By Steven Ralston, CFA
Swingplane Ventures Inc. (OTC BB:SWVI) holds an option to acquire a 75% interest in 32 mining claims in an intriguing region of copper deposits located in the Atacama Desert of northern Chile. Known generically as the Algarrobo property, the area is in the administrative division of Region III, approximately 25 kilometers east of the port of Caldera, 43 kilometers northwest of Copiapo and 850 kilometers north of the country’s capital, Santiago. In January 2013, through the acquisition of Mid Americas Corp., Swingplane Ventures obtained the option to acquire these 32 tenures or mining concessions (11 Roble and 21 Angela tenures) surrounding and to the southwest of past producing mining operations that exploited three Major Veins of high-grade copper in the vicinity of Algarrobo.
Even though Swingplane is in the development stage of resource exploration and delineation, which will require several rounds of financing, its option on a past producing property should permit limited copper production in 2013 due to the Chilean government’s unique promotion of the copper industry. In 1960, the government created ENAMI (Empresa Nacional de Minería), a large, state-owned mining company, which is designed to assist small- and midsize-mining companies by providing competitive milling and processing services. ENAMI purchases high-grade ore and concentrates of copper, gold and silver for processing in its smelter and five refineries.
The potential of the tenures under Swingplane’s option is four-fold: 1) another vein (Veta Gruesa) south of the central Major Vein has been discovered on the Roble tenures and high-grade ore is now being mined by the company through artisanal methods, 2) limited production of both high-grade and low-grade copper ores was sold through ENAMI from 2009 to 2010 and a new license is expected to be granted within a few months, 3) given the extent of the mineralized trend in the Algarrobo area, further exploration should discover additional primary and secondary veins on the Roble tenures and 4) the expansive Angela tenures, which are on trend with the southernmost Main Vein, provide blue sky potential for the discovery of the southernmost Main Vein’s continuation and/or other primary vein complexes. Due to the high grade of the rich copper veins in this area of Chile and the prior permitting of ore sales to ENAMI, Swingplane should be in a position to partially fund the exploration and development of its tenures with operating cash flow, once a mill is constructed and operational to process ore.
Two other blue sky aspects of the Algarrobo property are: 1) the presence of low-grade gold content in the high-grade copper oxide ore and 2) the potential for the delineation of uranium deposits, which were indicated by an exploration project conducted by the Chilean Nuclear Energy Commission between 1975 and 1981.
High-Grade Copper-Bearing Veins
During the second half of the 19th century and early 20th century, most of Chile's copper production was derived from the exploitation of high-grade copper bearing veins. The high-grade copper ore was concentrated in the northeast-trending and steeply-dipping veins associated with long-ago volcanic action in the Andes. In general, these veins were from 750-to-2,000 meters in length, 1-to-12 meters wide and about 370-to-670 meters in depth. Smaller vein structures with individual veins less than 350 meters long and 0.5–to-1.0 meters wide were also encountered and exploited in near-surface zones of oxidized material down to depths of less than 100 meters. The rich veins of copper ore were separated by sections of low-grade ore or completely barren rock. A prolific area of copper production from high-grade veins is the region in Chile that is west of the Andes and between Latitudes 21° South and 27° South.
The nature and history of the high-grade copper veins at Algarrobo are consistent the early history of the exploitation of Chile’s copper resources. Within the Algarrobo project area, which is located at Latitude 27° South, three systems of fractures (also known as three Major Veins) have been discovered and exploited to some extent. The systems are composed of at least eight primary mineralized veins that are over 2.5 meters wide and have surface lengths between 300 and 1,300 meters. The true strike lengths of these primary veins have not yet been determined due to sand cover. In addition, a number of secondary veins (classified as splays, horsetails, en echelon, etc.) have been discovered and presumed to be present across the Mineralized Trend in the Algarrobo area from the Panga mine in the northeast to the Alicia mine in the southwest.
The Mining Concessions controlled by Swingplane Ventures
To better clarify the properties on which Swingplane Ventures holds an option to acquire, a more accurate description of the Algarrobo property would be helpful. Historically, the mining area has been known as El Roble Y Algarrobo. The three Main Veins, which have been partially exploited by at least 30 mines, are oriented in a northeast-southwest direction, each over a distance of between one and three kilometers. The northernmost Major Vein can be identified by the historical operations of the Panga, Argentina and Uruguay mines. The central Major Vein, approximately five kilometers to the southwest, is recognized by the workings of the Estaca, Viuda and Descubridora mines, which are on tenures encompassing roughly 300 acres and held by other leaseholders. The 11 Roble tenures controlled by the option held by Swingplane Ventures almost totally surround this historically mined area and encompass approximately 2,300 acres. A further four kilometers south-southwest is the southernmost Main Vein with the Alicia and Caldera mines, also on tenures held by other leaseholders and encompassing only 250 acres. Swingplane’s option also controls 21 Angela tenures, which contain almost 13,000 acres immediately southwest and on trend with the southernmost Main Vein.
The Acquisition of the Option
Swingplane Ventures holds an option by which it can earn a 75% interest in 32 tenures in the area of Algarrobo, Chile. Initially structured in mid-2012 as a purchase of the option from Mid America, the deal was restructured in January 2013 as the acquisition of Mid America (a company incorporated in Belize) for 100,000,000 shares of common stock and 5,000,000 shares of super-voting convertible preferred stock. Originally, the Algarrobo option agreement was made and entered into on April 23, 2012 between Mid America, the optionee, and Gunter Stromberger and Elsa Dorila Duarte Horta, the optionors. The option allows the holder to earn a 75% interest in 11 Roble tenures and 21 Angela tenures in the mining area of El Roble Y Algarrobo by making a series of payments totaling $2.70 million to the optionors and spending $20.0 million towards mine development, in addition to being subject to three other conditions described below.
To-date, $1,200,000 has been paid to Gunter Stromberger, Elsa Dorila Duarte Horta and the Sociedad Legal Minera (Legal Mining Companies) controlled by them as required under the option agreement. Two other payments of $750,000 each must be made by Swingplane on or before June 30, 2013 and June 30, 2014, respectively, in order to keep the option in force. In addition, by April 23, 2015, Swingplane Ventures must expend $20,000,000 (half of which must be expended by October 23, 2013) towards the exploration of minerals and the development of mining operations in order to fulfill the terms of exercise. Also, until Swingplane Ventures constructs a mill to process the ore, the rights of production are retained by the optionors (Gunter Stromberger et al). After a mill is constructed, the optionors will be entitled to one-third of the net proceeds until $5,000,000 is received, and thereafter the interest of the optionors will revert to 25%. Swingplane must make all necessary payments to maintain the tenures in good standing during the option period. Lastly, Gunter Stromberger will act as field supervisor for the project (for a fee of $25,000 per month) until the 75% interest is earned by the Swingplane Ventures.
Geologically, the Algarrobo property lies on the western fringe of the Atacama Fault System and west of the Chilean Iron Belt, which hosts several significant Iron Oxide Copper Gold (IOCG) mines, such as the Candelaria mine (80% owned by Freeport McMoRan Copper & Gold – FCX: NYSE) and the Mantoverde mine (Anglo American plc – AAL: LSE). The Western side of the Andes in northern Chile is an important province for copper deposits, which has allowed Chile to become the world's largest copper producer. As the country’s largest export, copper is considered strategic to the country’s national interest. The copper deposits of Chile have been categorized into at least eight different types. Though the rich porphyry copper deposits are the most prolific, other types, such as the intrusion-related copper mineralization in the area of the Algarrobo property, are also noteworthy.
Algarrobo property is in the southern portion of the Atacama Desert. The northernmost Major Vein and central Major Vein are at higher elevation of approximately 1,000 meters while the southernmost Main Vein is about 750 meters above sea level and the Angela tenures are on a flattish, sandy desert floor at an elevation of approximately 550 meters.
Historical Production in the area of Algarrobo
The copper deposits in the Algarrobo area were discovered in 1808; however, large-scale industrial mining operations by a British company did not begin until 1868. Based on the mine waste piles, it is estimated that primarily between 1868 and 1910 approximately 800,000 tons of copper ore grading better than 12% was extracted from approximately 30 mines (exploiting the three Main Veins) and directly shipped as smelting ore. The central Major Vein was the most heavily exploited, especially between the Estaca and Viuda mines where the vein and associated lenses were mined extensively over a 600-meter strike to a depth of 250 meters. Horizontal levels at depths of 180 meters and 280 meters connect the vertical main shafts of Estaca and Viuda, which are 350 meters apart. Copper ore was extracted from the oxide zone, which extends to a depth of between 110-to-120 meters and the transition oxide-sulphide zone to a depth of 160 meters. At the Viuda mine, the sulfide ore was extracted down to 450 meters. Initially transported about 40 kilometers on a wagon road, the ore quality and reserves at surface were sufficient to warrant the construction of a 21-kilometer railroad line from Algarrobo to Caldera in 1906. From Caldera, ore grading higher than 15% Cu was shipped directly to England and the remaining ore was processed at a local smelter before being shipped to England.
From the 1920’s until 1997, limited mining by local miners (pirquineros) was conducted to shallow depths up to 40 meters. The pirquineros excavated and hand-graded the ore, which was transported to Caldera by railroad until the 1940’s. Around 1960, ENAMI constructed a 35-kilometer road to the area to facilitate the reprocessing of the waste rock dumps, which initially grading between 6% and 8%. In 1973, ENAMI increased the acceptable grade of direct smelting ore from 6% Cu to 12%.
Most recently, during 2009 and 2010, limited production from Roble 2A (a tenure controlled by the option held by Swingplane Ventures) was sold to the ENAMI facility at Copiapo. The complete collection of ENAMI assay certificates are not publicly available; however, a representative sample of certificates listed in the NI 43-101 technical report (dated January 22, 2013) document 15 shipments of high-grade (5.75% - 18.0% Cu) copper oxide material and 17 shipments of low-grade (1.30% - 6.08% Cu) leachable material. Interestingly, all of the documented shipments of high-grade copper oxide material contained gold (between 0.5 and 1.6 g/t Au), for which no credit was given according to ENAMI’s procedures.
Exploration and Development relating to the Roble tenures
In 1998, after acquiring the mining claims on approximately 3,700 acres (including the northernmost and central Major Veins but not the southernmost Main Vein) American Canyon Mining Chile Ltda., a Chilean company and at the time a subsidiary of a American Canyon Mine Inc. (a Nevada corporation), began exploring the Algarrobo property, along with another copper prospect in Region III (the San Ramon property approximately 30 kilometers south of Algarrobo). From the Algarrobo area, 187 grab samples were collected from past producing mines, workings of pirquineros, vein outcrops and mine dumps in order to map the deposits in the vicinity. Of the 187 samples, 19 samples assayed greater than 6% Cu (six over 10% Cu), along with significant gold mineralization (17 samples graded over 1.0 g/t Au, of which four were over 5.0 g/t). The mapping project concluded that workings on the central Major Vein extended over a strike length 1,400 meters, of which 350 meters were mined to a depth of at least 280 meters. The vein width was irregular but at its maximum had been over 5 meters. In addition, there was evidence of mineralized lenses, the largest of which was 60 meters horizontally, 40 meters vertically and between 1.5 and 5.0 meters wide. Despite the results of the mapping project, Gunter Stromberger, President of American Canyon Mining Chile Ltda., primarily pursued the San Ramon property, ultimately optioning a 75% interest to Trio Gold (TGK- TSX-V) in 2002. By 2005, Trio Gold failed to make the required CDN $5.5 million in exploration expenditures under the option agreement and forfeited its rights.
Another rock sampling program and mapping project was conducted on the Algarrobo property in 2000. Gunter Stromberger collected a total of 160 samples from existing mines (both at surface and underground) and waste dumps. Though grab samples are selective by nature, the assay results confirmed the presence of anomalous to high-grade copper mineralization accompanied by low-grade gold mineralization, generally between 0.4 and 1.4 g/t Au. The mapping project documented that only five of the eight mineralized primary veins (all of which were over 2.5 meters wide) had been commercially mined. Another 12 lesser mineralized veins with widths between 1.0 and 2.5 meters had been mined, predominately with hand tools, but only to a limited depth.
It is important to recognize that the vast majority of the 347 samples taken during 1998 and 2000 project studying the historical mining sites were taken from tenures not controlled by Swingplane Ventures (only 8 assuredly are from the Roble tenures). However, the assay results are indicative of the presence of high-grade copper veins prevalent in the area. In addition, the mapping programs indicate the presence of interpreted veins on many of the Roble tenures, especially on lands immediately adjacent to historical mine works and on the tenures of Roble 2, Roble 2A and Roble 2B, which are located directly between the northern Major Vein and the central Major Vein. And to reiterate, limited production was sold from Roble 2A in 2009 at 2010.
In 2009, Gunter Stromberger undertook a 15-hole reverse circulation (RC) drilling program totaling 842 meters to test the continuity and grade of near-subsurface copper veins situated in Roble 5B, approximately 500 meters south of the Estaca mine. Six holes intersected copper veins (grading between 1.32% Cu over 10 meters and 2.25% over 4 meters), four holes encountered low-grade anomalous copper (0.1% - 0.8% Cu) and five holes were abandoned, most due to over 25 meters of overburden. Since 2010, Mr. Stromberger has driven three drifts (a horizontal cut to access a mineralized vein) with heavy equipment, outlining a strike exceeding 450 meters, confirming the discovery of another vein, dubbed the Veta Gruesa.
More recently, in 2012, Richard Walker (the exploration geologist who authored the NI 43-101 technical report) conducted two due diligence property evaluations. The assay results of 29 representative rock samples confirm the presence of anomalous to high-grade copper (along with elevated assay values for gold) that is associated with potentially mineable veins. The proposed budget for the recommended exploration and mining of the property is $4.25 million, well within the required $20 million required to secure the 25% interest of the Algarrobo property under the option agreement.
Finally, high-grade copper ore grading at least 9% Cu is being stockpiled from the drifts. Once a license is granted, the Direct Shipping Mineralized Material will be shipped to the ENAMI facility at Copiapo.
Little information is available concerning the Angela tenures, which are situated southwest of the historically mined El Roble Y Algarrobo Mineralized Trend. However, 11 out of 29 rock samples collected by Richard Walker for the due diligence of the NI 43-101 technical report were from the Angela tenures. In addition, the discovery of the Veta Gruesa and other veins (False Estaca and Descubridora) south of the central Major Vein at lower elevations increase the probability that high-grade copper veins lie below the sand-covered desert. However, the exploration for the veins will be challenging. The airborne geophysical survey (specifically a Gryphon Multi-Parameter airborne survey) recommended by the NI 43-101 technical report may be the key to locating mineralized veins below the deep sand cover. Many exploratory drill holes into the dune overburden will be needed to test for sand-covered copper mineralization in the Angela tenures.
Chilean Mining Law grants constitutional protection of mining property rights over mineral tenures but also incorporates the aspect environmental protection, which requires the fulfillment of further procedures, most importantly an environmental impact assessment, adding time and hindrance in the development of a mining project. The development of the Angela tenures probably would require an environmental impact study regarding the phenomenon of Flowering Desert, which at a minimum would include a list of species of flora and fauna associated with the area of influence. During the operational phase, the operator would need to institute procedures to then destroying local wildlife habitat, such as waterholes, nests, caves, etc. The Algarrobo area is classified as a Rural Zone and a Dune Protection Zone (ZPI - 6), which protects the dunes from exploration activities. Fortunately, American Canyon Mine and Gunter Stromberger in particular were involved with the process of filing an Environmental Impact Statement for Algarrobo in 2002.
Though not mentioned in any of the Swingplane's press releases, the Chilean Nuclear Energy Commission, with the assistance of the International Atomic Energy Agency, conducted an exploration project between 1975 and 1981. Seven areas in Chile totaling 105 square kilometers (14% of the Chilean land area) were systematically surveyed in order to collect geological data related to uranium. Utilizing exploration techniques (such as airborne radiometric prospecting, geological and ground radiometric survey and geochemical surveying of sediments water and soils) the prospecting project estimated that 513 tonnes of ore classified as estimated additional resources grading 0.04% U3O8 (Triuranium octoxide) was present at the El Roble Y Algarrobo claims. Whether there was any follow up to the report and resource estimation by the Chilean Nuclear Energy Commission and/or Swingplane Ventures is not known.
The valuation of a development stage mining company is challenging and often adjusts quickly to new information. Managements of mineral production and exploration companies create value through evaluating, acquiring, exploring and/or developing mining properties. As a development stage company, it is not possible to value Swingplane Ventures on an earnings or cash flow basis due to the lack the data needed for these traditional techniques of valuation analysis. Since the company is in the pre-financing phase, book value would neither adequately reflect the company's ability to attract financing nor capture the value of the company’s resource base. Though book value can often represent the value of an early-stage junior exploration company, the Swingplane Ventures has not advanced to a milestone point in the exploration phase that the resources have been estimated to a degree of certainty to allow the utilization of a NI 43-101-compliant resource-based valuation model.
The prospects for discovery of additional high-grade copper veins on the tenures controlled by the option held by Swingplane Ventures are promising. Recent production from Roble 2A in 2009 at 2010 and the driving of three drifts on the newly discovered Veta Gruesa vein on Roble 5B strongly suggest the continuation of high-grade copper veining in several of the Roble tenures. In addition, the discovery of other veins (Manto Ossa and Descubridora), along with several subordinate veins, advocate for the existence of other significant veins parallel to the three Main Veins and networks of secondary veins in the Roble tenures. The potential of the Angela tenures is more elusive since it is based on limited rock sampling and conjecture that the prolific NE-SW trending veining of high-grade copper continues to the southwest at a lower elevation beneath the sand dunes of the Atacama Desert.
A report by Gunter Stromberger dated July 13, 2000 speculates that 5,000,000 to 10,000,000 tons of economic grade copper and gold mineralization has yet to be discovered. The conjecture is based on the fact that only five of the 20 veins have been exploited in the past and that the width of the veins increase at depth, specifically the width of several veins doubled at a depth of 20-to-40 meters and increased up to 200% at deeper levels. Mr. Stromberger’s estimate is based on the 187 samples of the hand-grab sampling program conducted by American Canyon Mining in 1998. Mr. Stromberger's guesstimation is not NI 43-101-compliant. However, utilizing a attributable resource-based NAV valuation model that incorporates the company’s negative working capital, $20 million in required exploration/development expenditures, the current copper price of $3.75 and the assumption that production will commence next year and continue for nine years, the 5,000,000 to 10,000,000 ton ore estimate (assuming an average grade of 3.0% Cu) leads to a target from $0.46 to $0.92 per share, respectively.
The stocks of junior gold companies have a unique trading profile. The stocks tend to mark time, trading sideways-to-down, during incubation phases. Then, some event occurs, such as the announcement of a significant discovery from an exploratory program, a change in the macroeconomic demand for the company's commodity, the completion of significant financial funding, the announcement of a takeover in the industry, etc. The news of the development stimulates upside price movement in a mark-up phase as the new information is discounted by first-movers. Generally, the price appreciation continues, albeit at a slower pace, usually on heavy volume until the newly created demand instigated by the announcement is fulfilled. After the initial rally, another period of time of sideways-to-down action occurs. Often the stock retraces some, or sometimes all, of the prior price-appreciation during this digestion phase. If and when a subsequent important positive event is announced, another mark-up phase is set in motion.
The Swingplane Ventures currently is the topic of considerable news flow from the company (12 news releases in the last three weeks plus the filing its latest 10-Q last week) and by penny stock promoters. Also, with copper prices having risen steadily since November 2012 from $3.45 to over $3.70 per pound, investors and the media are focusing more on ferreting out opportunities in the copper industry. Furthermore, Canada’s First Quantum Minerals Ltd. (FM: TSE) is currently making a hostile offer for Inmet Mining Corp. (IMN: TSE), which is developing a $6 billion copper project in Panamá. All these events are contributing to the stock’s recent rally.
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