Challenger Gold Limited (CEL) Earnings Call Transcript & Summary

So good afternoon and thank you for joining me today. I'm Jane Morgan, the Investor and Media Relations Manager for Challenger Exploration. To tell us more about the projects and discuss today's announcement regarding the Hualilan Gold Project in Argentina today, we are joined by Challenger's Managing Director and CEO, Kris Knauer.

Hi.

[Operator Instructions], sorry, Kris, [Operator Instructions] But I'll hand over to you.

Thanks, Jane, and welcome, everyone. And I'll spend 20 minutes walking you through Hualilan and then we'll take some questions as well. Just a cover for Hualilan there on front page. So resource, 2.1 million ounces open in all directions. It's got a high-grade skarn component of 1.1 million as at 5.6 million, which is significantly larger in the high-grade component than we thought. And look, I think the way it's looking is by the time the resource is 3 million or 4 million ounces, more than half of it's going to be skarn, which bodes well. And, well, don't forget our Ecuadorian projects. Some of the results there, 250 meters at 1.4. We sit next to a 17 million-ounce ore body. We should have some more Colorado V holes coming out next week. I'm just waiting for final assays. But I think we'll give the market an understanding there. But we think we've got the other half of Cangrejos, which is 17 million ounces. And right now we're getting 0 value for it. Cash balance, $19.5 million. We've almost finished our program in Hualilan , so we've gone down to 5 rigs from 9. So cash burn will be around about $7 million to $8 million a quarter from here. So not a need to raise money in the immediate term, and we're actually looking at a couple of royalty options at the moment as well. Company strategy. And as of today, this company strategy is real. Yesterday, we ran the San Juan Mining Minister through the resource. He's a mining engineer, and his response was: "Look guys, I take this personally. You know I like you, but you've now got Argentina's next gold mine, and I'm going to have to put a lot of pressure on you to get going and actually put it in development because looking at the economics in San Juan, in fact you've got 2 million ounces. It's big enough. So really, you've just got to go." Some of the milestones to look forward there. Again, we've actually drilled 195,000 meters of the 204,000 meters now, so it won't take long for a resource upgrade. And where we get to is high-grade starter pit in Argentina. There's a sort of 5-gram-plus feed there for the first 2 years. That means low CapEx. We can scale into Argentina. And then if you are doing 200,000 ounces a year of low-cost gold, that makes $1 billion CapEx to add another 0.5 million ounces or more in Ecuador eminently fundable, which differentiates us from a lot of the other Aussie companies with nice, being-below-grade Ecuadorian projects. So really, the asset base we've got here can create a 750,000, 1 million ounce a year production company, and that's the path we're on now. Hualilan, just looking down from the air. So basically, we've now got 3.5 kilometers of strike. We've pushed it another 400 meters north as well. The resource here covers what you can see in the green, which is 2.2 kilometers. So really, we've only drilled 60% of the strike extent. It's still open at depth, open in all directions. What does the resource look like? Focus on the sort of the right-hand table, which is effectively the grade tonnage curve. The fact that we did this at a 0.25-gram cutoff is really a factor of the low cost in Argentina. We've got indicative quotes for $.60 a liter diesel wholesale. I think everyone knows what diesel costs in Australia. Electricity at $0.10 a kilowatt-hour if we take it from the San Juan power utility. We've had build-own-operate solar producers give us quotes of $0.06 and $0.08 a kilowatt-hour. Power is generally 1/3 of your operating costs. 1/3 is staff. There are a whole sort of raft of skilled mine workers in Argentina. We'll end up paying them between $1,500 and $2,500 a month compared to 4x that in Australia. So what costs $4 a tonne in Australia costs $2 a tonne in Argentina, which is why we've been able to use such a low cutoff. But if you sort of look at some of the other cutoffs there, at a 0.5-gram cutoff, almost 2 million ounces at 2. Or if we want to look at the underground route, there is basically a nice core there of 1.6 million ounces at 3.1 grams. The one thing that Hualilan has in its favor is if gold prices or costs change significantly, you've got the ability here to dial up your own head grade, and it will be economic even at ultra-low gold prices. What does it look like? So this is a long section on top showing the grade. As you can see there, I've highlighted three sort of zones in red circles which show high-grade starter pit. Open along strike, open down dip. Most of those holes, you can see the projection are deeper. You've got a body dipping at 45 degrees. The hole goes through it and further down. So all of those deeper holes there are actually behind the ore body. As we sort of get through this, we expect that this -- it will extend to the bottom of the page and will get much, much larger. And then the bottom is the resource classification. So the higher-grade components in indicated category, we'll drill those out to measured, but that bodes well for us being able to do a starter pit. And then in terms of where have we come from, where do we go, now that we've got a resource out to market, we can sort of say that original resource was never 0.5 million ounces at 12. We did the numbers early. It was about 250,000 ounces at 5. But because it wasn't sure, we couldn't put it out. So at the moment, on the right-hand side is what it looks like in 3D. You can see down here in Verde there's a gold block, which is the high grade coming in. We're finding a lot of high-grade material as we go deeper. But it's still open in all directions and five key areas where we're drilling at the moment where we feel we'll get a lot of resource growth, including down at Flor de Hualilan about 500 meters south along strike, which is down dip from -- the sort of 15 meters at Verde [ and Magnata ], we're getting into what looks like some high-grade mineralization visually down there as well. And key takeaway from this resource, it was based on 126,000 meters of the 204,000 meters. So we're not doing scoping study at the moment. We'll do that when we finish the 200,000 meters simply because we think this resource will grow substantially. What does it look like? Again, I've got some tight sections I'll walk through here just showing where they are. We'll go from south to north. And then on the left there is the core from a hole we're still drilling down at Flor de Hualilan 600 meters south. You can see there some massive sulfides in the core and in that intrusive that's all sort of bleached white. That's actually alteration. And those black bands in there are sulfides that generally goes a gram or 2 when you see rock like that. So Sentazon, which is the southernmost section, the blocks there you can see are actually the current resource wireframes. Purple and red are the high grades. And then the holes in blue are holes that we've drilled while waiting for assays or marked where there've been associated massive sulfides. You can see there that, that has been filled and extended, yet it looks like we're joining the gaps in Sentazon. You'll probably have about double the mineralization there. And Sentazon is quite significant. It's 330 (sic) [ 330,000 ] ounces in the resource at the moment of high grade, and we see the potential to double that. It's still open at depth then there's a deep sort of high grades expanding and heading north at depth. This is just showing the geology of it. And again, you're highlighting the fact that the resource is over this 2.2 kilometers, and we've got some significant intersections sort of much south of that. Second, type sections. So this is basically the extension of the Verde zone south of the Magnata Fault. All of that stuff there in the blue and the green that's below the open pit, that's actually not in the resource. The way we do this resource is we run an optimized pit shell, which effectively tells us what we can mine at $1,800 gold. And then we can only report what's greater than a gram under it because we can mine it underground. So all of that mineralization there currently isn't in the pit. You can see follow-up holes down dip with both intersected. What's logged is actually looking like it's far higher grade. This is a likely drill area. So some high grade here at depth. There's some mineralization along strike where this has -- likely has the potential to push this pit down and you would all of a sudden get a lot more of the ounces that are actually there in this sort of sediment-hosted zone into the resource. At the moment, we can only get 100,000 ounces or probably 250,000 ounces of in-situ into our resource under the JORC Code. Magnata Fault, this is the western end, still open very much to the west. We drilled a bunch of holes and got some low-grade intersections. We've now drilled deeper, and what we're seeing is high-grade Magnata Fault mineralization coming back in that's open at depth. We've got a hole going in on the hole 491. We got 16 meters at 7 [indiscernible]. And then on the right, there's the manto. That assay is pending. It looks like it's pushed Magnata Manto further up surface as well. It actually outcrops on top of the hole there. So we've got to sort of do some surface trenching as well. But again, we'll grow the Magnata mineralization significantly from here. This is the central Magnata Fault. You can see that it splits into sort of three zones. And one of the key takeaways with the Magnata Fault is you drill a hole, you don't find anything. It doesn't mean it's closed off at depth. It's a factor of where you've had open space. So basically, hole 442 there, 29 meters at 5.3. That was drilled under some holes where the gap is that didn't really get anything. And we've also got some big drilling planned under that hole and further depth. This big sort of resource area here may well come back in a dip as we go underneath it. It's just a factor how the faults push together and where you actually had an open space to fill up the mineralization. As we move sort of north into Verde, and this is what we're seeing everywhere, basically a couple of the holes' assays pending have intersected what looks like high-grade skarn mineralization at depth at Verde. There's also a new zone coming in. An intersection there of 26 meters at 2, including 4 at 12, but we just didn't have enough drilling to get any of that into the resource. But again, very much open at depth and going to expand. Same thing in the Gap Zone. You can see what we could currently get into resource given the lack of infill drilling. These infill holes have actually intersected mineralization, and you can see there the red dots are basically what the wireframes will look like or what the mineralization will look like when we can include these holes with assays pending. And these will hopefully push the pit down as well. Gap Zone has got a big bulk zone of mineralization. Again, the blobs that are green and blue there that we couldn't get into the resource, that intercept there of 104 meters at 1.7, only the top 30% of that actually got into the resource. And there are some of the intercepts there, basically, sorry, that are below or not in the open pit there, a bunch of 50- and 60-meter intercepts of 0.7 and 0.8 million. We'll look at some bulk underground mining, and we may be able to get that into the resource as well. But again, the unconstrained resource was almost 2.5 million ounces. So there's 400,000 ounces in-situ there that we haven't been able to get into the resource under the JORC Code. And the sort of northern most section here, Verde Zone, which is really interesting. Hole 520 was the last of the holes we actually got into the resource. We fast-tracked that. So I think the last hole on top of that was, again, 498. Reasonably fast-tracked as it intersected 2.5 meters of what looked like manto. It was within limestone. You see the main manto up here in purple. It goes better than 10. And basically, assay has got 2.5 meters at 64. And again, this is what we're seeing here in Verde. As we go deeper, there's a distinct high-grade zone, what we think is the extension of the manto that is basically coming in. We've drilled some holes along strike and down dip. They have all intersected and similar looking stuff as well. So we think this is an area where we'll get significant resource growth. And also, because this was intrusion hosted, we use different top cuts, and I'll talk to that later. But if we had to use manto-style top cuts, you'll probably double the 80,000 ounces in this dip design to 160,000 ounces. And again, just to sort of wrap up where the growth comes from, deeper at Sentazon, this new high-grade domain at Verde, the Gap Zone there, where we're drilling underneath and around hole 458, we've got the 70 meters at 7. We could only include a little bit of that into the resource, and there are some holes there that look like they need to set some nice mineralization as well. And we're now pushing mineralization Verde style across the Sanchez Fault as well. And on the bottom of the table there, basically that's the resource if we didn't use any top cuts. Generally, what you do is you sort of statistically run your top cut, you take away the sort of top 2% of the intercepts and treat those as being whatever the 98% intercept was. If we don't run top cuts in Hualilan, that resource increases to 2.5 million ounces. And as I said, we've used the sort of intrusion-hosted top cuts on that sort of deep Verde Zone. And had we not done that, we would have probably gotten an extra 100,000 ounces into the. Resource. I think when we get more drill data, we'll be able to do that next time, which means we've got another 100,000 ounces up our sleeve as well. And again, this is just showing some of the intercepts outside of the pit. 5 Meters at, yes 8.7 meters (sic) [ grams ], 400 meters north; 13 meters at 15.5, 600 meters south. There are some deeper intercepts here that haven't got in that actually were holes that were far enough out to intersect the Verde Zone on trends. So again, this is all open at depth. You can see there are some high-grade shoots there that we'll aggressively chase as well. And I suppose what does this all mean? The network we've spoken to before, but -- basically really high-value concentrates. No deleterious elements, which means high payability, low-transport costs. And the one thing we were hoping to get out of this was a robust, high-grade starter. And we've done various lower-value pit shells here, which effectively tell you, at a $600 an ounce cash cost, what can you get into the pit. So you can see there, there's 340,000 ounces at a grade of 5.3 or over 0.5 million ounces of 4.4. There's our high-grade starter pit. That lets us start at maybe 1 million tonnes per annum trading skarn. Year 3, we'll add another 4 million tonnes per annum trading intrusion-hosted material and double production, but effectively do a second leg out of cash flow. So it keeps your CapEx down between $100 million, $150 million. And then again, all of this is basically around 2.2 kilometers of a circular magnetic feature that's got another 3 kilometers around the other side. It's undrilled. And then when we step back, we've got another sort of 4 or 5 of these same anomalies as well. So really, we're only just getting started. This is very much interim resource. Almost finished the 204,000 meters now, so there'll be an upgrade sooner than I think the market anticipates. And final message, don't forget Ecuador. Every single one of these sort of regional anomalies we've drilled has got better than 500 meters of gold intersection in it. It sits 2 kilometers away from a 17 million-ounce ore body that doesn't have a high-grade starter pit, has an ultra-low all-in sustaining cash cost. We now have that high-grade starter pit. So there's a window there for someone to put together potentially 30 million to 40 million ounces where we have the high-grade starter pit. And that will be ultra valuable, and I just don't think the market is giving us any value whatsoever for that. So thank you, and I'm very happy to sort of take some questions now.

Well, thank you for that Kris. [Operator Instructions] But you also actually did mention it, but when can we expect an upgraded resource on the rest of the drilling?

So look, in terms of time line, we'll finish this 204,000 meters sometime probably in the first couple of weeks in July. It's about 2 weeks to effectively log and cut the core if we can get the backlog down a little bit. Now that we've only got 5 rigs, call it a month to get it all into the lab. Then we're really in the hands of the labs. Turnaround times have been 35 days. They're picking up now because of busy season in Canada. Maybe call it 2 months. So mid-July, mid August, mid-September, mid-October. Hopefully sometime October. If the labs let us down, it probably rolls into the first couple of weeks in November. But certainly, the fact there's been nine rigs drilling it out for the last bit, it'll be a lot quicker.

Well, thanks for that, Kris. So just another one. "So how are you going to allocate drilling budget between Argentina and Ecuador?"

Look, Ecuador is crying out for some drilling. But having said that, Argentina still is the main game. Without Argentina, we can't fund Ecuador. So we'll still have -- well and truly, over half will go to Argentina. In terms of the next drilling, once we finish the 204,000 meters, there's a little bit of infill drilling to get enough into measured to basically run our bankable feasibility study, but luckily most of what we need to get the measured to shine. And then we'll probably have 1 to 2 rigs running around, shooting some of these regional targets as well. So the sort of drilling blade will come down fairly quickly, but the majority is still Argentina.

"Once you're full in, will there be enough meters in the current program to adequately drill the likes of the 600-meter gap where intel is required to bring on more ounces into the resource?"

Yes. I mean we've actually drilled most of those holes already in that sort of 60,000 meters we've done since then. Assays pending. And look, we've obviously got some of those assays, but the way it works is you can't put them out until after the resource, so expect a bit of a backlog catch-up. But yes, we do. I mean effectively, the 200,000 meters will not get us as much regional exploration drilling as we had hoped, but we're putting the meters into actually drilling out that Gap Zone and also Sentazon and this new Verde Zone at depth.

Kris, I've got a few questions just on the network to date. "So can you just elaborate on the metallurgical testing that's been done to date?"

Yes. So the metallurgical testing we've done to date, basically we've done 28 separate flow tests. It's prefeasibility-level network. The only things we haven't done that we'll need for bankable feasibility study are combination testing, which we've got the old testing there, and some of the variability testing. But basically, we've tested the skarn, two separate sort of composites. We've tested the intrusion-hosted, the sediment-hosted material. We've tested the same grades that we'll actually mine. And by the time we sort of look at running a leach circuit at the end, which will recover the final sort of 5% to 10% of the gold, we've got 95% recoveries of gold, low 90s of silver. We get a lot of the, well, most of it, 90% of the lead and 90% of the zinc out in the skarn. It's a sort of simple, not very fine ore. It's a course grind. We then get 15% of that material with grind finder. The metallurgy is a dream. You wouldn't expect to get the grade concentrates we're getting out of the sort of deposit with this grade. But look, it's -- effectively, we don't need to do any more for a prefeas, and there's only a little bit more of a program that we're actually starting now to be ready for a bankable feasibility study.

Wonderful again. There's a webinar attendee who has asked if you could go over again what tonnage, grade and gold-equivalent production could come from the starter pit operation.

Yes. So look, you've got that starter pit there. There's 340,000 ounces at 5.3. So -- and I'll do the arithmetic on the slide, but if we do 1 million tonne per annum in the skarn, then that's basically 53 million ounces of -- 53 million ounces -- or, sorry, 53 million grams of gold. You divide it by 31.1. You're effectively looking at somewhere north of 120,000 ounces a year, just off 1 million tonne per annum planned for those first sort of 3 years. It's in a $600 pit, so the cash cost is going to be less than $600. And then you add a 4 million to 5 million tonne-per-annum plant treating 1 gram bit, which is the intrusion-hosted stuff. And that will add another 5, 5.8 by 90%. Effectively, that adds another 100,000 ounces. But first 3 years, you're looking at $600 gold based on that optimized pit and 120,000 to 130,000 ounces a year production, which is a nice mine. Less than a year payback. Oh, I think you're just on mute, Jane.

Oop, sorry. That -- sorry, I am. And that actually answers the next question. So let me just jump into this. So how many rigs will remain after this current program? And what's the sort of like sort of cash burn rate like for the second half of this calendar year?

So basically, at the moment, we've got 5 rigs in Hualilan, 2 in Ecuador. Cash burn off that should be about $7 million, maybe $8 million a quarter. Post this program, we will probably leave 2 to 3 rigs at Hualilan simply because we want to get that cash burn write-down, which is 5 rigs across the board, which brings your cash burn down to probably $6 million a quarter, maybe a little bit under $6 million, $5.5 million. And that lets us 1 rig, 2 rigs perhaps doing regional exploration and then 1 on the drill head. It probably starts at 2, on the drill head with the measured and 1 regional, and then moves to 1 drill head and 2 regional.

Wonderful. Another webinar attendee just asks, "Can you elaborate on the strip ratios?"

We're not allowed to talk about those, but, look, I will. Basically, the overall pit -- strip ratio of 10:1. And you've got to bear that in the context of we've used USD 2 a tonne mining for ore and waste. You go up the road and have a look at what they're doing in the feasibility study they've done for Jose Maria, which will move a similar amount of dirt, or Lindero. And they're basically mining at over $20 a tonne. And then if you look in those high-grade starter pits, the strip ratio there is 5 to 6:1. And all that material you're pulling out, half of that material is actually 0.25 to 1 gram intrusion-hosted material that you actually stockpile, so that pays for the mining earlier. So nice strip ratios.

Thanks, Kris. Just a question about availability of water project. So maybe [indiscernible].

Yes, no. So basically, at either end of the project, there are two natural springs that produce enough water to cover all of our drilling, our grade control and all the processed water we need. Having said that, we don't want to use that water. There's a borefield around about it that ties the other side of the hill, where there's been some water bores drilled by Glencore that has enough water for a process that sell on water. So we'll actually take that water. It means we've got to build a -- put in a pipeline a couple of Ks, which is only a layer, a sort of typical rubber line. But no, there's -- water is not an issue.

Wonderful. "So has this resource changed the strategy at all?"

Look, it has. What I think you'll find now is post this next resource upgrade, we'll probably now get hopeful of it getting into production simply because we know that, that high-grade starter pit is there. And I think once you're in production, then you don't have to worry about capital raises to fund drilling in Ecuador. So yes, look, it's pushed us probably a little bit faster into production rather than drilling for the next 18 months and seeing how big it gets. I think now we'll probably move to production sooner. And as I said earlier, we're going to get that kind of pressure from the Argentinian authorities now simply because they've looked at it and they understand it's already in mine.

Thanks, Kris. There's a few questions coming through about our neighbors, our producing neighbors actually. Is there any interest coming from any of our producing neighbors?

Look, there is. It's ongoing. And, I mean, that's probably not because we're ultra special. It's because they're paid to look at us. But yes, no, there's interest. There's been a request to go into the data room. We actually have let one group into the data room simply because they are prepared to sign a 12-month standstill agreement. And before we let anyone into the data -- actually, we've let two groups into the data room. So second group is, yes, happy to sign a 12-month standstill simply because I think we've got a lot of value-add in the next 12 months. But yes, no, there's a lot of interest out there.

Wonderful. Sorry, I'm jumping around a little bit here. There's just a question about access to power supply.

Yes. So when I talk of sort of $100 million to $150 million CapEx, we have basically priced putting in a line to the grid, which is about USD 20 million. Now that USD 20 million is all deductible out of our royalty. So basically, it means we won't pay a royalty for the first 3 years of production. That's $0.10 a kilowatt-hour power. We're currently talking to the authority if we can do a power swap deal, which would then let us put solar on site and put double the solar into the grid and take it back out at night. But yes, look, effectively, it's advanced the CapEx up from $100 million to $120 million. But it's a 3-month job to put a line in to connect to the green power. And that green power in San Juan is predominantly hydropower and solar power.

Thank you, Kris. And I think just finally, so what else should shareholders look forward to in the near future?

Yes. So I sort of alluded to it. I'm hoping to get the last of the first 2 or 3 holes in Ecuador back at the end of this week. So that would let us get a release out next week. And those 2 or 3 holes, if we get them, I think, are going to be ultra significant. They're the first 2 holes we've drilled on the 2 largest anomalies in Colorado. They -- the boys outside of the log at both of those holes have been intersecting 500 meters of sulfide. So we're pretty hopeful about what we see. It looks to us exactly the same as Cangrejos, which means 500 meters at 0.4 to 0.6 style gold. And then obviously, we've been handcuffed in terms of Hualilan results until this resource is out. So there's a bit of catch-up to look forward to there as well. And I think the focus there will be what recent results have we got that would have moved the dial on the resource. Just, I think there's going to be quite a few holes that how do we wait it and other I understand we couldn't. We might have got a sort of different outcome again. It's just moving phase of when do you cut it off.

Well, Kris, I think that's all we have time for today. If we have missed any of your questions, please feel free to reach out by the contact details on the bottom of our ASX releases. But thank you for joining us all.

Yes. And thank you, everyone.

We'll be in touch.