Telson Resources Inc. (TSXV: TSN / OTCBB: SOHFF) - Initiating … · 2017-08-17 · for...

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA

August 9, 2017

2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Telson Resources Inc. (TSXV: TSN / OTCBB: SOHFF) - Initiating Coverage – Commencing Production

at Two Projects in Mexico

Sector/Industry: Junior Resource www.telsonresources.com

Market Data (as of August 9, 2017)

Current Price C$0.40

Fair Value C$1.82

Rating* BUY

Risk* 4 (Speculative)

52 Week Range C$0.16 - C$0.55

Shares O/S 104,149,005

Market Cap C$41.66 mm

Current Yield N/A

P/E (forward) N/A

P/B N/A

YoY Return -18.4%

YoY TSXV -8.5% *see back of report for rating and risk definitions. * All figures in US$ unless otherwise specified.

Investment Highlights

� Telson Resources Inc. (“company”, “Telson”) is advancing its polymetallic Tahuehueto project in Durango, Mexico to production. Pre-production commenced in late 2016.

� Tahuehueto is one of the highest-grade gold deposits in Mexico, and has probable reserves of 3.26 Mt at 3.4 gpt gold, 42 gpt silver, 0.35% copper, 1.19% lead and 2.24% zinc.

� The company is also preparing to re-start production at the recently acquired Campo Morado mine, also in Mexico. Measured and indicated resources for this project total 1.40 Moz of gold equivalent (gold and silver).

� A Pre-Feasibility Study (“PFS”) on Tahuehueto was completed in 2016 for a 550 tpd operation. The study showed an after-tax IRR of 36%, and an after-tax NPV @ 8% of $77 million.

� The operating cost estimate is just $495 per gold equivalent oz produced. The initial CAPEX estimate is $32.2 million.

� Pre-production commenced at Tahuehueto and the company made its first sale of bulk materials in February 2017 for $1.47 million. The company is currently mining at a rate of 3,000 to 3,500 tonnes per month, and have a toll milling contract in place. Telson is currently processing stockpiled ore at approximately 300 tonnes per day.

� We are initiating coverage with a BUY rating and a fair value

estimate of C$1.82 per share.

Risks � The value of the company is highly dependent on gold and silver

prices. � Delay in receipt of permits. � Security issues and operational risks at Campo Morado. � Access to capital and potential share dilution.



Background

Tahuehueto

Project

The company was formed in 1986 as Samarkand Resources. The name was changed to Soho Resources Corp. in 1999, and subsequently to Telson Resources Inc. in 2013. The current President, Ralph Shearing, is a founding member. Since 2004, the company’s primary focus has been on the Tahuehueto project. In 2015, Telson underwent a corporate reorganization, stock consolidation (2:1 basis) and a change in control / management as a result of an investment from Reyna Minas, S.A. de C.V., a private Mexican mining group, and a group of Mexican shareholders. Jose Antonio Berlanga Balderas (CEO), Enrique Margalef Vergara (VP Corporate Development) and Arturo Bonillas joined the board. Ralph Shearing maintained his position on the board, and is currently the company’s President. Management, directors and insiders currently own 47% of the total outstanding shares of the company, strongly aligning management and investors’ interest.

In June 2017, the company acquired the Campo Morado mine. Management’s focus at this time is to advance Tahuehueto to commercial production and put the Campo Morado mine back into production by the end of 2017 or early 2018. Location

The Tahuehueto project, located in north-western Durango State, Mexico, consists of 28 mining concessions covering 7,492 hectares across five non-contiguous blocks.



Source: Company

The State of Durango has the Sierra Madre Occidental range running through it, and Tahuehueto lies within the Sierra Madre Mineral Belt. This mountain range includes one of the world’s largest precious metals regions, running from southeast Arizona, U.S.A., to Guanajuato, Mexico, a distance of 1,500 km. The Sierra Madre Occidental has been mined for hundreds of years. Tahuehueto is located close to several well-known mines / advanced stage deposits, as shown in the map below.

Source: Company



Tahuehueto is:

� 25 km north of the Topia polymetallic-silver mine owned by Great Panther Silver (TSX: GPR) – this mine produced 899 Koz of silver equivalent ounces in 2016 - operations consist of multiple small, narrow-vein mining operations.

� 65 km northwest of the La Cienega gold, silver, base metal mine owned by Fresnillo plc (LSE: FRES) – it holds a 2,200 tpd underground mine, flotation and leaching plant - reserves of 830,000 ounces of gold and 54 million ounces of silver

� 85 km southwest of the Guanacevi silver district � 280 km southeast of the Palmarejo silver and gold mine in Chihuahua owned by

Coeur Mining (NYSE: CDE) – this mine produced 4.4M oz silver and 73,913 oz gold; reserves of 40.8M ounces of gold and 592,000 ounces of silver

� 150 km northwest of the San Dimas Mining District – it is on the border of Durango and Sinaloa states, and is one of the most significant precious metal deposits in Mexico.

The largest community in the region is Tepehuanes (population of 15,000), located approximately 175 km by road (55 km paved and 120km dirt) east of the property. The project can also be accessed via a fixed-wing aircraft. Telson maintains an airstrip approximately 20km by road north of the project. Diesel generators currently provide power to the project site. The company recently retained a third party to conduct an engineering design and cost study to construct and operate a gas powered electrical generation plant to support commercial production operations. Water source is Rio Las Vaultis which flows 365 days. The project’s terrain is steep with elevations ranging from 600 m to over 2,500 m, making drilling relatively challenging. Aerial views of the project are shown below:

Source: Company



Source: Company

Geology and History

Mineralization on the property is classified as intrusion-related epithermal low-sulfidation polymetallic with gold and silver, accompanied by copper, lead and zinc mineralization. It is considered to have been derived from porphyry intrusion source rocks at depth. Mineralization occurs as polymetallic epithermal veins along a northeast-striking corridor for approximately 5 km. Alteration exists within this corridor for over 7 km of prospective terrain for mineral exploration. Epithermal gold and silver systems are very common sources of gold and silver ore, especially in Mexico. They are found at depths of less than 1 km in areas of volcanic origin, where fluids from magma mixed with other waters, and mix to form hydrothermal fluids that rise through the earth’s crust, precipitating mineral deposits in cracks and fractures. These veins can be near vertical to near horizontal, but the best deposits are often found in sub-vertical veins, because horizontal fractures often have a tendency to collapse on themselves and destroy mineralization. The first recorded exploration on the project was in 1904. In the early 1990s, a 50 tpd plant

was constructed and operated. However, there are no available records of production data. Concentrates from the mill were flown to Santiago Papasquiaro (west-central Durango) and then driven to a smelter at Torréon (Coahuila state). Telson acquired the property in 1997. Telson controls a 100% interest through a 99.9% owned subsidiary. Of the 28 concessions, 23 (roughly 2,000 hectares) are subject to a 1.6% NSR.



A summary of the historic work completed on the Tahuehueto project is shown below:

Year Work Conducted

1904 First recorded exploration

1970s 50 tpd plant operated

1975 - 1977

geochemical and rock sampling, detailed geological

investigations, drifting, and crosscutting at the Sacramento de la

Plata mine

Early 1980sdrilled 28 surface and underground holes at El Creston and Cinco

de Mayo structures / IP study over an area of about 3 by 0.4 km

Early 1990s700 m of underground workings on the El Rey and El Creston

zones

1997 Acquired by Telson

2004 Geophysics, sampling and geological mapping

2005 - 2008 47,276 metres / 248 holes

2008 1st NI 43-101 Resource - 6.4 million tonnes

2009 2nd NI 43-101 resource - 12.2 million tonnes

2010 PEA completed by Snowden

2016 PFS completed by Metal Mining

2017 Reports first sale from pre-production

Source: Company

According to management, Telson has invested over $25 million in the project so far. As shown above, since taking over, Telson drilled 248 holes totaling 47,276 m. All of the drilling occurred during 2005 to 2008. The first NI 43-101 resource estimate was completed in 2008, followed by an updated estimate in 2009. The company completed a Preliminary Economic Assessment (“PEA”) in 2010, and a PFS in 2016. Pre-production started in late 2016, and the company reported the first sale of bulk material in February 2017. 2016 Resource Estimate and PFS

A PFS completed in 2016 by Metal Mining Consultants Inc. was based on a 790 tpd underground mine operation for 21 years. The mined ore will be processed at a 550 tpd facility consisting of conventional crushing/milling/flotation/filtering process. The facility will produce lead, copper and zinc concentrates (containing gold and silver) which will be trucked off-site for smelting and refining.



The following table shows the project’s reserve and resource estimates as reported in the PFS. At a base-case gold price of $1,000 per oz, the project has probable reserves of 3.26 Mt at 3.4 gpt gold, 42 gpt silver, 0.35% copper, 1.19% lead and 2.24% zinc, consisting of approximately 662 Koz of gold equivalent. The measured and indicated resource is 1.05 Moz gold equivalent and the inferred resource is 476 Koz gold equivalent.

Source: 2016 PFS

The reserve estimate covers six zones, of which, the El Creston zone accounts for approximately 55%.

Source: 2016 PFS

We believe there are significant opportunities for resource expansion along depth as well as along strike. Only a small portion of the currently identified 800 hectares has been drilled to date. Note that there has not been any work on the remaining 7,492 ha land package. In the following maps, the red lines indicate the reserve veins, which are traced for approximately 3 km from Cinco de Mayo in the south to Santiago in the north. The yellow veins indicate 11 km of identified mineralized veins that are yet to be drilled



Source: Company



Prefeasibility Study Results

The proposed mining layout for the El Creston El Perdido and El Rey zones is shown in the image below:

Source: 2016 PFS

The study showed an after-tax IRR of 36%, and an after-tax NPV @ 8% discount rate of $77 million.



The estimated annual production is approximately 16,100 oz gold, 177 Koz silver, 0.9M lbs copper, 3.2 Mlbs of lead and 5.6 Mlbs of zinc. The operating cost estimate is $91.26 per mineralized tonne, or $495 per gold equivalent oz produced. The initial CAPEX estimate is $32.2 million, which includes approximately $16.1 million for the processing facilities. We consider the low CAPEX and operating cost as

the key strengths of the project.

The company prepared an internal PFS based on a larger 1,000 tpd operation. Results were not disclosed as a new PFS NI 43-101 report is required for the company to be able to release this information. Our fair value estimate on the project, based on a 1,000 tpd operation, is C$126 million (based on a long-term C$:US$ of 1.1). Note that this valuation is solely based on the reserve estimates and do not account for any upside from the identified resource estimates, and the exploration potential mentioned above. A summary of our inputs and assumptions are shown below.



Source: FRC

We have used an initial CAPEX estimate of $45 million and an operating cost estimate of $78/t. Note that our CAPEX estimate is conservative as the company expects to have a significantly lower CAPEX by leasing equipment. Also, a significant investment has already been made to acquire mill equipment. The sensitivity of our fair value to gold price and the discount rate is shown below:

Source: FRC

Advancing to Commercial Production

Subsequent to the PFS, the company has been aggressively advancing the project to



production.

• A mining permit for a minimum 1000 tonnes tpd was applied for in late 2016. The company expects to receive the final approval by November 2017 or earlier.

• In February 2017, a sulfide flotation processing facility was acquired for $1 million. The capacity of the facilities is currently 1,000 tpd.

• Secured a $2 million line of credit with Caterpillar Leasing (NYSE: CAT) for leasing mining equipment.

• Portal development (297 m) crosses the El Creston vein structure and exposes mineralized vein. This indicates that the cost associated with underground mining will be relatively low as no support systems have been necessary in the Haulage Level Portal (see image below).

Source: Company

• Along with mine development and construction, the company commenced pre-production in late 2016 by collecting bulk samples. In February 2017, the company reported the sale of a 3,500 tonne bulk sample collected from the El Creston zone at Level 10. The average head grades were 9.5 g/t gold, 63.9 g/t silver, 3.54% lead and 6.24% zinc. The Level 10 ore shoot is estimated to contain over 50,000 tonnes.



El Creston outcrop and portal

Source: Company

• The mined ore was trucked to a toll milling facility (the Andes toll mill near Guanacevi) located 270 km from the project. Approximately 259 tonnes of zinc concentrate and 201 tonnes of lead concentrates, containing 27.9 kg of gold and 192.6 kg of silver, were produced generating $1.47 million for the company.

• Telson subsequently entered into a processing agreement with a 300 tpd Atocha mineral processing plant to process at least 21,000 tonnes of ore in 2017. The Atocha mill is located 110 km from Tahuehueto and closer compared to the Andes facility. In a press release, dated July 31, 2017, the company announced that approximately 4,600 tonnes of ore has been delivered to the Atocha mill site, of which, 1,500 tonnes has been processed through the sulfide flotation mill circuit.

• The company is now mining ore underground at an average rate of 200 tpd.

• Entered into an off-take agreement with Mercuria Commodities Trading, S.A. de C.V. to purchase all concentrates produced from pre-production mining. Mercuria has already made an upfront payment of $1 million.



Campo Morado

Mine

We expect multiple catalysts from this project over the next three to six months as the

company advances to commercial production.

In June 2017, Telson acquired a 100% interest in the Campo Morado mine from Nyrstar Mining Ltd (ENXTBR: NYR). The acquisition price is $20 million plus adjustments (variable price), of which, $3.5 million has been paid to date, and the remaining $16.5 million is due by June 13, 2018. The variable price is defined as follows: The greater of either of (a) or (b) below: a) $20 per tonne of zinc sold if the zinc price is over $2,100 per tonne;

Or b)

• 0.5% NSR received from zinc if zinc price is between $2,100 and $2,200 per tonne

• 1.5% NSR if zinc price is between $2,200 and $2,300 per tonne



• 4.25% NSR if zinc price is over $2,500 per tonne. Telson has the option to purchase the NSR for $4 million. The project, covering 12,045 hectares across six mining concessions, is located in Guerrero State, approximately 160 km south- southwest of Mexico City. The following map shows the project’s location as well as several key mines / deposits in the region.



Source: Company

Campo Morado is an underground polymetallic mine, with infrastructure in place for processing up to 2,500 tpd.

View of the Campo Morado Storage and Logging Facility

Source: Company

The mine was put into production by Farallon Mining in 2009. Farallon was acquired by Nyrstar in 2010 for $409 million. Production was suspended in early 2015.



Operations were initially suspended in late 2014 due to a blockade of the mine by union activists. Operations recommenced after a few weeks; however, Nyrstar management decided to suspend operations again in Q1-2015. Nyrstar cited “on-going issues associated with security in the region” and “systematic intimidation of its workers” as the primary reasons. Although Nyrstar indicated through their press releases that they had been working closely with the Mexican government, and State and Federal police forces, there have not been any mining or processing activities on Campo Morado since then. Guerrero has a history of high cartel-related crime, and the state is considered to be one of Mexico's most violent states. Projects in the region have reported kidnappings / deaths in the recent past, including Torex Gold's (TSX: TXG) Limon-Guajes and Los Filos (then owned by Goldcorp's - TSX: G) mines. Operators understand the high risk levels of conducting business in the region, and are generally cautious. The following table shows Campo Morado’s production history:

Source: Nyrstar

Production was on a declining trend from 2011 to 2014, due to declining grades and recoveries. In 2014, the mine processed 657,000 tons of ore with an average grade of 1.2 g/t gold, 115.7 g/t silver, 4.6% zinc, 1.2% copper, and 0.9% lead. Approximately 48,000 tons of zinc concentrate at 47%, and 29,000 tons of copper concentrate at 13%, including 6 Koz of Au and 0.9 Moz of Ag, were produced. The average grades of the milled material in 2009 were much higher at - 2.47 g/t Au, 180.3 g/t Ag, 1.34% Cu, 1.08% Pb and 10.04% Zn. The following chart shows the mine’s direct operating cost, which was at $87/t in 2014. A 2010 technical report on the project had estimated an operating cost of approximately $60/t.



Source: Nyrstar

Although the sale of asset to Telson may seem like a distressed sale by Nyrstar, we do not believe that is the case as Nyrstar has been divesting all of their mining assets in Latin America to focus on their operations in Canada and the U.S. Geology

Campo Morado’s mineralization is of the volcanogenic massive sulphide (“VMS”) type. Six primary deposits have been identified to date, including the G-9, El Largo, El Rey, Naranjo, Southwest, and Reforma. Nyrstar was focused on mining the G-9 deposit.

Locations of the known VMS Deposits

Source: Company

Historic drilling includes 3,306 surface and underground diamond drill holes totaling



577,155 m. The following table shows the 2014 year-end resource estimate on the project reported by Nyrstar. The estimate, covering six mineralized bodies, showed 14.7 Mt of measured and indicated resources and 2.15 Mt of inferred mineral resources. Measured and indicated resources total 1.40 Moz of gold equivalent (gold and silver), and 3.09 Moz (gold, silver, copper, zinc and lead).

Nyrstar focused on mining G-9 because of its relatively higher grade and less refractory versus the other four deposits. Ore from G-9 is amenable to conventional flotation methods, while ore from the other deposits require the use of hydrometallurgical methods to produce gold, silver, copper and zinc. The 2010 technical report on G-9 suggested a recovery rate of 35% for gold, 45% silver, 70% copper, and 80% zinc. Refractory gold ores have ultra-fine gold particles, and are naturally resistant to recovery by standard recovery processes, such as cyanidation. Therefore, refractory ores require pre-treatment in order for cyanidation to be effective in recovery of the gold. The refractoriness is primarily due to the encapsulation of extremely fine gold particles by sulphide minerals that is unaffected by cyanide leach solution. Telson’s Development Strategy

Telson is currently working towards restarting mining operations. Mining will be focused on the El Largo, El Rey and Reforma orebodies. Management expects to make the following changes to previous mining operations:

• In 2014, zinc and copper concentrates were recovered using a room and pillar mining method. Telson intends to adopt a sublevel caving mining method, which would result in lower mining costs and additional tonnage (no pillars). It will also process within the mill, all available economic metals (gold, silver, copper, lead and zinc), resulting in



higher revenues.

• Telson intends to focus on zones with higher precious metal content targeting a minimum of 2.5 g/t Au with corresponding elevated silver values along with base metals.

• Investigate the viability of adding a leach circuit to the mill design and improve recovery rates of precious metals.

• Investigate the possibility of re-processing the existing tailings with vat leaching to extract the remaining considerable unrecovered precious metal.

In our discussions, it was indicated that management is confident that their extensive experience operating in Mexico, and the efforts performed to date with the Campo Morado community will allow for a smooth restart of operations in the near future. Management anticipates a time line of 4 to 6 months. The company is in discussions with concentrate purchasers for offtake funding to raise capital required (up to $7 million) to recommence operations. Fair value estimate – We decided to use a very conservative valuation model to estimate Campo Morado’s fair value. We believe the project’s current valuation is heavily

dependent on Telson management’s ability to restart operations, as well as successfully

execute their above-mentioned development strategy. We based our valuation on a very conservative 10-year mine life at 2,500 tpd for a total of 7.5 Mt. Note that the project’s measured and indicated resource estimate alone is approximately 15 Mt. We also used a high discount rate of 20% versus the typical rate of 11.5%.

Source: FRC

The sensitivity of our fair value to gold prices and the discount rate is shown below:



Gold Industry

and

Comparables

Source: FRC

The industry has been experiencing a trend of declining reserves and production (see charts below), which we believe will encourage larger companies to seek high-quality and undervalued assets to add to their portfolios. The following charts show the combined production and gold reserves of the major gold producers:

Gold Reserves (in Moz)

Production (in Moz)

Source: Goldcorp Inc.



Management

The above charts include production and reserve data of Goldcorp, Barrick, Newmont, Newcrest (ASX: NCM), Agnico Eagle (NYSE: AEM), Kinross (TSX: K), Yamana (TSX: YRI), AngloGold (JSE; ANG), Gold Fields (JSE: GFI) and Harmony Gold (JSE: HAR).

The following table compares Telson to several other junior resource companies.

Source: FRC

Telson is currently trading at an Enterprise Value (“EV”) to resource ratio of C$25 per

oz versus the comparables average of C$62 per oz.

Management and board members combined hold 14.42 million shares, or 14% of the total, strongly aligning their interest with investors. Shares are very tightly held as management, board and insiders currently own 47% of the shares, and an additional six shareholders own approximately 30%.

Brief biographies of the management team and board members, as provided by the company, follow:

Jose Antonio Berlanga Balderas, P.Eng – CEO and Director

Mr. Balderas is a Mining and Metallurgist Engineer with 37 years of experience in evaluation, design, planning, engineering, construction and operation of mining and metallurgical units. He is currently President and CEO of Reyna Minas S.A. de C.V., a Mexican company, founded in 2001, formed by Mexican professionals with extensive experience and skills in the development and operation of mining projects through the application of technology and high optimization methods in extracting minerals. Some of the projects that Antonio through Reyna Minas has participated include: El Oro in the State of Mexico, La Negra in Queretaro and Pinzan Morado in Guerrero, among others. He has also promoted important mining assets with Canadian companies, the latest being the Morelos Sur and El Barqueno projects with Cayden Resources. Additionally, he is a partner and CEO of Cortez Gold Corp., a Canadian company which owns a concentrate treatment plant in Matehuala, San Luis Potosi. During his professional career, he worked eight years as mine



superintendent with Servicios Industriales Penoles, SA de CV on various projects between 1978-1985 and with Minera Autlan in 1993. From 1993 to 2001 he obtained invaluable knowledge of the deposits and mines in Mexico as deputy technical director of the Trust for Mining Development in Mexico, a development bank specializing in the mining industry. He has been a two term President of the prestigious College of Engineering Geologists and has occupied executive positions in the AIGMM as well as an advisor in the Engineering faculty at UNAM. Ralph Shearing, P. Geol. – President and Director

Ralph Shearing is responsible for the management of public company management and compliance. Mr. Shearing is a graduate of the University of British Columbia holding a B. Sc. Geology Degree. Since graduating in 1981, Mr. Shearing has practiced his profession as a professional geologist throughout Canada, and internationally. He has been directly involved in several world class exploration and development projects in British Columbia, Canada. During an active mineral exploration and development career, Mr. Shearing has gained hands-on experience in all aspects of mineral exploration, including, geophysics, geochemistry, geology and diamond core drilling, the latter as a senior partner of a successful contract diamond drilling company. In 1986, Mr. Shearing founded Telson Resources Inc. a junior resource and development company listed on the TSX Venture Exchange. Mr. Shearing's experience managing and directing publicly listed companies over the last 22 years, combined with his practical experience in implementing major exploration projects, gives Telson Resources Inc. a director with unique insight, invaluable practical experience, and a well-rounded business approach to a junior resource company. Enrique Margalef – VP Corporate Development and Director

Mr. Margalef is a former investment banker with 10 years of experience in mergers and acquisitions, financial valuations, evaluation of investment projects, analysis of financial statements and cash flow management. He has performed business valuations and analysis of investment projects for Mexican and transnational companies in the mining industry, training/education industries, payments industry and hardware industry, among others. During his professional career, 5 years have been dedicated specifically to the mining industry, having been a partner a Candiani Mining Investment Bank for 3 years. He has advised numerous clients in the valuation of their mines and exploration projects. Additionally, he managed the investments of Vander Capital Partners private equity fund for the acquisition and exploration of two early stage exploration projects before moving to Vander Mining, a Vander Capital Partners subsidiary, as a partner. Previously, he served as Associate Consultant at Mastercard Advisors, where he was dedicated to the evaluation of investments and acquisitions for Mastercard Worldwide. Prior to his work at Mastercard, he served as an analyst at the investment bank Serficor, where he gained experience in financial analysis, business valuation and due diligence in mergers and acquisitions between foreign and Mexican companies in various industries. He graduated in Economics from Universidad Anahuac in Mexico. Remigio Martinez Muller, B.S. Geo - Director

Sr. Martinez worked his whole professional career with Grupo Mexico starting in 1967 as a Mine Geologist in Taxco, Guerrero and ending as Grupo Mexico’s Director of Exploration in



2013. From 2013 to 2016 he maintained an exclusive consultant position with Grupo Mexico and became an independent consultant thereafter. During his career with Grupo Mexico, Sr. Martinez oversaw geophysical exploration in Mexico where his work was instrumental in the discovery of several porphyry copper deposits, such as El Arco in Baja California and Malpica in Sinaloa Mexico. From 1975 to 1980 Sr. Martinez was Chief Mine Geologist, where his group of geological professionals increased the reserves of seven underground mines owned by Grupo Mexico’s subsidiary, Industrial Minera Mexico S.A. (IMMSA). During his tenure as Director of Exploration he was influential in the definition and evaluation of the Buenavista Zinc deposit, adjacent to the Cananea Porphyry Copper deposit. In South America, Sr. Martinez supported the exploration staff of Southern Peru in the discovery of the “La Tapada” portion of the Tia Maria copper deposit and in identifying several other deposits in Chile. His most recent contribution to the Grupo Mexico was the preliminary evaluation of the Aznalcollar massive sulfide deposit in Spain. In his 46-year career with Grupo Mexico, Sr. Martinez worked as a Geophysicist and Exploration Geologist, Manager of Mine Geology for underground operations, and Director of Exploration for Grupo Operations in Mexico, Peru, USA, Canada, French Guyana, Ireland, Australia and Chile. During his career, he has worked in all facets of mineral exploration and development, from field geology to final economic evaluation of properties and onward to underground and open pit mining operations. He has extensive expertise in porphyry copper and in underground vein and skarn type deposits. Sr. Martinez graduated with a B.S. in Geology from Michigan Technological University in 1966 and in 1973 he received a M.S. in Economic Geology from the Colorado School of Mines. He has been a member of the Asociacion de Ingenieros de Minas, Metalurgistas y Geologos de Mexico, AC since 1967. He has also been a member of the Society of Economic Geologists from 1980 to 1988 and from 1998 to 2013.

Arturo Bonillas, P. Eng - Director

Mr. Bonillas is the President and Co-Founder of Timmins Gold. His knowledge of mining in Mexico has been essential to the Company's success. As President he built the production and exploration teams in Mexico and guided the company to consistent annual increases in reserve and resource growth, throughput and production. The Mexican team led by Mr. Bonillas has an impeccable track record in relationships with the local communities, obtained in his more than 34 years of experience in the mining and exploration industry in Mexico. He has held positions ranging from mine planning engineer, operations research engineer, chief of financial planning and Vice President of purchasing for Compania Minera de Cananea, and later for a subsidiary of Placer Dome in Mexico. He directed full bankable feasibility studies for the Mulatos gold project in Sonora, and the San Felipe gold project in Baja California. Mr. Bonillas holds a B.Sc. degree in Industrial Engineering from the University of Arizona (1980). His extensive network of contacts and thorough understanding of the Mexican mining industry will enhance the Board's understanding of operations and local issues. Mr. Bonillas is fluent in both Spanish and English. Yao Sun, B.Comm, CFA, CMA, CPA – Director

Mr. Yao Sun graduated from the University of BC with a Bachelor of Commerce in 2005. He is an active member of the CFA Institute and the Certified Management Accountants (CMA) of Canada. Upon graduation from UBC, Mr. Sun was a financial analyst and portfolio



manager for a private real estate company in Beijing, China. He is currently the CEO of Clearstone Capital Corporation, a Canadian company which provides advisory services to Canadian & Chinese public companies. Our net rating on the management team is 4.0 out of 5.0 (see below).

Source: FRC

The company’s board has six members, of which, three are independent. We believe that the Board of Directors of a company should include independent or unrelated directors who are free of any relationships or business that could materially interfere with the director’s ability to act in the best interest of the company. An unrelated/independent director can be a shareholder. The following table shows our analysis on the strength of Telson’s board.

Source: FRC



Financials

Stock Options

and Warrants

Valuation and

Rating

Risks

At the end of Q1-2017 (ended March 31, 2017), the company had cash and working capital of C$1.93 million and C$1.26 million, respectively. We estimate the company had a burn rate (cash spent on operating and investing activities) of C$580k per month in Q1-2017. The following table summarizes the company’s liquidity position:

The company had total debt of C$4.93 million outstanding from a line of credit (15% p.a.).

Subsequent to the end of Q1-2017, the company raised C$4.74 million through equity financings by issuing 10.13 million shares at an average of C$0.47 per share.

The company currently has 6.83 million options outstanding (weighted average exercise price of C$0.13 per share) and 25.18 million warrants (weighted average exercise price of C$0.07 per share) outstanding. At this time, all of the options and warrants are in-the-

money. The company can raise up to C$2.58 million if all the in-the-money options are exercised. Our overall valuation on the company’s shares is C$1.82 per share.

We are initiating coverage with a BUY rating and a fair value estimate of C$1.82 per

share. We believe the company is exposed to the following key risks (not exhaustive):

� The value of the company is highly dependent on gold and silver prices. � Development risks. � Shares are thinly traded.



� Security issues at Campo Morado. � Operational risks at Campo Morado. � Delay in receipt of permits. � Access to capital and potential share dilution.

We rate Telson’s shares a risk of 4 (Speculative).



Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by Telson to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, Telson has agreed to a minimum coverage term including an initial report and three updates. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (71%), HOLD (8%), SELL (5%), SUSPEND (16%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

Telson Resources Inc. (TSXV: TSN / OTCBB: SOHFF) - Initiating … · 2017-08-17 · for...

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Transcript of Telson Resources Inc. (TSXV: TSN / OTCBB: SOHFF) - Initiating … · 2017-08-17 · for...