There’s an old adage in the mining sector stating ‘the best place to find a new mine is in the shadow of an old mine’. That’s still a very true statement and it could very well be Callinex Mines’ (CNX.V) company slogan as it’s exploring right next door to the 777 Mine operated by HudBay Minerals (HBM) in Manitoba.
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About Callinex’ properties

Callinex Mines has a lot of properties but we’d like to focus on its two most important properties in Manitoba which are also the most advanced projects. In the Flin Flon belt in Manitoba, Callinex Mines owns the Pine Bay project and the Flin Flon project (for a total surface area of approximately 8,500 hectares) and both are located just a few kilometers away from the existing 777 mine and concentrator located right outside the town of Flin Flon.

Sometimes the lack of infrastructure is a pain for a lot of mining companies. One could easily discover a very nice deposit, only to realize it would require hundreds of millions of dollars to be spent on upgrading and improving the existing infrastructure but this most definitely won’t be the case at Callinex’ main projects.

As you can see on the image, there’s a high-voltage power line running right through the Pine Bay project (and barely missing the Flin Flon claims) and there are paved roads throughout both properties. On top of that, there’s an existing rail link going straight through the town of Flin Flon to connect Canada’s West and East coasts. Add the fact Manitoba is an extremely mining-friendly province (the province is even contributing C$160,000 to the current drill program on the property and has reimbursed Callinex with a C$175,000 cheque for its previous drill program) to the equation, and despite the fact it can get pretty cold in the winter (but this shouldn’t disturb a year-round operation, as the 777 mine proves), Flin Flon seems to be the perfect place to work, not in the least because it probably is the largest VMS District in the entire world when you take the historical production into consideration!

The Pine Bay project seems to be the most advanced zone as this area contains a few past-producing mineralized zones as well as an existing mine shaft and is also host to a historical resource estimate containing 1.6 million tonnes of 2.81% copper equivalent (just to make a quick comparison, a 2.81% copper grade would equate to 4.3 g/t gold as of today’s metal prices).

There’s an additional kicker here. This historical resource estimate contains a higher-grade zone of almost 700,000 tonnes at almost 4% copper and could easily be accessed by existing underground workings. We don’t want to jinx it, but this zone could be particularly interesting for Callinex as it could pave the way for some sort of toll mill agreement with HudBay whereby Callinex could try to process its high-grade underground blocks at the 777 concentrator.
Callinex’ first round of drilling was focused on the mineralized zones around the existing mine shaft, and this approach has proven to be very successful as Callinex Mines has already discovered several narrow intercepts such as 4 meters of 2.5% CuEq but more importantly, it also intersected a broad layer of high-grade material. The assay results for the 4th hole of the winter drill program resulted in 44.2 meters of 4% copper equivalent. That’s an important result because of two reasons. First of all, the grade is good but the average width is excellent. A 4% copper-equivalent grade is equivalent to 6 g/t gold. Secondly, this interval was discovered at less than 50 meters below the surface area, making this zone even more interesting to mine.

This is the first time in history all land packages have been consolidated

So why has nobody fully realized the potential at Callinex’ land packages? Well, the short answer is ‘they have’, but the longer answer is that this is the first time in the past 100 years one company owns the entire land claim, no one has ever been able to consolidate the ownership of the properties, despite major producers and explorers having been involved in exploration activities at the land package. On top of that, the science of geophysics is currently much more advanced than back in the days when VTEM surveys weren’t able to give a clear ‘picture’ deeper than 150 meters, whilst right now the same surveys are able to give the geologists a good idea of what’s lying underneath the surface up to 350 meters. Also keep in mind a large part of the new discoveries were found at a depth, so Callinex is now in an unique position to re-explore its projects with modern technologies.

And the names involved in the Flin Flon and Pine Bay projects will definitely ring a bell, or at least they should as most people will have heard of Placer Dome and Inmet way before they were acquired by respectively Barrick Gold and First Quantum Minerals. In fact, Placer Dome liked the project and even wrote an extensive evaluation report on the Pine Bay deposit area (which we like more than the Flin Flon Project, due to Pine Bay’s more advanced status), but its geologists were unable to convince the higher-end management to continue exploration activities at the properties.

The Placer Dome report is available on the website of the province of Manitoba, and definitely highlights the potential of the project. The Placer Dome geologists wanted to conduct another 3,500 meter winter drill program at Pine Bay to follow up on some earlier leads down plunge of the Pine Bay deposit, but unfortunately the top level of the Placer Dome team decided to reduce the capital and exploration spending on the property despite the expectations of finding a VMS deposit with a size of 30 million tonnes.

So all signs were pointing in the possibility of a large VMS deposit, but nobody in the history of the property has ever followed up on it as nobody in the history of the Pine Bay project has bothered to put all historical drill data together. Callinex is the first company that has made the effort to put all date of in excess of 1,000 shallow holes together in an attempt to understand the mineralized structure at the project.

Why the potential of exploration success is quite high

Exactly because nobody has ever before consolidated the ownership of the entire project, the total mineral potential remained untapped until Callinex Mines arrived on scene.

Keep in mind the Flin Flon belt is a VMS-system and if there’s one thing everybody agrees on when talking about VMS deposits, it’s the fact these type of deposits occurs in one large ‘central’ deposit and several smaller ‘satellite’ deposits.
The 777 mine was actually a (smaller) satellite deposit of the large Flin Flon mine, so the odds for Callinex Mines to own one or several more satellite deposits on its land package (which has a strike length of 10 kilometers)are looking pretty good, and these odds are even increased by already having a past-producing mine (and no less than 5 deposits) on the Pine Bay project.

At this point in time, we’re very excited about the prospects of finding an extensive mineralized zone at the Pine Bay project, and these expectations are definitely fueled by the conceptual exploration target of 30 million tonnes by Placer Dome and a 20 million tonne target outlined by Inmet. These two companies were held in very high regard by the technical and investment communities, so their expectations should not be taken lightly.

Callinex Mines has now started another 2,500 meter summer drill program after it raised C$3.4M in hard dollars and a flow-through financing wherein it attracted Resource Capital Funds as a major strategic investor. The fact RCF is investing in what’s being seen as an early-stage exploration company is extremely encouraging and is a great vote of confidence for both the (technical) team at Callinex (as Resource Capital Funds does not invest in any company if it doesn’t believe in the management) as well as the property itself.

It will be very interesting to see what the drill results will be from the Sourdough zone which hasn’t seen any form of modern exploration since 1980. Callinex will be following up on drill targets it has generated and the geological structure of the mineralization might indicate where to search for high-grade VMS-structures next. Fortunately it’s relatively cheap to book some drill rigs right now, and we would expect Callinex’ cost per meter (including assaying) to be less than C$130/meter for diamond drilling.

The end game? A sale to HudBay seems to be the most rational outcome

Although Callinex Mines definitely keeps all its options open, we think that further down the road a sale or joint venture agreement with HudBay Minerals is in the works. HudBay is already operating the 777 mine and concentrator so it’s very familiar with the region, but what’s more important, the 777 mine seems to be coming close to the end of its useful mine life. One might expect the mine could have continued for a while, but let’s take a minute to check up on what HudBay’s management team had to say about the 777 mine and its exploration activities.

“We just recently completed two holes. They are currently being logged. We will do some borehole pulsing, and again [the] current plan is to do a couple more holes, but really results to date at 777 have not been that encouraging.”

Alan Hair, senior vice-president and chief operating officer, agreed with that assessment.

“I mean, we’ve obviously been drilling in other areas in 777, not just War Baby,” he said. “I mean, as Brad indicated, it very much looks as if 777 is now approaching the end of its life in terms of ability to extend the reserves any further.

This means two things. First of all, the 777 concentrator will run out of mill feed from 2020 on, and from that moment on, the asset becomes a liability for HudBay as it will convert from a cash flowing asset to a cash-losing asset where it might have to spend tens of millions on reclamation. Every decent CFO of a mining company would step in the board room to make sure the board of directors and management team are fully aware of this situation, and that any deal to ensure mill feed would be a good deal for HudBay which is currently experiencing a slower-than-expected ramp-up at its Constancia project in Peru.

So what do you think HudBay will do in case Callinex is able to prove up a resource estimate containing for instance 10 million tonnes at a decent grade? Will it tear down the concentrator and sell it for spare parts and scrap? Or will it attempt to make a deal with Callinex to make sure its 777 concentrator continues to work? That will be an easy choice for HudBay as a 10 million tonnes estimate would be sufficient to keep its concentrator going for an additional 5 years.

Callinex’ management team

Max Porterfield – CEO, President and Director

Over ten years of experience in natural resources and financial markets, previously with Brazil Resources and US Global Investors.

Mike Muzylowski – Chairman

A renowned geologist and member of the Canadian Mining Hall of Fame with over 50 years of experience which has included the discovery and development of 16 mineral deposits through to production.

Investment thesis

Callinex Mines seems to be the most obvious nearology-play there is. It’s operating in a safe region in a proven VMS deposit in the shadow of a producing mine. On top of that, that producing mine will be depleted by 2020 and the exploration programs executed by HudBay are definitely not yielding the results they were hoping for whilst Callinex Mines now owns the largest land package in the immediate vicinity of the 777 mine that is not controlled by HudBay.

With a working capital position of approximately C$4M, Callinex Mines is in an excellent position to follow up on an amazing previous drill intercept of 40 meters at 4% copper-equivalent. This is one of the very few companies ticking all the boxes, and if even just half of Placer Dome’s 30Mt exploration target comes true, we have very little doubt Callinex’ market cap of C$16M will grow rather exponentially.

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Disclosure: Callinex Mines Inc. is a sponsoring company, we own shares. Please see our disclaimer for current positions.


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