Challenger Gold Limited (CEL) Earnings Call Transcript & Summary

Welcome to The Gold News Channel. Ladies and gentlemen. My name is Kerry Stevenson. And I've asked Kris Knauer. He is the Managing Director of Challenger Exploration. The ASX code is CEL. Now Challenger have got a couple of projects over in South America, but the one we want to talk about today is in Argentina. It's their flagship Hualilan project, and they've come out with some pretty significant news, a discovery in that area. And I want to talk to Kris about that. I also want to talk about, and just share with all of you watching this, the opportunity that Argentina affords, and that's a really important word as well, when you are looking for gold because there's gold and there's gold and there's jurisdiction. So Kris, welcome back to The Gold News Channel. Good to see you.

Good to see you, Kerry, and thanks for having me.

Well, you've come out with a significant announcement. But before we get into that, just give our viewers a brief overview of who are Challenger Exploration.

Okay. So Challenger 2 projects, both in South America. The lead is definitely Hualilan project in San Juan Province Argentina. San Juan has been consistently the top rated mining jurisdiction in South America for a long time. Hualilan has a 2 million-ounce resource, open in all directions, will get significantly bigger, 3 rigs on site at the moment. That resource is based on about half of the drilling we've done today. It's got a nice high-grade core, over 1 million ounces at almost 6 in that high-grade component. And the second project in Ecuador where we're getting 500 [meter] in [ SX ], between 0.5 gram and 1 gram. We sit next to our 20 million-ounce ore body, and we think we've got the other half, but Argentina are definitely the focus.

Yes. And I think we will focus a little bit on Argentina. But before we do that, with Ecuador, would you say you're spending about 25% of your time up there? Or what's -- how do you [indiscernible]...

20%, 25%. When you've got an asset that's going to throw off 3 million ounces with a really nice high-grade component as we do in Argentina, it's difficult not to spend most of the money on that.

Yes. And that's why we're to focus on that again today, which is this discovery is -- now let me see if I get this right, Sentazon Deep?

Sentazon.

Sentazon. I knew I'd get it wrong, ladies and gentlemen. Sentazon. Sentazon Deep, talk to us about this discovery and why this is something that people should sit up and take notice of.

Yes. So -- look, we were chasing up a hole we deepened -- sorry, let me just get rid of that. I don't know why I'm getting a phone call.

That's because you're popular today because you made an announcement.

Well, could be or it could be someone trying to sell me a solar plan or gas, too, which is more likely, of course.

But Kris, there's no gas to be had, so they can't sell it to you.

Yes, correct. So -- look, basically, when we followed up an earlier hole but we deepened it 250 meters. They've got a sniff firm about 150 meters below the main zone. The hole we announced -- or one of the holes we announced today was 50 meters at 3.5 with 40 meters at just over 4, 20 meters at 7. It actually dips the reverse orientation. So we've got the main mineralization dipping to the sort of left. This one dips the other way. It follows the contact with an [indiscernible]. So different orientation, much deeper because. It dips the opposite way, our drill holes weren't excited to really get into it. And we've got a bunch of holes that in hindsight have now terminated above that new zone. It's important because it's high grade, it's thick, it's got scale. Look, in the grand scheme of things, it probably adds significantly to the underground component of the mine. I mean, having said that, the underground component is probably 8 to 10 years out from production starting anyway. But -- look, more ounces is always nice.

Well, more ounces is always nice, but I guess from our community out there listening at the moment, they're thinking what's the value. So if we can get into -- because you said this is more the underground component. But it is thick, it's high grade, what's next steps? And why should people be looking at you? I'm just trying to get my head around the value proposition from an investor point of view.

Yes. So if you take us as we stand now, we're trading -- and this is assuming you value Ecuador at nothing, which I think the market is doing, which is wrong, but let's assume that as a starting point. You take us at the current share price today, we're trading at around about $80 an ounce in ground. You look at our peer group -- and our peer group is a fairly special group. It's basically companies that have got more than 2 million ounces in 1 deposit. It's got grade and it's got growth. So you look at the grade, gold, sort of some notable North American Rupert resources, [ Great Bear ], which has been taken over recently. There's only about 15 of these sort of like-for-like peers in the world, and I'm excluding Africa there because I don't like to go anywhere where I potentially get kidnapped. But basically, you take that peer group of ours, and as I said, it's a very small peer group. The reason it's a small peer group is companies that have got that kind of deposit either get in production really early and get re-rated or they get knocked off, but it's just simple as that. So that peer group, at the moment, trades at about $160, $170 an ounce. I knew the value a month ago, it was $155 an ounce when we've done the work, but they've all been rerated 10% or 20%. Yes, that's a company like The Gray Bellevue. So you take us, we're basically trading at almost a 50% discount to that. Why we did a discount? We've only just got in that peer group. We haven't done any economic studies that the Gray and Bellevue have both done, pre-phases or in Bellevue's case, they're fully funded about to get into production. And it's similar to that peer group, those that are trading at $150, $160 ounces, and most of them have finished at least a pre-phase. So you take us where we are now, which is trading at almost a 50% discount. You've got a significant resource upgrade coming in February next year, which is going to be based on more than 50% more drilling, and it should be reasonably like-for-like. You then have a prefeasibility or a scoping study, which will be done in April, May, which will move us along that value chain, and then we'll go straight to a prefeasibility study, probably a second resource upgrade around June. And then effectively, at the end of that period, you're looking at sort of probably 8 to 9 months from now, we're hopefully trading at $160 an ounce, not $80 an ounce on a resource base that's more than 50% higher. So there's a significant re-rate for us, and it's not a re-rate by 10% or 20%, but a re-rate of potentially more than double in the next 8 or 9 months.

So Kris, you're putting that down to the fact that you just are in that -- I guess, that funny little part of the growth of the company, whereby you haven't done a scoping study yet, there's a mineral resource upgrade coming, and it's not a dead spot of it. It's that spot where the market doesn't quite recognize where you're at. And as you said, when you start trading at $80 an ounce in the ground and your peers at $160 -- $155, $160, are you just saying that once you get a little bit further down that value chain, there will be a re-rate there?

We're boring.

You're boring?

We're boring at the moment. They put out 40 meters at 4 here but they that out a month ago, they put something better out 2 months ago. We're in that little phase now where we're boring. I mean, the other thing is, I was chatting to [Glencore], which is our second largest traditional shareholder, Canadian based, this morning. They want to get me over for a roadshow and they said, look, as we did the rounds of all of the companies we've invested in. They know them all, apart from you. They've never heard of you. None of these North American funds or any of the investors [have now] heard about Challenger. Let's get you over to tell the story. So they think there's some low-hanging fruit there. And that's a fact that we've done virtually in our marketing in the States because we're focused on the Aussie market. And -- so there's a couple of factors there. But right now -- yes, they put out great results a week ago. They put out good results 2 weeks ago. The company doesn't move on drill results. I think resource [indiscernible] study and all of a sudden, the institutions will start to value us on what it's going to be. And -- yes -- it's one of those ones that will happen very quickly but very slowly.

Very slowly for those of us watching it, and to yourself, but very quickly when it does happen. Bit of a hockey stick. And by the way, ladies and gentlemen, not financial advice. Do your own research on the company. And also give Kris a call. I often say to people, "Look, if you are looking at companies like Challenger Exploration, by all means, call the company up, ask the questions, there's no questions." Because not all of us know what Chris says. And I think you explained that quite well that you're in that boring stage at the moment. But do you think Argentina has also potentially got something to do with it because if you have the same resource sitting in Western Australia, I think it'd be very different, like you mentioned Bellevue and De Gray?

Yes, look, it does. That perception is changing. Those funds that understand South America, and we're talking BlackRock, we're talking [XER] smart recovery funds, commodity discovery fund, mainly European funds. They know we're in San Juan province and they know that's a tier 1 jurisdiction. Some of the other less sophisticated funds -- Canaccord 8 months ago, tried to organize a roadshow for us in London, just a Zoom roadshow. And 50% of the institutions said, "They're in Argentina, we don't want to talk to them." Again, that's positive, if you can educate them, you get a whole pool or buy out there that basically haven't heard of the story. So -- look, to a degree, yes, those that understand Argentina and South America, no, it doesn't worry them at all, particularly not if we're in San Juan. If we were next door in Mendoza, then that's a totally different story. Things in Argentina are done at the provincial level. And we've got one of the most pro-mining governors in Argentina. It sort of helps us that 2 of the 3 mines that are currently there producing gold are in their last 2 or 3 years of production, so they're going to have a big royalty holder fill, which makes it very hungry for us to get in production, which is always hopeful.

Speaking of which -- but -- sorry to interrupt you, Kris, speaking of which, look, I know there's a lot to go before you get into production. But can you give us like a big picture overview of what this looks like?

Yes. So look, we're lucky that we've got that high-grade core. So -- and look, we've got 3 million ounces, which we expect to have maybe not this next resource upgrade, but certainly the one after. Then we're probably increasing these numbers by 50%. But at the moment, if we had nothing but this 2 million ounces we've got, we start with a 1 million tonne per annum plant threading 4.5, 5-gram material for the first 4 or 5 years. That throws off, simple math, 4.5 by 0.9% recovery, divided by 31.1. The math is basically the 100,000 ounces plus a year of ultra low-cost gold. You can expand, you can use 3 or 4 out of cash flow, put in a bigger plant to treat the lower-grade material and effectively doubling up production. And in terms of what's the cost to put 1 million tonne per annum plant into production, the rule of thumb, the analysts tell me they use is USD 100 million per million tonnes per annum. So it's not an expensive startup. It's a really cheap startup because we're treating high-grade gold, it's going to be a high ounce and a low cash cost startup. And in terms of how do we get that $100 million, we've had some detailed discussions with silver streamers. 1% of our revenue is silver. If we give that away, we'll end up with USD 60 million to USD 70 million upfront from a silver stream. There's more than half of our CapEx and project finance is available out of Argentina in pesos, which is really cheap project finance. We've had some reasonably detailed discussions there. So for us -- yes, let's call it USD 150 million to start up, which we'd only will be -- if half of that comes from silver streaming, in -- 25% to 35% of that comes from project finance. We're not looking to raise any more equity than we have raised. And again, chatting to the guys at QRC this morning, I know they'll go again and probably do most of that if I need them to. So I think when the scoping study comes out and the market realizes the low cost, the low start-up costs, I think will be a few raised eyebrows and a few companies out there going s***, I should have seen that one coming."

Okay. When you talk about that, though, what we -- in terms of getting into production, are we talking 5 years down the track?

No. Look, you can do it faster. I mean, anyone who tells you they'll be in production within 3 years from where we are is full of s***, basically. You can get close. We'll finish...

Have a good technical term, ladies and gentlemen.

Look, we're sort of 3 to 4 years out, we think. We can potentially -- if we do enough work in the scoping study which we're aiming to, we can possibly duck the pre-feas stage, which saves us 4 or 5 months. And then it's just a matter of getting long lead items. I mean, look, potentially last half 2025. Realistically, the early 2026.

We're in a bit of a funny point at the moment just because of, I guess, inflation and a few challenges around logistics, et cetera. Does that impact you at all with your projects, some of these long lead items? Costs going up, is that impacting at all?

Long lead items, we haven't done the work yet because we're only starting the scoping study now. I suspect yes. In terms of -- look -- the beauty of us is we're in Argentina. So at the moment, we're putting in a 60 person mining camp, purely because it's a political thing within election coming up. It helps us get our [indiscernible] approved. That camp is costing us about USD 0.5 million. That's if we do the 120-person camp, which basically covers our mining staff for 1 million tonne per annum. So I said to a gold company the other day, what's it going to cost you to put a 120-person camp into WA and the response was somewhere between $8 million to $11 million.

What?

These things aren't cheap in the middle of nowhere. So that gives you an idea of, yes, there's going to have to be inflation in the system for things like mills and plants. We will get all of that out of China. We've scoped out something when we first went in, which was a 250,000 tonne per annum [for a] plant engineered in Australia, built in China and delivered in boxes in a store by the manufacturer, which was pretty cheap. Would this happen similar this time I'd say. So -- yes, look, it does -- it's impacting everything, but our starting base is ultra low in terms of that part of the CapEx item, which is half the CapEx that is not plant and equipment.

Okay. Kris, I think it's a pretty exciting time. And as we said earlier, that you're in that boring stage, so the market is not realizing, which is why I wanted to get you on to The Gold News Channel today. You're going to be presenting at The Gold Conference at the end of August in Sydney. That's going to be a very interesting time for Challenger Exploration. I can't wait to hear where you're at then. But for now, give us 3 reasons why people should be sitting up and taking notice of Challenger Exploration right now.

Yes. Look, we're cheap. We're trading at half of what our peer group is. That's for a resource upgrade, which will be a fairly sizey resource upgrade. And then you get another sort of upgrade in terms of value per ounce because we've done a scoping study, which will be finished in sort of April, May. So we're trading at 50% below everyone now. You throw in another fairly big resource upgrade and then you throw in another re-rate on the back of numbers finally being out there. And the next -- really, the next 5 to 6 months is going to be a pretty good time to be a Challenger shareholder.

There you have it, ladies and gentlemen. And that's why I was keen to have a chat with Kris today. As I said, reach out to me if you got any questions. But I think that 2023 is going to be a very good time for gold companies, but choose wisely, ladies and gentlemen. Do your own research. But as Kris just said, there's a resource upgrade coming. The numbers are coming out with the scoping study, plenty of news flow to come. Watch this space. Kris Knauer, Challenger Exploration, thanks so much for joining us on The Gold News Channel today.

Thanks, Kerry. Pleasure to be on.