over 113.0 meters; 4.02 g/t Au Eq over 31.2 meters; 6.07 g/t Au Eq over 14.2 meters; and 9.73 g/t Au Eq over 6.0 meters

LM-15-SC-16 - 24.0 meters grading 4.30 g/t Au Eq, including 6.54 g/t Au Eq over 14.0 meters

In May 2015, Source Exploration announced the discovery of a new highly mineralized zone at the Nopaltepec target. Discovery hole, LM-15-NP-01, intersected multiple mineralized intercepts of gold, silver and copper from the collar to a depth of 203 meters. The intercepts included 5.74 g/t Au Eq over 17.0 meters, including five meters grading 13.70 g/t Au Eq, containing a one meter interval grading 35.02 g/t Au Eq. The hole ended in mineralization.

The Nopaltepec zone occurs 100-150 meters above the downward projection of the recently drilled El Dorado/Juan Bran zone. The grades and type of mineralization are similar to the high-grade mineralization at the Santa Cruz target, located 250 meters to the east. Source plans on further exploring this zone in the next exploration program.

Will Las Minas have enough ounces to host an economic mine?

We believe so.

The maiden resource is scheduled to be released in late May or early June, and will be the stepping stone for something much larger. Mr. Zamani believes Las Minas has enough potential to be in production for at least a decade, and to amortize all the cost of infrastructure needed to be an economic mine. The scale is definitely there.

#2 Grade - Media Luna Copycat

When looking at grade, Mr. Zamani compared what Las Minas has yielded to date to similar deposits/mines around the world.

Las Minas is best compared to Torex Gold Resources' (TSE:TXG, Mkt Cap: C$2.15B) 7.42 million ounce Au Eq, Media Luna deposit, located on the Guerrero Gold Belt. Las Minas has skarn deposits that is analogous to Media Luna, which averages 4.48 g/t, and is expected to produce 313,000 ounces of Au Eq per year at an average AISC of US$636/oz.

To date, Media Luna has seen close to 122,900 meters of drilling, compared to Las Minas' 16,420. However, enough work has been done to conclude the geology and mineralization are almost the same:

two pictures of mineralized core samples
(On the left, Media Luna core. On the right, El Dorado core. Source: Rocks to Riches Equity Research Report)

Another comparison can also be made to the El Limon-Guajes Mine, also a skarn deposit located on the Guerrero Gold Belt and owned by Torex. El Limon-Guajes currently has M&I resource of 4.12 million ounces Au with another 360,000 ounces in inferred at a grade of 1.86 g/t. The project is a high-grade, open-pit gold deposit with a resource grade of 2.65 g/t. El Limon-Guajes commenced production in December 2015 and commercial production in March 2016. At full production, the mine will produce an average of 370,000 ounces of gold for the life of mine, and will be one of the lowest cost producers with an average AISC of US$636/oz.

table compares Las Minas with two Torex Gold deposits

Las Minas' compares very favourably to both Media Luna and El Limon-Guajes, both skarn deposits located in Mexico. Obviously, there is still a lot of work to get Las Minas to a development stage project, but the foundation is there to place Las Minas in the top 10% of amongst similar operations.

#3 - Management - Motivated & Ready

Ali joined the board to be a voice for the shareholders, and was recently appointed Chairman of the Compensation Committee. As an active investor as well, Palisade Global will aid management in achieving set milestones and to ensure long-term moves are in the best interest of shareholders.

Brian Robertson is Source Exploration's CEO and President, and recently appointed Chairman of the Board. Brian joined Source in September 2009, originally brought on to advance the San Acacio silver project located in Zacatecas. He was hired by Ewan Downie, the CEO and President of Premier Gold Mines (TSE:PG, Mkt Cap: $690.7M), who served as the Chairman of the Board at the time. In October 2010, Brian acquired Las Minas which became Source's flagship till this day.

Brian brings over 30 years of mining experience, ranging from management, exploration, project management, and aspects of mine construction. He served as the President of Victory Nickel and Nuinsco Resources and is a Director of Romios Gold Resources, Appia Energy, and Minnova Corp.

Its important to note, that while Ewan Downie resigned as Chairman of Source in 2012, it was due to pressure from his Board of Directors at Premier Gold. The decision was made to limit his activities with junior companies. However, during his tenure he was a strong advocate of Las Minas, introducing the asset to many large mining companies. In fact, till this day Source shares an office with Premier Gold in Thunder Bay.

Source Exploration brings a motivated and technically astute team to the table. We know the Directors very well, and believe this team will be able to take Las Minas to the next level.

#4 - Jurisdiction - Premier Mining Country

Mexico often ranks well in any mining survey in terms of jurisdictional risk. The government is very pro-mining. Brian Robertson has also approached the locals the right way, with the mentality that Source Exploration is a guest in their community, and has been active in working with local schools and sports programs.

That being said, Las Minas is a mining town and is just itching to get back to work. The infrastructure is all there, including hydroelectric power and water at site. And Mexico City is located just 270 kilometers west by paved highway. We have no qualms about Mexico and Las Minas.

The Mines, Mexico

There is no denying that Source's exploration results to date are impressive. Drilling has outlined gold, silver, and copper skarn zone that covers 840 meters on strike and 420 meters in width, with mineralized intercepts varying from 20 to 245 meters in length.

There are some very big catalysts on the horizon, beginning with assays from the current drill program that are expected as mid-April.

Source Exploration is also carrying out detailed geological mapping, sampling and target definition at the Pueblo Nuevo concessions. This work is focused on historical mines with high-grade epithermal vein systems, and results from this program will be available in early to mid-May.

But the biggest piece of news most everyone will be waiting for will be the maiden resource estimate, which is slated for Q2.

The company recently closed a private placement, which will become free trading on July 3. This will understandably bring some selling pressure, as the financing was done at 15 cents and shares are now trading at 27 cents. For people looking to average down their positions or for people who missed their first opportunity, this time window may bring a good entry point. However, it is after the resource estimate, the stock may very well be flying by then.

Lastly, Source Exploration will complete its reorganization and rebrand with a name change to Mexican Gold Corp. This is very fitting as the company has new life and ready to attract new investors and capital. Management has made it clear that it will be actively marketing the story, and we believe Las Minas has already attracted the interest of many majors.

The consistency of Las Minas is strong, and even non-technical investors can put together the dots. This has all the makings of a district scale opportunity, and we believe it will be home to multi-million ounce deposits in a mining-friendly jurisdiction.

Palisade Global Investments Limited holds shares of Source Exploration. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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