Tracker - December 11, 2019: Sirios resource estimate for Cheechoo sets stage for consolidation of Eleonore South
Sirios Resources Inc announced a maiden resource estimate on December 11, 2019 for its 100% owned Cheechoo gold project in the James Bay region of Quebec which is good enough to qualify as an optionality gold play. Using a 0.3 g/t cutoff grade based on $1,300 gold and a 1.3 CAD:USD exchange rate Sirios reported an inferred resource of 71,000,000 tonnes at 0.69 g/t gold for an open pit scenario representing an in situ resource of 1.6 million oz gold. The rock value at $1,466 per oz is USD $32.52 per tonne. At a 0.5 g/t cutoff the resource drops to 37.3 million tonnes at 0.97 g/t for 1.2 million oz in situ and a rock value of USD $45.72. At the 0.3 g/t cutoff Sirios was forced to exclude 25% of the potential inferred resource, or 400,000 ounces, because the pit edge had to stop at the southern border of the Cheechoo project. The maiden Cheechoo resource estimate was initially predicted to be available by the end of Q1 of 2019 but was delayed for several reasons, one of which came to light the day the resource was released.
The first reason was the decision to complete additional infill drilling during 2019 to make available a bigger tonnage footprint for the deposit model, with a 200-300 million tonne resource ranging 0.4-0.6 g/t a plausible outcome. Such an outcome representing a 3-5 million ounce resource would have left Cheechoo as a gold optionality play of interest only to investors willing to speculate on a near term gold price above $1,600. This was the scenario evident at the start of 2016 when Sirios changed its delineation focus to establishing higher grade structures within the low grade disseminated tonalite intrusion. The stock traded as high as $1.42 in 2016 before the gold uptrend that year reversed and it became apparent that while a different drill hole orientation did generate more high grade intervals, these were still too erratic to cohere into identifiable high grade zones that could be exploited by underground mining. By 2018 Sirios had switched back to its original model of outlining a bulk tonnage open-pittable resource.
The second reason for the resource estimate delay was an attempt to quantify the nugget effect in the hope of bringing the resource grade into the 0.7-1.0 g.t range. Sirios collected 5.5 tonnes of representative material and submitted it for analysis in the form of a couple dozen batches. The first few batches received by mid October suggested that the hope might become a reality, but by the time all the batches were processed the results were so erratic as to be inconclusive. Sirios also received expert advice that with this style of deposit a meaningful assessment of the nugget effect would require a bulk sample 3-5 times the planned daily operating rate. Sirios had considered 3 operating rates of 10,000 tpd, 20,000 tpd and 40,000 tpd which implied bulk samples from 30,000 to 200,000 tonnes, a scale and expense that would make sense only at the feasibility study stage.
The real reason for the delay, however, was an effort by Sirios to reach a "collaboration" agreement with the three owners of the Eleonore South property which covers the southern half of the Cheechoo intrusion, Newmont-Goldcorp and Eastmain Resources Inc at 37% each, and Azimut Exploration Inc at 26%. The 43-101 resource estimate rules do not allow any mineralization accessed by open-pit mining to be included in the resource if the required pit limit extends onto an adjacent property whose owners have not granted permission for the pit to extend onto their ground. The Eleonore South JV had during the decade following Virginia's Eleonore discovery focused only on the margins of the Cheechoo intrusion without much success, but in 2016 it began to explore the Cheechoo intrusion itself with Azimut taking on operatorship. The JV established that similar low grade disseminated mineralization with erratic high grade zones was present on its half. By 2018 the Cheechoo story had stalled and Azimut stopped contributing its share of costs, relinquishing operatorship back to Eastmain which was run by Claude Lemasson since mid 2016 after a cranky hedge fund supported by Bay Street forced out the husband-wife team of Don Robinson and Cathy Butella who had run Eastmain since the late nineties. Eastmain went on to advance the Clearwater project and delivered a PEA in 2018 which disappointed the market, and forced Eastmain to start exploring for additional deposits on the property. Given that the 37% Eleonore South stake was meaningless to Newmont-Goldcorp, a distraction from Clearwater for Eastmain, and of zero value to Azimut, one would have expected the partners to welcome some way of monetizing their stakes in half the Cheechoo intrusion which clearly needed to be developed as a single standalone open pit mine. Sirios management has not disclosed why an agreement could not be reached, but decided in November it would have to deliver a resource estimate based on a pit whose limit stopped at the southern border.
The result was a considerably smaller resource which did manage to achieve the low end of the desired 0.7-1.0 g/t grade range but which disappointed the market which was hoping the resource would reach the 3 million ounce threshold. The stock price retreat on the day the of the resource estimate reflected that disappointment. Sirios, which has $1.5 million working capital left following a financing in October that was taken town 75% by Newmont-Goldcorp to establish a 19.9% equity stake on a fully diluted basis, could pursue additional infill drilling to the west of the resource estimate pit where mineralization was excluded because it lacked sufficient drill density. However, that may not be necessary. On December 6, 2019 Eastmain quietly announced late Friday afternoon that the CEO was leaving to "spend time with his family and to pursue other opportunities", which is code for him being fired or quitting over some fundamental disagreement with the board of directors. Whatever the reason, Eastmain now has an interim CEO and all the more reason to monetize its 37% Eleonore South stake in order to focus on Clearwater, especially at what might be the beginning of a new gold bull market. The likelihood is now much higher that Sirios can secure a "collaboration agreement" which allows it to recalculate the Cheechoo resource. However, the situation is now much better to secure a deal which allows Sirios to acquire 100% of Eleonore South, possibly for stock on terms which reflect the reality that Sirios has a resource estimate with critical mass for a standalone mine on its 100% owned ground while whatever sits on Eleonore South still needs proper delineation for an open pit scenario and possibly lacks critical mass to be a standalone open pit mine.
Sirios currently has 178.1 million shares fully diluted which implies a value of $30.3 million for its 100% owned Cheechoo project. It remains to be seen what sort of deal can be worked out, but with Newmont-Goldcorp as the largest shareholder at 19.9%, Azimut eager to fund its Pikwa and Elmer projects without major equity dilution, and Eastmain temporarily leaderless, the chances for a favorable deal that sends the Sirios stock price into an uptrend, and thus benefiting any paper component to the deal, are very good. I am maintaining the Bottom-Fish Spec Value rating for Sirios Resources Inc with a readiness to upgrade it to Fair Spec Value if the Eleonore South property can be consolidated 100% into the Cheechoo project on win-win terms.