TSXV: RDU
Location: Mexico and Guatemala
Commodities: Gold & Silver
Level of Risk: Moderate
Potential Return: High
Dilution Dampens Potential Returns
Investing in junior exploration companies can be both thrilling and perilous. While the allure of striking gold promises significant returns, the journey is often fraught with uncertainties, with one of the most common being dilution. Exploration companies are typically not cash-producing companies, faced with substantial expenses, particularly depending on the regions they explore.
Even if they succeed in answering unanswered questions, they often need to return to the markets for further funding to advance the project to an economically viable stage. Once deemed economically viable, there are typically two options: securing additional funding to develop the project in-house, which requires a different skill set from discovery, or selling the project either partially or completely to a company with the necessary capital and experience to bring it into production.
In tough markets like those experienced over the last four years, only savvy investors tend to remain in the space. They understand the dynamics, waiting for drill results, anticipating market reactions to fundraising needs, and strategically participating in private placements with warrants to maximize upside potential while mitigating downside exposure.
While I won’t mention specific companies, it's clear that news stories are more exciting when the share structure remains intact, rather than having an excessive number of outstanding shares, which can dilute the impact of any market value movement on portfolio value. This brings us to the prospect generator model.
The Prospect Generator Model
A favourite subsector of the mining industry for the renowned Rick Rule, the prospect generator model leverages partners' technical expertise and financial resources to limit dilution and de-risk projects. Partnering with reputable companies not only reduces risk but also lends credibility to the project, as partners conduct extensive due diligence beyond what retail investors typically do.
Prospect generators often limit the need for brokers to raise capital, resulting in less coverage for their projects. Additionally, they typically have patient management teams that avoid excessive promotion. But with the right timing, investing in prospect generators can provide exposure to wealth-generating discoveries with lower risk.
While management may disagree with categorizing themselves as a prospect generator, this article focuses on Radius Gold and why I believe we're at an important inflection point.
Radius was founded by Simon Ridgway as part of Gold Group Management Inc., which has made several significant gold and silver discoveries and successfully sold deposits in Mexico and Central America, including the Cerro Blanco deposit in Guatemala (Bluestone Resources), Natividad deposit in Nicaragua (Calibre Mining Corp), the San Martin deposit in Honduras (Glamis Gold), and the San Jose deposit in Mexico (Fortuna Silver).
This article will bring you up to date on their latest developments and why I think now is a great time to consider a position.
The Sell-Off
Before we delve into their flagship projects, it's worth mentioning the most recent sell-off of Radius Gold and why this presents an opportunity for new investors.
Last year, Radius reached a peak of excitement, engaging in a move not entirely unfamiliar to them but indicative of their strong conviction of this specific project. In April 2023, Radius announced a small non-brokered private placement, which ultimately closed on May 30th, yielding total gross proceeds of US$1,951,247.
The specific purpose behind these proceeds was to initiate drilling at the Tropico Project in the Fresnillo district of Zacatecas, Mexico. Radius had entered into an option agreement on March 21, 2023, and expressed great enthusiasm about drilling this project. In interviews, Bruce stated unequivocally that they did not intend to option this property out, underscoring his deep conviction that this was their next significant discovery.
For those who might not be as familiar with Mexico, the Fresnillo district is one of the major silver districts globally, and Radius genuinely believed, and still does, that the Tropico Project holds immense potential. While Fresnillo (56%) operates it, and it was initially discovered by Mag Silver (44%) with the expertise of the esteemed geologist Peter Megaw, it's crucial to highlight that the Juanicipio Project serves as a parallel, showcasing the potential for Tropico.
You can see Tropico is in close proximity to the Juanicipo deposit.
The market was clearly excited, and I was right there with them; it was the main reason I invested in Radius Gold. Their initial drill program helped them gain a better understanding on the geology. The thesis is that Tropico is this 'hotspring type' sinter and breccia pipe, where at depth, there's the potential for a substantial amount of valuable rock.
Bruce's keen eye spotted an elliptical zone of intensely silicified hydrothermal breccias measuring approximately 450 m x 250 m. However, as you can observe in the photo above, their land package wasn't the largest, and this is where the problem arose.
The theory it was a brecciated pipe held true, but it was not completely vertical as the team hoped for. Rather, it turned out to have a flat dip, and the "good stuff" would likely be situated off their property.
To management's credit, they halted drilling immediately upon confirmation of this and are now in the process of acquiring the neighbouring property. However, even if successful, it will inevitably be a lengthier process.
As a result, individuals who were initially interested in Tropico sold off their positions. With an illiquid stock, it didn't take much for the price to plummet from C$0.28 to below C$0.10.
Mexico
Plata Verde
But that's not the only project Radius has in Mexico. The Plata Verde Project, situated in Chihuahua, Mexico, recently underwent a significant development: the replacement of an exclusivity agreement with an option agreement with Fresnillo.
For those unfamiliar, Fresnillo is approximately a £3.441 billion company listed on the London Stock Exchange and is one of the leading silver producers globally. Quite an impressive partner for a company with a market cap of about C$12 million.
Here are the terms of the option agreement briefly summarized:
– Fresnillo is required to spend US$4,762,000 in exploration activities over a four-year period.
– In addition to exploration expenditures, they must make a total of US$2,825,000 in option payments.
– Fresnillo will have the right to earn a 70% interest in Plata Verde if they meet these conditions. If exercised, Radius and Fresnillo will establish a new company (Newco), with Radius retaining 30% ownership.
That's the gist of it, and this new agreement provides for an initial investment of US$250,000 to mobilize drilling and field teams, with a second investment of US$250,000 on the day drilling commences. This showcases the beauty of the prospect generator model.
So why is this multi-billion dollar company interested in Plata Verde? Well, there's a hidden mining camp on the property that Radius re-discovered in 2020. They believe it dates back to the late 1800s, with evidence suggesting that historic miners hand-excavated large caverns.
There are three distinct types of mineralization styles with the highest grades related to intense brecciation and fracturing.
This project is super interesting because, as you can see in the picture above, it involved large-scale excavation. However, it remained undocumented and unknown for over 100 years, with no locals recalling any family members having worked at this historic mine.
The company's project page highlights that "there is low sulfur in the system and the dominant silver minerals are silver chlorides. This means no scandalous alteration, no red iron oxides in the creeks. The oxides of silver are green and camouflaged."
Plata Verde translates to green silver, so there you go. Despite its historical significance, it has never been drill-tested, but the drill team is now mobilized to the site.
Radius completed geophysics on two targets and recent chip samples up to 815g/t Ag at Mina Mojonera and 730 g/t Ag at Mina Real.
Based on an interview I listened to, Bruce mentioned that both he and some specialists at Fresnillo don't quite understand this project yet, but they find it very exciting and can't wait to learn more.
Amalia
I won't dwell on Amalia for too long, but it's definitely worth mentioning. Radius holds an option agreement for this project as well, partnering with Pan American Silver, another multi-billion dollar company.
They have the right to earn 65% of Amalia, but as you may recall, last year Pan American acquired Yamana Gold, which was valued at around $4.8 billion dollars. Such an acquisition prompted Pan American to review and prioritize exploration efforts, resulting in a pause on exploration at Amalia. However, this is a known discovery and arguably worth the entire market cap of Radius.
But I don't anticipate Pan American scrapping Amalia entirely because there are some truly impressive grades there. With three major gold-silver targets proven by drilling, including the latest results showing the best intercepts to date. Back in August of 2022, Radius announced the drill results from the El Cuervo target.
Drill hole AMDD22-066 returned 13.55m at 841 g/t Ag and 10.25 g/t Au including 5.65m at 1,560 g/t AG and 19.16 g/t Au. However, the company failed to provide the depth of this intersection and I do not see it in the table on the company’s project page. But based on other results that are available on the website and this diagram, I reckon it is around 250 - 320 metres.
When Pan American resumes drilling, we can expect months of further news releases with some promising drill result headlines.
Guatemala
Motagua Norte
Now, this is where management experience truly shines. Simon Ridgway is one of the few individuals you'd want leading an exploration venture in Guatemala. While the risks are higher, their team has successfully navigated through various challenges and is currently drilling at their Mila gold discovery as of the time of writing.
Just recently, on February 15, 2024, Radius (40%) announced that their joint venture partner, Volcanic Gold (60%), began drilling. This project boasts some impressive grades, with visible gold from chip samples reaching as high as 692g/t Au.
And although there is visible gold all over, with 20 chip samples over 100 g/t Au, the team thought it’d be prudent to conduct some continuous lines of 2 metre chip channel samples of mixed outcrop and colluvium across a quartz boulder.
Impressively, over a 34 metre line, the grade averaged 42 g/t Au. Another 24 metre line averaged 54 g/t Au.
On March 4, 2024, the two companies provided an update on the drilling, which the market viewed as negative. The junior market is currently quite finicky, and it could have been due to the wording used, such as "returned relatively high silver and lead results but poor gold numbers."
However, in a follow-up interview, linked here, Simon sounded rather dumbfounded by the sell-off in Volcanic, more so than Radius, given that Radius has yet to react to the drilling taking place at Motagua Norte.
You have to understand that this project is complex, and the team didn't initially grasp the controls and orientation of the mineralization when they began drilling. They drilled a few holes under the assumption that the boulder ridges running north-south might be controlling the mineralization. However, after the first few holes, it became apparent that this wasn't the case. Instead, a major east-west structure uphill from the initial holes was found to be controlling the gold deposition.
In the interview, Simon mentioned that it became clear to him that the new target lies where the North American plate and the Caribbean plate come together. This is particularly exciting because this geological setting mirrors that of some major deposits around the world, with Simon referencing the California Motherlode deposit.
They are now pivoting and drilling the new targeted area, and we can expect assay results and frequent updates within four to five weeks.
Now, I might have missed a key component if you're reading this article and not familiar with Gold Group Management Inc., but Volcanic is part of the Gold Group, and Simon Ridgway is the founder, president, and CEO of Volcanic. With the 60/40 JV, Radius stands to benefit greatly if they can figure out the Mila target and claim another new discovery.
Holly
Similar to their Mexican projects, Radius not only has the potential for a new discovery in Guatemala, but they also have a project that has been yielding excellent drill results.
However, the Holly Project also exemplifies jurisdictional risk. On February 22, 2022, there was a violent attack at the Holly Property where a group of individuals threw fire bombs at the drill rig, pumps, equipment, and the surrounding forest. Fortunately, no one was reportedly injured, but it's important to address this incident in this article.
Volcanic/Radius had issues with this small group of individuals in 2021 as well, as they claimed that the exploration efforts from the Gold Group were negatively affecting the region. However, it's worth noting that a drill rig operation is relatively small compared to a fully producing open-pit mine.
This is where management experience becomes crucial. Simon has over two decades of experience in Guatemala specifically and understands the nuances of the country.
Now, personally, I am writing off Holly, although I shouldn't. But there is so much value within Radius that it seems forgivable to do so.
However, in terms of the project, it's worth mentioning the last results prior to the incident.
These two pictures of the cross and long section at La Pena should speak volumes and showcase the potential of Guatemala's geology.
Why consider Radius now?
So, we've discussed the projects that Radius has exposure to, but I want to clearly outline why you should consider them among the thousands of options out there if you're seeking exposure to gold and silver.
As we mentioned at the start of the article, dilution can significantly impact potential gains. Personally, the capital structure is the first thing I look at when considering a company. Radius has been around for quite some time, so with a fully diluted share count of around 117 million, it's not terrible. There are companies that come to market with much higher share counts.
You can see that Radius has treated shareholders well in the past, providing excellent returns in a couple of instances within a short period of time. However, if you were just a buy-and-hold investor, that wouldn't have done you much good.
But I'd argue that we're currently at a point where Radius is very undervalued, with a market cap of only C$12 million.
The recent option agreement provides a nice cash injection into the company as well as an exciting silver catalyst. With Pan American drilling Plata Verde, a project that has never been drill-tested and is unknown to the modern world, it could be timed nicely if silver decides to follow the trajectory gold is currently experiencing.
In four to five weeks, we can also expect some drill results from the Motagua Norte project in Guatemala. Volcanic seems to have garnered more interest in the market than Radius, which is kind of counterintuitive and provides an arbitrage opportunity. Volcanic has the right to earn 60% of the project, whereas Radius has exposure to 40% of the project with no exploration expenditures.
New discoveries are one way to move the needle in this market, and Radius is lined up in 2024 to be targeting two exciting projects at the expense of their partners. Currently, both Volcanic and Radius are trading at a discount given the jurisdictional risk of operating in Guatemala, but if they hit some bonanza grade, the market can only overlook the jurisdiction so much.
There is also the added kicker that the Amalia project could see further exploration from Pan American this year.
As of Q3 2023, Radius Gold had a cash balance of C$1,650,236 and equity investments of C$1,244,721. But given the recent option agreement with Fresnillo, we can add another US$500,000 to the treasury. So the enterprise value is probably more like C$10 million? And they have partnerships with two of the largest silver producers in the world.
Seems like an undervalued play to me, ready to unlock its value.
Disclosure: I have a beneficial long position in the shares of one or more of the companies discussed in this article, either through stock ownership, options, or other derivatives. I wrote this article without external assistance, and it expresses my personal opinions. I was not compensated for this article, and I have no business relationship with any company whose stock is mentioned in this article.
