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 Fri Oct 26, 2018
SVH Tracker: Putting Serengeti's Kwanika drill results into context
    Publisher: Kaiser Research Online
    Author: Copyright 2018 John A. Kaiser

 
Serengeti Resources Inc (SIR-V: $0.42)
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SVH Tracker - October 26, 2018: Putting Serenegti's Kwanika drill results into context

Serengeti Resources Inc released initial holes on October 18, 2018 from the summer PFS related drilling on the 100% owned Kwanika copper-gold project in British Columbia. The stock, which had been lumbering along in the $0.13-$0.15 range exploded to a high of $0.60 on 10.2 million share volume before settling back to close at $0.35. The stock opened at $0.34 and within 15 minutes peaked at $0.60 but then dropped quickly into the $0.40-$0.50 range where it churned for the rest of the day until the last 30 minutes. Since then the stock has ranged between $0.25-$0.40 as the market tries to decide what the results mean. The market action attracted detractors such as Inca Kola whose disdain for the project based on the fact that at current copper-gold prices Kwanika as envisioned in the PEA is not worth developing prompted him to bash the company. The market reaction was indeed overdone and amounts to a market hijacking, possibly by algo traders who "chose" to ignore the fact that this was not a new discovery hole but was a hole drilled within the existing Kwanika deposit. The K-180 hole interval of 513.9 m of 0.64% copper, 0.8 g/t gold and 2.08 g/t silver is better than what GT Gold Corp has delivered for its new North Saddle porphyry discovery at Tatogga, but it is not much different than the better holes pulled in 2007 when the Central zone at Kwanika was first discovered. It is important that resource sector speculators remember that S-Curve action is sustainable only when a hot hole signals a new discovery, not an infill hole within a deposit that has been sufficiently delineated to allow an economic study to be published (about 100 holes for 50,000 m in the case of Kwanika). It is also important to distinguish between a hole that twins a prior hole for metallurgical or verification purposes and a new hole. Legitimate operators will always make clear the nature of such a hole. The summer holes drilled at Kwanika were not twinned holes but they do have a purpose that Serengeti did not clearly articulate in its press release, though I suspect that even if it had the market would still have hijacked the stock on the open. This is the result of the new trend where companies release news a couple hours before the market open when west coast investors are still asleep and east coast brokers are enjoying their coffee while reading the newspapers. There just is not much time to review the meaning of news and publish a reasoned explanation of its meaning.

So if the Kwanika hole #K-180 is not a new zone, a discovery within a discovery such as hole #421 is at the Stardust project of Sun Metals Corp, why has Serengeti's stock price not collapsed back to $0.15? The reason is that the drilling strategy is confirming a hypothesis developed by Serengeti and its Posco-Daewoo collaborators that the grade of Kwanika's Central zone as modeled for the PEA may be under-stated. It is too early to tell how much; for that we will have to wait until the middle of Q1 of 2019 for an updated measured and indicated resource estimate. The goal of the 7,400 m PFS drill program is to investigate the possibility of expanding the pit shell so that the open pit life can be expanded from 2 to 5 years. This would allow a longer period of lower operating costs and defer the capital spending needed to develop the deeper resource for block-caving. Both would boost the NPV and IRR under the DCF valuation model. Holes #184, 185, 187 and 190 are fanned outwards from the center of the pit to test the pit wall limits. The hope is that the results will enable the PFS to expand the pit and thus extend the open-pit mining period. Hole #191 off to the west was not drilled to intersect the deposit; it was drilled to intersect the north-south Pinchi Fault which cuts off everything to the west. This hole has been established as a water flow monitoring well; so far water flow has been minimal which is good news for the future underground mining phase.

The purpose behind hole #180 and #181 is to test the hypothesis that the domain model used for the resource estimate and derived from delineation holes drilled mostly in an east-west direction understates the grade because there is an east-west orientation to the factures and veinlets that control the mineralization. There is also an emerging suspicion that a swarm of NWW-SEE oriented dykes 1-15m thick which internally are barren but have gold enrichment on the margins may have introduced a later phase of gold mineralization which has not been captured by the generally east-west oriented delineation holes. These PFS holes are also HQ holes which are wider than the NQ holes on which the PEA resource estimate is based. Hole #180 was drilled from north to south to scissor hole #177 which was drilled from south to north. The good results in hole #180 apparently support the hypothesis that the gold content in the underground minable portion of the Central Kwanika deposit is understated. The fan of holes drilled northwards from south of the deposit to test the underground portion (#183, 186 and 188) will serve a similar purpose. Adding an east-west oriented domain to the resource modeling strategy will not make a huge grade difference, but it may be large enough that, when combined with extending the open pit portion of the mine life, it will make Kwanika economically viable at current metal prices without relying on a 5% discount rate. This would counter the Inca Kola dismissal that Kwanika is just another optionality play. Cory Fleck of the Korelin Economics Report does a good job pressing David Moore to explain the PFS drilling strategy in his 13 minute Oct 25, 2018 Interview.

While the results reported last week do not justify the market response, they also do not justify innuendo that the holes were drilled as a market manipulation tactic. Whether the results will actually improve the deposit grade is impossible to quantify from assays reported for the 16 holes (7,400 m) drilled this summer; we have to wait for the resource estimate in Q1 of 2019. But Serengeti CEO David Moore did seem quite pleased with the high grade obtained within the open-pit portion of hole #180 (101.5 m 1.02% copper, 0.68 g/t gold and 3.07 g/t silver), so overall I lean toward the view that Kwanika will look a lot better in Q2 2019 when the PFS is completed than it does with the PEA published in April 2017.

The holes targeting the underground minable portion of Kwanika may also expand the underground resource, though hole #179A certainly has not accomplished that. It was a deepening of a hole drilled late in the 2016 season that generated a lot of hype about apparent grade improvement at depth. The hole was stopped before it ran out of mineralization because Serengeti had used up the budget funded by the South Koreans. Unfortunately that hole did not need to be deepened much before it hit the Pinchi Fault. I have had Serengeti Resources Inc as a Good Relative Spec Value Buy since 2016 for two reasons. The first is as an optionality play on better copper and/or gold prices that make Kwanika a no-brainer development candidate. That reason is being enhanced by the results coming out of the PFS drilling program which appear to be lowering the metal price threshold for developing Kwanika as a combination open-pit/underground mine. The second reason is that Serengeti also engages in discovery exploration which exposes shareholders to the potential for S-Curve market action. Were Serengeti to report hole #180 for its planned drill programs at the Atty project next to Centerra's Kemess East project, or the Croy Bloom project it upgraded to drill ready stage this summer, the stock would have sailed past $0.60 and be trading up a storm as the market speculates what the other holes will contain. In 2016 I also had hopes for a deep IP target about 600 m north of Kwanika which a drill program that year did not properly test. But Posco Daewoo has not been interested in spending money on finding another underground minable zone near Kwanika so that hope is off the table. During the summer of 2019 Serengeti would like to drill the Atty and Croy Bloom IP targets; the growing respect of the market for Kwanika will make funding for those programs easier. Serengeti remains a Good Relative rather than Good Absolute buy because Kwanika as envisioned by the PEA is not in the money at current copper and gold prices, but the bet is that this will change next year courtesy of a better PFS, stronger gold and copper prices, or even a combination of both. I'll have more to say about the Atty and Croy Bloom exploration plays next year as we get closer to the 2019 drilling season in central British Columbia.

 
 

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