GOLD - ATEX Resources: Still A Buy After Strong Rally On Valeriano Exploration Potential Near-Term Catalysts

2023-05-22 10:45:38 ET

Summary

• The share price of ATEX Resources has surged by 158% over the past 18 months, driven by the company's advancements in delineating the Valeriano porphyry copper-gold project in Chile.
• In this article, I provide an updated investment thesis for ATEX Resources and explore potential actions that shareholders may consider taking with their stock.
• Patient shareholders with a multi-year time horizon may be richly rewarded in the long run as ongoing exploration efforts continue to grow the intrinsic value of Valeriano.

Since its initial introduction to the Seeking Alpha community in January 2022, ATEX Resources ( ECRTF ) has experienced significant appreciation. Despite a recent pullback of 37%, the stock has still managed to deliver a gain of approximately 158% to investors, as illustrated in Figure 1.

Currently, investors in ATEX Resources may find themselves at a critical crossroads, grappling with several key uncertainties. What sets ATEX apart from other junior mining companies, which for the most part have struggled since August 2020? How much further upside potential does ATEX offer? Considering the recent downturn in Dr. Copper, largely influenced by the bleak economic outlook of China, ATEX faces the risk of further sell-offs, potentially eroding the gains accumulated over the past 18 months. Should investors consider taking profits to protect their paper gains, or should they consider adding to their existing positions? Additionally, given that copper porphyry exploration is costly, what level of equity dilution risk are shareholders exposed to going forward?

To address these crucial questions, it is imperative to (1) update the investment thesis of ATEX and (2) review how natural resource-focused value investors are supposed to think about junior mining stocks. Let's delve into these aspects below.

Inflection point on the hockey stick

Investing is an iterative process of weighing the potential rewards against the risks involved, which is particularly true in the realm of exploration-stage junior mining investing. At The Natural Resources Hub, we leverage our geoscience background to analyze the news flow from drilling activities, aiming to estimate the scale of mineralization within the property, which ultimately determines the project's upside. Additionally, we monitor various risks related to mineralization continuity, metal grades, ore metallurgy, local infrastructure, and jurisdictional factors. Based on our experience, we have found that one of the most opportune moments to build a position in an exploration-stage mining company is when the exploration program has produced initial indications of a world-class mineral deposit or when significant de-risking events occur. This marks the inflection point on the hockey stick, representing a significant turning point in the project's trajectory.

In the case of Valeriano as shown in Figure 2, the historical intersection of 1,194m at 0.73% CuEq suggests that the project potentially holds large-scale epithermal gold-silver and porphyry copper-gold-silver systems. ATEX acquired an option on the project in 2019; however, it has to delineate the spatial extent, grades and continuity of the mineralization therein before it increases its interest in the project to 100% by September 1, 2025.

P hase II drilling

In 2022, ATEX adopted a new strategy for Phase-II drilling following the 2021 program that targeted shallow mineralization. The focus shifted to drilling the core of the porphyry, with two diamond drill holes: ATXD-17 and ATXD-19 . In June 2022, the results were reported. Drill hole ATXD-17 intersected 1,160 meters with a grade of 0.78% CuEq (copper equivalent), including an impressive 550 meters grading 1.03% CuEq. This intersection is globally significant when compared to other porphyry projects. On the other hand, drill hole ATXD-19 encountered operational issues and was lost at a depth of 1,309 meters before reaching the target depth. However, it still returned a noteworthy result of 647 meters grading 0.65% CuEq, ending in potassic altered and mineralized porphyry.

These two drill holes confirmed the presence of a high-grade core in the Valeriano deposit, highlighted by the 550-meter intersection of 1.03% CuEq. Additionally, Phase II exploration helped expand the porphyry mineralization to the northeast and southwest, delineating an 850-meter by 800-meter envelope of the copper-gold mineralization, as depicted in Figure 3. It is important to note that the mineralization remains open, suggesting further potential.

Despite the significant exploration success achieved through Phase II drilling, Mr. Market spent some five months sleeping at the wheel, perhaps confused by the then-declining copper price (see Figure 1) and sulking over a C$12.4 million private placement financing round and the ensuing equity dilution. Such a contrast between operational breakthrough and market indifference highlights the kind of unique opportunities available in junior mining investing. In such cases, discerning investors are often afforded ample time to back up the truck after the company has publicly released evidence for a world-class mineral deposit.

Phase III drilling

Equipped with C$12.4 million in capital, ATEX Resources initiated Phase-III exploration in October 2022. In this phase, directional drill hole ATXD-11A , positioned 200 meters northeast of the historical extent of mineralization, intersected 1,270 meters grading 0.63% CuEq . The hole ended in mineralized porphyry with a grade of 0.73% CuEq. ATXD-11B , a sidetrack also off ATXD-11, returned high-grade intervals (0.80% CuEq over 1,010 meters and 0.94% CuEq over 222 meters) within an impressively long interval of 1,342.5 meters grading 0.73% CuEq in the newly-discovered Western Trend, as depicted in Figure 4.

While complete assays for drill holes ATXD-22A and ATXD-23 are expected by late May 2023, preliminary data suggest that significant mineralization has been encountered in those two holes. The final two holes in Phase-III, ATXD-22B and ATXD-24, are projected to be completed by the end of May 2023 .

As Phase-III drilling progresses, it becomes increasingly clear that the Valeriano deposit consists of three distinct high-grade trends. Each of these trends remains open along strike, with approximately 4,500m of strike-length yet to be drill-tested (see Figure 2), suggesting that the Valeriano mineralized system still has great potential for substantial expansion. The discovery of the Western Trend has broadened the Valeriano mineralized corridor to an impressive width of 1,000 meters. Drilling so far indicates that mineralization extends to depths greater than 1,000 meters. Therefore, the Valeriano deposit is poised to emerge as a giant porphyry copper-gold deposit.

Valuation and risks

Elephant country

The potential emergence of Valeriano as a giant porphyry copper-gold deposit should not be viewed in isolation but rather within a regional context. The mining industry has long grappled with a perplexing gap along the Andean porphyry belt, a gap that is referred to as the Link Belt by ATEX.

However, in recent years, three gigantic porphyry deposits, namely Los Helados, Filo del Sol, and Josemaria, have been discovered at the northern end of the Link Belt. These findings were made, respectively, by NGEx Minerals Ltd. ( NGXXF ), Filo Mining Corp. ( FLMMF ), and Josemaria Resources, a subsidiary of Lundin Mining Corporation ( LUNMF ), all of which belong to the Lundin Group of companies. Lundin Group call these deposits the Vicuña mining district, as depicted in Figure 5.

Located at the southern end of the Link Belt, Valeriano and the El Encierro porphyry copper-gold deposit, owned by Antofagasta plc ( ANFGF ) and Barrick Gold Corporation ( GOLD ), are highlighted in Figure 6. El Encierro contains an initial resource of 552 million tonnes at 0.79% CuEq within a larger resource of 2,459 million tonnes at 0.56% CuEq. Valeriano and El Encierro, separated by a mere distance of around 5 kilometers, appear to form a promising mining district that could rival Vicuña in terms of both tonnage and grades.

Looking ahead, it is likely that the Antofagasta-Barrick JV will seek to acquire ATEX Resources so as to consolidate the district. Before such a scenario unfolds, investors may find guidance by considering the market capitalizations of NGEx Minerals (C$1.17 billion) and Filo Mining (C$2.88 billion) as indicators of the potential market cap that ATEX could ultimately reach, up from its current market cap of C$190.42 million.

Valuation

Based on the scale and average grades observed thus far, I estimate that Valeriano has the potential to contain a copper equivalent resource ranging between 20 Blb and 30 Blb. It is worth noting that the ongoing drilling program may further expand the extent of mineralization within the Valeriano deposit. Using a valuation metric of US$0.04 per pound of copper equivalent, it is projected that ATEX could achieve a market cap in the range of C$1.1 billion to C$1.7 billion, when a transaction takes place after the project has undergone sufficient delineation. Considering ATEX's current market cap, I strongly believe that the company has significant upside potential in the coming years.

Compared to market darlings Filo Mining and NGEx, ATEX still remains under the radar. However, ATEX has a series of near-term catalysts that could drive a substantial re-rating in the next 12 months. Final assay results for four drill holes in Phase-III exploration are expected in July-August 2023, followed by Phase-IV drilling that is scheduled to start in September-October 2023. ATEX plans to report a mineral resource update in the third quarter of 2023, with the technical report set to be filed in the following quarter. Additionally, the company plans to run five drill rigs in the first quarter of 2024, to accelerate the exploration program.

Risks

The election of left-wing politician Gabriel Boric as the President of Chile in December 2021 has raised concerns within the mining sector regarding future investments in the country. Boric supported the drafting of a progressive constitution, introduced a tax reform bill that increases copper mining royalties, and planned to reform the lithium industry. The resultant political and fiscal uncertainties have created panic among investors.

However, recent developments indicate that the situation may not be as dire as initially perceived. The process of constitution reform began in 2019 after mass protests in the country. The first draft of a new constitution proposed by a left-wing Constitution Council was rejected by 62% of voters in a referendum last year. This prompted the election of a new Constitution Council, where the right-wing secured a sweeping majority on May 7, which makes it highly unlikely that a radically progressive new constitution will be implemented. A new draft constitution will be presented to voters in another referendum scheduled for December.

Furthermore, on May 11, Chile's Senate approved an amended mining royalty bill, which has been sent back to the Chamber of Deputies for a final vote. The amended proposal introduces a flat-rate ad valorem tax of 1% on copper companies producing >50,000 tpa , significantly lower than the originally proposed 3%. Additional royalties ranging from 8% to 26% will be imposed based on the operator's operating margin, rather than fluctuating according to the copper price as initially suggested. There have also been reports of an agreement to reduce the tax rate from 47% to 46.5% for companies producing >80,000 tpa and 45.5% for companies producing 50,000 - 80,000 tpa. This new fiscal regime appears to be more favorable to the mining industry than initially anticipated, providing relief to miners operating in Chile after close to five years of uncertainties. While the new mining royalty bill does not directly impact exploration-stage companies like ATEX Resources, it does create a pause for senior producers considering acquiring junior miners or mining projects in the country. Therefore, the resolution of the crisis is excellent news for ATEX and other companies in similar positions.

ATEX Resources, being a pre-revenue company, will need to raise equity capital to cover operational expenses, fulfill option payments to the property vendor, and fund ongoing exploration programs. I reckon that ATEX may need approximately C$12.5 million per year to cover overhead costs and exploration activities. Furthermore, ATEX has scheduled option payments of US$3.5 million due by September 1, 2023, and an additional US$8 million by September 1, 2025; half of these option payments can be settled through the issuance of common shares.

Even though the Valeriano-El Encierro district seems to be richly-endowed in copper and gold, there is no assurance that the Valeriano deposit will prove to be an economically viable project. Additionally, external variables such as commodity prices, foreign exchange rates, infrastructure availability, and market conditions can significantly impact ATEX's future results.

The less-traveled road to multi-baggers

Determining what to do with your investment in ATEX Resources after its recent gains requires assessing various factors beyond simply listing the merits of the Valeriano project. Shareholders may reach different conclusions based on their temperament, as Warren Buffett once said: "The most important quality for an investor is temperament, not intellect."

In my 2021 and 2022 Seeking Alpha interviews, I emphasized the greater potential to find future unicorns among micro-cap stocks in the junior mining sector compared to other industries. Investors should understand that high-quality, yet lesser-known, junior mining stocks like ATEX Resources are more likely to deliver significant returns, even a ten-bagger, over the next five years, than popular mega-cap stocks like Apple ( AAPL ) or Amazon ( AMZN ). Despite financial analysts' irrational aversion towards junior mining stocks, it's worth noting that much more money was lost in once-celebrated large-cap stocks like Enron, Lehman Brothers, and Global Crossing than in all junior mining names that have failed over the past century. At any rate, understanding the risk-reward profile of your investments and knowing in which case you may swing for the fence is crucial, regardless of market capitalization.

Conventional wisdom goes that predicting commodity prices is the trick to profit from resource stocks. However, early-stage explorers generally exhibit a weak correlation with the metal prices, as shown in Figure 1 for ATEX Resources. An investor doesn't need to have the ability to prophecy commodity prices with high granularity to thrive in resource investing. Instead, it is vital to adopt a time horizon aligned with the project life-cycle. Throughout the 5, 6, or 7 years it takes to advance a mining project toward production, investors must constantly know the difference between the intrinsic value of the underground deposit and the daily fluctuations in share price.

Investor's takeaways

This analysis indicates that ATEX Resources has significant upside potential as it continues to expand the scale of the Valeriano deposit and de-risk the project. To that end, a series of near-term catalysts are expected in the next 12 months.

However, it's worth noting that approximately 60 million warrants are set to expire before the end of the next year, which may contribute to stock volatility.

Nonetheless, patient investors with a multi-year time horizon recognize that the share price is likely to experience substantial appreciation in the long run, aligning with the growing intrinsic value of Valeriano.

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