Tracker - September 3, 2020: What's Next for Serengeti Resources Inc?
Serengeti Resources Inc was made a Favorite on December 31, 2018 with a Fair Spec Value rating based on the expectation that an updated resource would boost the copper and gold grades of the Kwanika Central deposit and a PFS funded by Posco would deliver a favorable outcome. Optimism for a higher grade came from a decision to change the orientation of infill drill holes to catch the mineralized veinlets at a better angle. The updated resource estimate published in March 2019 moved much of the resource from inferred into indicated category, which was needed for a PFS, but failed to boost overall grades. The M+I+I resource now stands at 110,300,000 tonnes of 0.23% copper and 0.21 g/t gold for the open-pittable portion, and 203,600,000 tonnes at 0.25% copper and 0.31 g/t gold for the underground portion which would have to be block-caved. The South Korean company Daewoo (since acquired by Posco) agreed in 2016 to earn 35% by spending $8.2 million, with an initial milestone an updated PEA published in April 2017 which envisioned a 15,000 tpd open pit and underground mining operation with a 15 year mine life. The PEA indicated an after-tax NPV at 7% of $191.2 million and 16.6% IRR with 4 year payback based on $2.90/lb copper and $1,270/oz gold and CapEx at $476 million. This economic outcome did not clear development hurdles, but Posco decided to proceed with a PFS on the assumption higher copper and gold prices would eventually prevail. In October 2019 Serengeti announced it would not complete the PFS, ostensibly because it had run out of money, but in reality because the numbers were not adding up to a strong PFS at prevailing metal prices. Kwanika needed bigger scale or higher metal prices to justify further feasibility demonstration work. Posco had vested for 35% which shifted operatorship back to Serengeti which proposed a $1 million budget for a 4,000 m program that included several holes within the Central Zone to test the deeper portion near the Pinchi Fault that had insufficient density to be included in the PFS block model, plus nearby exploration drilling. Posco declined to participate and will dilute to 33% by the end of 2020, with Serengeti climbing to 67%. I was ready to close out Serengeti as a Favorite at the end of 2019, but when I heard from CEO Dave Moore that Serengeti would revisit the NW Deep IP target I kept it as a Favorite but downgraded it from a Fair to Bottom-Fish Spec Value rating to reflect the need for new zone discoveries to make Kwanika more than an optionality play on higher copper and gold prices. The NW Deep target was generated in 2016 and sits at a depth of 500-1,000 m and may be a down-dropped extension of the Central zone due to a north-south normal Central Fault which cuts through the Central Zone. It parallels the regional strike-slip Pinchi Fault which cuts off everything to the west. Hole #178 drilled in 2016 intersected only 0.11 g/t gold and trace copper over 245.3 m, which led to the conclusion that the hole had overshot the target. But Posco was not interested in spending exploration dollars so it was not followed up. In late August 2020 Serengeti began a 900 m 60 degree east to west hole which will undercut the 2016 hole into the NW Deep IP target to a vertical depth of about 730 m. It will also sample the shallower mineralization along the way that belongs to the open pittable part of the Central Zone. Target depth is expected by the end of the second week in September; drilling and other exploration activity has been slow due to covid-19 protocols. Serengeti does not intend to make an announcement about the visuals of this hole, but David Moore will be spending 2 weeks in central BC walking the core and checking out the 2 other projects being explored in 2020. Assays for a possible discovery hole will not be available until mid October and will need to have high enough copper and gold grades to support block-caving. As a bonus Serengeti attracted block-caving expert Eric Strom as a director in 2019; he subsequently got a job with Newcrest as head of strategic planning for the Red Chris project in which Newcrest last year bought a majority stake from Imperial Metals in order to develop the richer underground portion of that copper-gold porphyry deposit. He remains a director and will be able to provide insights on what is worth pursuing as an underground target. At Kwanika the drill will move onto the Central deposit where 2 deep holes will be drilled, one from the north and the other from the east, to assess the copper-gold grade below the 535 depth limit of the mining plan contemplated by the stalled PFS. The results for these holes are unlikely to stir the market. Then the drill will move just to the south of the Central Zone where hole #190 drilled in 2018 targeting the deeper part of the Central Zone cut decent copper-gold mineralization at a shallower depth than expected. Two holes will test a 300 m undrilled section to the south of the Central Zone which could deliver results that help with the scale of the project. The final hole will be drilled about 500 m southwest of the Central Zone into what Serengeti calls the South Basin target. The western flank of the Central Fault is the edge of a sedimentary basin that extends beyond the Pinchi Fault which itself messes up geophysical data. In 2019 Serengeti ran an IP line close to the Pinchi Fault which revealed a new blind target they call South Basin. This hole could also deliver joy when drilled in October. During 2020 Serengeti is also conducting field work on the Top Cat and East Niv projects, both copper-gold porphyry targets. Top Cat is a group of claims optioned 100% in 2019 from a group headed by Don Mustard who explored the area during the 1990s through Lysander which was also partner with Teck on the Lorraine project 10 km to the southeast where Sun Metals is now Teck's partner. Serengeti plans to tackle the Nova portion of Top Cat with an RC program in 2021. Dave Moore seems most excited by East Niv which Serengeti staked in early 2018 after the BC government released results of a regional geochemical sampling survey. Serengeti tripled the size of East Niv in 2020 to 18,170 hectares as geophysical and soil sampling surveys revealed a district scale system of copper-gold mineralized monzodiorite intrusions. Moore is also quite enthusiastic about the Croy Bloom copper-gold project which is permitted for drilling, but is now stalled while Serengeti pursues a "social license" deal with the local First Nations. It adjoins the Kliyul project Pacific Ridge optioned 75% from Centerra in 2020. Serengeti is a Favorite because it offers gain potential on multiple fronts. The first is as a copper-gold optionality play based on Kwanika on which over $25 million has been spent since the Central Zone was discovered in 2006. If gold and copper end up above $2,000 per oz and $3.00/lb in a non-inflationary context Serengeti and Posco may resume work on the PFS. The second is the potential for Serengeti to grow the Central copper-gold system bigger through exploratory drilling in the vicinity on targets such as NW Deep and South Basin. The third is that Serengeti is a copper-gold prospect generator in British Columbia with 10 projects covering 110,00 hectares in its portfolio, of which East Niv and Top Cat will be drill ready in 2021, and maybe Croy Bloom if the First Nations can be brought on side with a drilling program. The potential market moving news window related to Kwanika discovery exploration results will shift to a lull from December until the exploration season for central BC resumes in June. During that lull Serengeti will have to attract a higher valuation through strong copper and gold prices, and discovery anticipation for the 2021 work season. Along the way Serengeti will need to refinance, though with only 120.6 million fully diluted, and no rollback since David Moore took charge in 2004, that should not be an issue if the resource junior bull market continues to awaken.