Interactive Investor users question SolGold

As drilling continues at SolGold's Cascabel project in Ecuador, executive director Nick Mather grows increasingly confident of the potential for a continuation of the significant high-grade mineralisation in the North West and South East targets in the concession.

With SolGold's flagship asset being the joint venture project, the operator funds Cascabel's exploration costs as part of the JV agreement with Cornerstone Capital Resources.

The Alpala porphyry target in the project has three lobes; the north-westerly, central and south-easterly. As the much-smaller central lobe has already been defined as "very long" by the company, Mather said the team are "wildly excited" about the potential for the remaining two.

"Everybody likes to think of Hole 6 as being a failure, but we have an intrusive system here with a number of different porphyries and on the basis of the magnetic evidence that covers some 20 square kilometres," he said. "Early on in an exploration and drilling programme it is as important to define where the ore body isn't as well as where it is."

"We are in the middle of Hole 7 and we are very confident with the interpretation that we have on the basis of the new geophysical model, which we did after Hole 6."

By conducting an induced polarisation (IP) survey, SolGold will charge the sulphide minerals in the porphyry to measure where mineralisation is most intense.

SolGold's share price closed at 7.825p on Tuesday, valuing the company at £51.03 million.

After speaking to Mather about the Cascabel project and the IP equipment delay, Interactive Investor put forward questions from discussion board users.

This section from 960 metres to 1079 metres continues in mineralisation but it is not clear about the level of mineralisation or whether it is visible or increasing in depth. Please clarify the current level of mineralisation at current depth.

Nick Mather: For us to report it is there, it is visible. Is it increasing in depth? I can't tell that because a lot of it is fine grained and there was a huge variation between the estimated grades and the actual grades in Hole 5, especially where the mineralisation was fine grained and the assay results were significantly high. Now, we are very cautious about speculating about the actual estimated grades because it just leads to too much speculation one way or another.

The resource is projected to be over 3km in length but the board's view is that they intend to go it alone. Please outline how SolGold would fund drilling a resource of this size but more importantly still deliver shareholder value, when the current market does not attribute an increasing market cap on even spectacular results.

NM: We haven't called it a resource yet. Certainly the target zone between the north-west target and the south-east target extends over 3km. At this stage, given the results in Hole 5, we are reasonably targeting high-grade intersections in other locations on that 3km target.

Given the strong reaction that we have from both industry and the market to high-grade intersections there is no doubt that the best "bang for buck" can be delivered by us doing the exploration work ourselves.

The more we can show the predictability of the geophysical model and back it up with drilling results, the easier it will be for the market to see real value. So, we don't expect that it is going to be unmanageably difficult or expensive for us to conduct and fund the exploration work for the foreseeable future ourselves. We have got enough money at the moment to continue drilling this year, fund the IP survey and put a second rig on.

We will fund the drilling with a combination of cash in the bank and further equity issues. At the moment we are adding value at a greater rate than we are spending money. The price of the equity in the market, in my view, is cheap.

What is the cost of drilling a 1,500 metre hole with a full suite of assays for the whole 1,500 metres?

NM: Each drill hole is costing around $400,000 (£235,795) to drill to a depth of 1,500 metres, including assays and geology.

If the current geological model at Alpala is indeed correct, then the resource is truly huge. The objective is to define a JORC resource, essential before sale or farm-out can be considered. Given the enormity of scale, how much further drilling will be required and how will that drilling requirement be funded?

The user is correct that the potential resource target at Alpala is enormous. I would disagree that we necessarily need to find a JORC resource before the company gets re-rated.

This project has all the hallmarks of yielding a very high-grade ore body. A very high-grade ore body where the net present value way exceeds the capital expenditure is something that is going to be much easier to fund the development of from both an equity and a debt point of view.

We are a way off that yet, but the user is right when they say it will be truly large, yes, that is why we are looking for it ourselves. We don't expect that we will necessarily need a JORC resource before the industry takes real interest in it. In fact they are and we are not entertaining a sale or a farm out.

An estimate of 18-25 holes was originally given for the maiden JORC. Is this still valid and is this based around only delineating the central zone?

NM: As long as they all intersect ore, that is still reasonable. You can determine the surface dimensions of the system with 18-25 holes. To do that we need two or three drilling rigs, from which we will get about eight holes per rig per year.

The influential IP that was due to start in January did not even warrant a mention in the latest Cascabel update. Why are the Ecuadorian authorities holding up what could be a key strategic project for the entire country?

NM: The Ecuador authorities are not holding it up. They are fully supportive of our activities but there is a lot of paper-work working out import duties etc. It is complex equipment and how it is treated from an import point of view is a complex matter.

There are 13 tonnes of equipment that has come in from Canada and it's going through a predictably laborious process. We do expect a resolution in the near future. The issue revolves around how long the equipment will stay in Ecuador. Once on site, because we have extended the grid the survey will take about six weeks.

When we had the old magnetic model it did not look deep enough. Things that appeared to be significant anomalies were actually from deeper down and they moved laterally. That is why we got Hole 6 into a peripheral position beside the north east and the edge of this very large mineralised porphyry system in the Alpala zone.

Why has urgent action not been taken to solve this major failure?

NM: Urgent action is being taken, but there is not a problem.

The second drill that has been mentioned for several months does not seem to be gaining any traction. It is understandable that drilling has been slow due to the depth of the resource.

However, we have not completed three holes this year and surely it would be more cost effective to deploy further drills sooner rather than later. At that point in time, will the second drill be mobilised and when do you envisage ramping this up to five-plus drills which will be required to move this forward at pace?

NM: The drilling is actually fast, the drilling contractor is doing a fantastic job. We are not going to deploy further drilling rigs until we have more reliable affirmation of the magnetic model. Hole 7 is doing what we want it to.

Based on magnetic and Cu/Au correlation what do the BOD [board of directors] estimate the value of total assets at Cascabel in terms of money in the ground.

NM: It is too early to go figuring that out and it is certainly too early to be talking about it publicly but let me say to have a target zone with three potentially high-grade lobes at Apala over a 3km length, with an intersection of 600 metres of high grade so far is putting this discovery in the top ten that we know of in the world.

At what stage do you envisage that the mining majors will cast their eyes upon SolGold?

NM: Well, knowing how ore majors tick, they probably already are.

Community engagement is clearly essential to ensure the long-term viability of Cascabel. Can you briefly outline your strategy to maintain their support?

NM: We have a close working relationship with the local community. We respect them, we employ them, we try to look after them as much as we can. We assist with whatever reasonable aspects of their lives we can validly support like the nursery and there is more coming.

I understand and respect the opinions of Dr Bruce Rohrlach (general manager exploration) regarding the correlation between Cascabel and Oyu Tolgoi. However, I am concerned that mentioning such a possibility prior to the IP survey has created inflated expectations. How confident are you that this hypothesis will come to fruition?

NM: It is not just his view that there is some comparisons in respect of Cascabel and Oyu Tolgoi; clearly we feel very confident that there are going to be some strong IP responses in this project.

I don't think there are any inflated expectations because the market hasn't gone ballistic on it and we are confident that the hypothesis will deliver otherwise we would not have published it and we are very confident.

There have been suggestions amongst investors that SolGold delays the release of negative news in order to "soften the blow". How do you respond to this notion?

NM: We don't delay the release of negative news. We release news when it is material. Now, there is lots of very positive news that we could release but out of context and by itself it would be similarly misleading and just as much so as negative news so there is a limit to the level of detail that should be released to the market.

The market is not sophisticated enough to be able to assess the technical importance of every single assay result nor detect the importance of every single day of drilling. So we are trying to release news on a regular update basis.

I am very conscious of people out there wanting to interpret every piece of news that we get and analyse it to death. We are not going to play to that because it can lead to dangerous conclusions, either positive or negative. So we are trying to be responsible about what we say and what we don't.

We are very excited by Cascabel: it is doing what it is meant to. Early on in an exploration programme you always get variations between the prediction and the result and it is just a matter of closing the gap between them and getting the market to come along with us when we have made the model more predictable.