Azarga Metals Corp., Oversold Copper/Silver Junior?

By Peter Epstein, CFA, MBA    http://EpsteinResearch.com

Silver (“Ag“) junior stocks have been destroyed over the past 3 months through July 17th.  Not even companies (near to) or in production have been spared.  Of course, the Ag price is the main reason for the carnage, it’s down 13.4% over the period.  While 13% might not seem like a disaster, it is compared to Gold (“Au“) [down 4.5% and Copper (“Cu“) up ~5% since April 17th].  In the past several days, the Ag price has settled in, now ~US$16.20/oz., and some pundits are saying that select juniors are significantly oversold.

A name I believe to be oversold is Azarga Metals Corp.  [TSX-V: AZR].  Not only is it off ~30% in 3 months, it was (and still is) under-appreciated to begin with.  More tangibly, Azarga’s flagship project is roughly 50/50 Cu & Ag and, as mentioned, the Cu price is up ~5% since mid April.  There’s no good reason for AZR to be trading off more than the average Ag focused junior!  {I estimate the average Ag junior was down ~20% from April 17-July 17}

Azarga is a [C$7.5 M / US$5.9 M] market cap company listed on the TSX-V (ticker: AZR).  It owns 60% [+ a call option on the remaining 40%] of the Unkur Copper-Silver project in eastern Russia, a project Interest it acquired 16 months ago.  In April the Company delivered a maiden NI 43-101 Mineral Resource estimate (“MRE“) of 42 Million metric tonnes (“Mt“) of 0.52% Cu and 38 g/t Ag — containing approximately 840 M Inferred pounds Cu Eq., or 124 M Inferred troy ounces Ag Eq.  The MRE was established quickly and cost effectively.

The first modern exploration program, conducted from Aug. 2016 – Feb. 2017, consisted of 16 diamond core drill holes (4,580 m), plus 4 trenches and sampling of various outcrops, tested a strike length of 3,400 m.  In the map below, the red oval is an area of key interest, a zone of thicker and higher grade mineralization (confirmed by a ground magnetics survey) in the northern part of the Resource area.

Unkur is a high-grade deposit that was actively explored in the 1960s / 1970s, including drilling & trenching during the Soviet era.  It has had several mineral resource estimates done on it, but none were (are) NI 43-101 compliant.  [Corporate Presentation].

Four important features of the Resource are; (1) most of it (79%) is near surface, including two higher grade pods of mineralization.  These pods could be amenable to low-cost open pit mining and could be mined earlier in a prospective mine plan, (2) mineralization is open in both directions along strike and down dip, (3) there’s now thought to be more than one layer of ore, not just a single mineralized zone, and (4) the MRE only covers about half the known strike length.

In an excellent Proactive Investors interview of CEO, President & Director Dusty Nicol in June, he stated that a potential doubling in size of the MRE was possible from the next drill campaign slated to start in August.  A doubling in size and a likely increase in grade.  He noted that the historic Soviet resource (not NI 43-101 compliant) of ~165 Mt is about 4 times the size of the MRE.  New work done by the Company so far seems to indicate that the Soviet era data erred on the side of conservatism on both size and grade.  Management continues to methodically validate the historical resource and is excited by results to date.

Regarding the opportunity to double the size of the MRE, Dusty thinks it could grow by a third or more from routine step-out drilling, connecting two known pods of mineralization in zone 2.  And, if step-out drilling is successful in extending strike length by several hundred meters, there’s tonnage underneath the pit bottom that could be included in an updated resource later this year.  The technical team, armed with a better understanding of what controls the distribution of high-grade Cu & Ag mineralization, is optimistic they can increase the overall grade by targeting geophysical anomalies to the North and Northeast.  After raising exploration capital, drilling is expected to start in August.

If the Company could double the size of the Resource to [840 M x 2 = 1.68 B lbs. Cu Eq.], it would be trading at just US$0.007 per lb. (net to Azarga) of Cu Eq. in the ground.  {adjusted for Azarga’s 60% ownership of the Unkur project}

Dusty is fluent in 5 languages and has worked in 70 countries, he stated that access to infrastructure is better at Unkur than in 90% of the places he’s worked.  He’s worked in really hard places in terms of terrain, weather and permitting, but Unkur’s location in eastern Russia is not expected to be challenging.  Dusty has no trouble getting to site or getting rigs in.  With the initial tonnage and grade and good infrastructure — less than 8 km from rail, direct rail to Vladivostok (a Pacific Ocean port) and Chinese smelters, power & groundwater onsite, — this next phase of exploration will support the work needed for a third-party NI 43-101 PEA or internal scoping study to be delivered in the Spring of 2018.

The project location has one advantage that few are talking about, namely a package of incentives provided to promote investment in Russia’s far east.  There are tax incentives and royalty reductions, but the most important thing is the Far East Development Fund (“FEDF”), a development bank specifically set up for the region.  It offers debt & equity funding and loan guarantees on preferential terms for projects such as Unkur.  Azarga has a strong presence in Russia, it has boots on the ground.  The entire technical team at site and administrative team in the city of Chita is Russian, and a significant percentage of the Company’s shareholder base is Russian.