Interview with Craig Dalziel – Part 2

The following is the second part of the interview. The first part was with John Thornton. This part is with Craig Dalziel. However, there is one more question for John Thornton. In case, you missed the first part of the interview, here is the link.

https://classicvalueinvestors.com/2018/11/01/interview-with-john-thornton/

Mariusz Skonieczny – In the context of your areas of expertise – the assessment and planning of major mining operations – do you think the timing is right for exploration and development of Santo Tomas, and if so, do changes in the industry since you first studied the project favor its development?

John Thornton – A lot has changed in the mining industry since I first worked on Santo Tomas starting in 1992, and all that will be to the advantage of the project.

Tools now available to the industry allow us to better see into the ground. The tremendous advances in computers have allowed many bright people to develop software for geological modeling and mine planning and especially in the production scheduling that allow us to model and evaluate enormous deposits that used to require scores of engineers using manual methods.  I remember my surprise on visiting the Athabasca Tar Sands, one of the world’s great earth moving mining projects in the late 1970’s, and seeing a mine planning department with over 80 mining engineers at drafting boards designing the movements of the world’s largest BWE’s and electric shovels to support the bitumen movement into the plant. We introduced several software products that reduced the department to several engineers to do the same planning steps. The sheer size of Santo Tomas has been tested and evaluated with today’s software supported by Hexagon’s Mine Sight to suggest a copper deposit that may be among the industry’s largest.

The use of modern technology such as the mineral remote sensing tools Oroco has employed at Santo Tomas and preliminary modeling suggests the surface expression of the eastern edge of the copper mineralization along strike stretches Santo Tomas 11 kilometers north to south.  Certainly the location of the Bahurachi copper project (bought by Jinchuan Resources from Tyler Resources of Canada for approximately $205 millionin 2006) several km to the north of the identified copper zone of Santo Tomas, suggests it is a continuation of the massive Cordillera we discussed in our previous conversation. The cordillera hosts some of the largest deposits of that structure such as Cananea and Caridad operated by Grupo in Mexico, and the big copper complexes such as Morenci, Twin Buttes and Sierrita in Southern Arizona and Bingham Canyon in Utah.   We now can see this from a significant large scale computer enhanced view of the surface of Santo Tomas. Additional drill target areas that were undetected with older manual methods have now been identified with the use of new technogy. This will greatly assist Oroco in defining and expanding the potential Santo Tomas resource, and to do so more effectively and efficiently than in the past.

We started identifying the potential size of mining Santo Tomas in 1992 when we modeled the project back then and reported some billion metric tons of suggested resource.  The software we used, Medsystem, was advanced from most of the world’s software mine planning modeling methods. To stay in the forefront, many modeling methodologies were developed along the way, including solids modeling from wire screen meshes for geological models, additional metallurgical modeling of the sampled and treated core to give more precise recoveries of the mined material  for determination of the optimal plant processing equipment for construction, production recoveries for economic purposes, more precise methods for various pit slope modeling during the design phases with road and pit design, and of course very complex production scheduling of complex ores for optimization purposes and economic planning and reporting. Advances of computers and software have sped up evaluations, made support of planning needs less expensive, and made it easier and quicker to show people what we have done than when I started with Santo Tomas some 28 years ago.

Changes in the realities of the copper mining industry – exploring, mining and consuming – in the last 25 years have been dramatic, and I think the present era will be looked at as a major inflection point. A dramatic drop in the pace of both new copper discoveries and the development of new resources at existing operations, and no less a dramatic increases in copper consumption and forecasts of even greater levels of copper use, suggest the dramatic rise in copper prices in the first decade of this century is here to stay and perhaps will even continue. Projects such as Santo Tomas will be able to plan more effectively with higher degrees of confidence in an environment of higher profitability and levels of cash flows, especially with the use of more technically improved processing equipment.  As the shrinking stock of undeveloped copper projects start to go into production over the next decade, without new discoveries to replenish copper resources, or technological changes to allow the exploitation of currently uneconomic copper resources, the balance of supply and demand will increasingly start to tighten and move prices even higher.

The decline of available new copper production is manifested in other ways as well. There has been a dramatic drop in average grades being mined worldwide, whether it’s at aging major mines or at newly developed mines. And at many of the world’s aging major mines there is a shift away from exhausted open pit operations, to smaller and more expensive underground mining operations. The obvious result will just serve to support higher prices for copper in the future.

I remember in the past during the mid-1950’s when I first started in this business,  the very low prices for base metals in the cents per pound to now, the same metals are dollars per pound, and demand for the metals are many multiples of what they were then.

As a relatively low cost, open pit operation, and much closer to the average grades currently being mined worldwide and the reserve grade of undeveloped projects, Santo Tomas should get considerably more attention from the mining industry than it might have 25 years ago.

Additionally, Oroco has assembled a land package of approximately 10,000 Ha (24,700 acres) providing the project room to grow through the exploration of all possible extensions and related regional ore bodies, as well as plan for mining for placing waste from the mine and treated tailings. Operations at Santo Tomas could run for decades and  require a great deal of land.

Advances in the ability to explore and plan operations at Santo Tomas are very important, and the increased attractiveness of it as an economic ore body in an environment of increased scarcity is also a positive development for Santo Tomas. No less important is the owner, Oroco, and their actions and abilities [Oroco’s ownership is subject to the approval by shareholders of the acquisition of Altamura, the terms of which were announced on Oct. 9, and the resolution of legal title issues]. I’ve been retired for a number of years, and was only interested to return to active evaluation through drilling and modeling if it would be to work with a team I trust, who can support a robust effort, and who had resolved the thorny legal issues that have dogged Santo Tomas’ ownership for most of the past two decades. I’ll very pleased to find the team Oroco has assembled appears to be excellent; committed, technically capable, and appearing to be very close to definitively resolving the legal issues and restoring clean legal title at Santo Tomas.

Mariusz Skonieczny –  The whole situation about the legals is kind of confusing. People think that Oroco is fighting to get ownership of Santo Tomas. This is completely untrue. Please elaborate more on this?

Craig Dalziel:  There is no question that the title issues can be confusing.  One of the reasons for this circumstance is that we have had to initiate several strategies concurrently in order to satisfy firstly ourselves, then the regulators, and now the investment community.  In certain respects, our strategies have required Oroco and its acquisition target, Altamura Copper Corp., to keep certain facts confidential in order to more effectively implement those strategies.  This, of course, has made the disclosure process more complicated and therefore confusing to a degree.  However, the facts are that Altamura holds a controlling interest in the contractual owner of the Santo Tomas concessions, Xochipala Gold, while also holding a fifty percent ownership interest in the registered owner, Compania Minera Ruero, with an option to acquire the other fifty percent interest in that entity.  It is the obstruction to the registration of the title transfer to Xochipala Gold which is the remaining legal issue.  As I stated to you previously, we are highly confident that a favourable resolution to this issue is a matter of time, and not an uncertainty of outcome.

Mariusz Skonieczny – Let me make sure I got this right. We already own the asset (more specifically we own a controlling interest in the asset). The asset is registered in Entity A, which we own. We are trying to transfer the ownership from Entity A to Entity B, which we also own. The fraudulent judgment which was obtained 3 years ago simply prevents an ownership transfer from Entity A to Entity B. This judgment has nothing to do with Oroco not owning the asset. Oroco owns the asset. Also, for three years, this judgment has not progressed anywhere. It only caused nuisance. Am I right?

Craig Dalziel:  In part, as you will have understood from my previous response.  However, it is very important to note the following:  The fraudulently obtained judgement which you have referenced is the specific impediment to a title transfer which is necessary to a better and more succinct definition of the present ownership of the Santo Tomas concessions.  With that transfer completed, Oroco would then be in position to exercise its option to acquire Altamura Copper Corp. and outright control of the entire Santo Tomas project.  As an interesting side note to this situation, I find it to be highly conspicuous that the parties associated with the impeding judgement, Aztec Copper Inc, an Arizona corporation, and its affiliates, have remained silent throughout this process and without any visible objection to being constantly described as the perpetrators of a fraudulent claim. 

Mariusz Skonieczny – When do you think the matter will get resolved?

Craig Dalziel:  One of the difficulties in dealing with a situation like this is determining how best to manage the expectations of the investment community.  Therefore, instead of trying to provide a definitive time frame to resolution, we have tried to demonstrate a progression of success which is intended to support a continuous build-up of project value within the context of the overall plan.

About Mariusz Skonieczny 333 Articles
Mariusz Skonieczny is the founder of Classic Value Investors.