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Conversation with THX

  1. kmickel

    1,815 Posts.
    I have had a conversation with Tony and we went over a number of items. My apologies for taking so long to post; but there was a fair bit to compile. I think the biggest item is that management are just as surprised as LTH as to why the SP is down. It may be just a sign of the general exploration market or... Despite the confusion, the governance THX employs remains such that expectations that the company publishes remain reasonable and realistic. In otherwords, they do not pad ANN with unsubstantiated or biased spin or claims. It comforting to hear the company re-iterate this.

    We conversed about drilling. Tony has made it clear THX as an exploration company is financially positioned extremely well re it’s cash reserves. However they are mindful that indiscriminate drilling, even on a grid, will not find an orebody (except by total luck) and will quickly use up the cash reserves. This will likely push the share price down to the levels of so many other explorers out there who have nothing to drill and no cash to drill it with. It was comforting to learn management are determined not to let THX fall into that category.

    Tony shared his thoughts re blanket drilling. Taking a scenario of 50m x 50m grid drilling with RC at 15cm holes only covers 0.00076% of the total tenement area so there ‘must’ be rigorous geological and technical control on where the holes are actually collared. If you did the same exercise on 9 RC holes at 50m spacing to cover 100m x 100m the percentage cover comes out at 0.0016%. Either way, indiscriminate blanket drilling, even on a grid, WON’T find an orebody (except by total luck). The geologist and management are not supporting blanket drilling due to the high cost and the high percentage for miss.

    He went on further to say that if THX had a high degree of geological confidence in where that at depth target might be, then they would not hesitate to drill it; however as present the confidence is not there. He expressed concern over what the market reaction would be if the company drilled a deep hole (probably in the order of $150-300,000 worth all up) if it didn’t come up with a big intersection of massive sulphides. Let’s assume it identified some minor intersections of copper mineralisation and had some geophysical anomalies along it. THX could call it a “technical success, adding to the understanding of the geological controls” - Tony said his concern would be about what the market would do and what would it mean to the SP. Which is why there needs to be a very clear deep target before you spend the big money drilling deep holes.

    He presented the following scenario. Say, RB is 2,000m x 1,000m. Say a “successful” (ie economic) orebody(ies) existed on the tenement. Roughly circular vents with massive to semi-massive copper sulphides and of about 30m average diameter. Say now you put down 50m x 50m grid over the whole tenement. That would give a total number of holes of 21 x 41 = 861 holes. Say, totally hypothetically, that these “orebodies” were starting at 300m depth (DeGrussa’s pods are both shallower and deeper, but I’ve picked a random depth purely for the exercise). So 861 holes, each averaging 350m (need to be deeper than the estimated top of the targets) and total, all-up cost for RC of say $150/m. That cost is the cost to the company of when you add in personnel time, core trays, chip trays, fuel, drilling consumables (mud, drill bits, etc etc etc), food, admin, assaying, geophysics, and so on. Drilling costs are not just the rate per metre quoted by a drilling company. That’s the tip of the iceberg in terms of total cost to company. And as such, even for RC drilling, that $150/m will be below actual. Doesn’t matter though: 861 holes at 350m per hole and $150/m comes to a bare minimum ~$45 million to grid drill a tenement looking for targets that could easily fit in between the grid of holes. And there could be more than one of these sorts of pipes sitting neatly between the holes drilled in the grid. And this massive program could potentially miss the lot.

    Sure one of the 861 holes might jag one of the targets – or clip the edge of one – but I think it is quite clearly not the efficient or effective way to go. As previously mentioned, THX management do not want to use up the company finances - ie shareholders’ money - on a scattergun, unplanned approach. Looking at the numbers, this is why:

    An average RC drillhole is 15cm in diameter. Drill two holes 50m apart and you’ve tested 30cm of 50m. That’s 30/5000 = 0.6% in a straight line. Look at our 2km x 1km Red Bore prospect and 861 holes of 15cm diameter would test (861 x π x 7.52) = 152,000 cm2. The tenement is 2,000m x 1,000m and 1 sq m is 100x100 = 10,000cm2. So total area of Red Bore is 10,000 x 2,000 x 1,000 = 20,000,000,000 cm2 and our $45M drill program of 861 holes has just tested 152,000 / 20,000,000,000 = 0.00076% of the total project area. Not exactly a high percentage if you want effective coverage, showing why it is so very important that you have valid geological targets to test if you want to improve the probability of drill success. When you look at those sorts of stats, it’s not really a surprise that the majority of drill programs across the sector come up with nothing of material interest. You NEED good geological control and understanding. And randomly located deep holes just do not cut it.

    I agree with Tony when he said Costica has had an extremely good hit rate in terms of the successes. Considering the numbers Tony provided in the scenario, it makes it even more clear what a very good job he is doing in interpreting and unravelling the unquestionably complex geology.

    Exploration is not straightforward. Red Bore is geologically challenging and Tony is immensely impressed with what Costica has come up with so far. His predecessors drilled 57 RC holes, mostly in a 20m x 20m grid, and 5 diamond over the RB gossan and sure came up with some mineralised intervals that formed the basis of the 2012 JORC resource. But they weren’t able to put up a robust model that explained the geology. Costica has since gone a long way towards doing that and is the reason for the successes that we have enjoyed.

    I appreciated Tony’s views and contributions as it supported my views the company has embraced a feasible and technically logical exploration strategy.

    I said; I would ask the company about the following three questions 1) Diamond drilling 2) “Tectonic Modelling”, and 3) Depth Range for Feasible Discovery . Tony has responded to them.

    • Diamond drilling. Up to twice the cost of RC and takes 2 to 3 times as long to drill (longer on deep holes as you have to keep pulling all the rods out to get the core out and then put the rods back down the hole). Also significantly longer to sample (have to cut the core) and so longer to get assays back. Does provide significantly greater information because you can really examine solid rock and not just rock chips. Only makes sense if you need to examine the structures and rock textures in greater detail. At present we know what we are looking for – the magnetite/chalcopyrite mix in these “pipes” / vents – and so just locating them and following them is more cost effective with RC. If we are successful in identifying new ones at Impaler and/or at Gossan then I would imagine that Costica probably would want to get additional info via DD follow-up. At present, the best use of shareholder funds is with RC.
    • “Tectonic Modelling”: I’m not sure exactly what is meant by this . Tectonism is a bucket term for the faulting, folding, shearing, remobilisation and general mashing up of the rocks that results over time from the earth’s crustal movements – plate tectonics. Trying to unravel what’s been going on is ultimately still the domain of grey matter. Gather all the available information – geology, petrology (rock types), geophysics, geochemistry, structural analysis, etc etc – and try to come up with a scenario (model) that explains what was originally there, what has happened over time, where things are now, and thus where you might predict the target material to be. I am not aware of any one-stop shop or software that might be captured by what you term “tectonic modelling”.
    • Depth Range for Feasible Discovery. No easy answer as it all comes down to economics. Kidd Creek in Canada is the world’s deepest operating base metal mine. It’s deepest shaft development is currently at 9,900 ft which is just over 3 kilometres vertically. It started as an open cut with a relatively small at-surface expression. It is VMS. So basically there is no single answer to the question of what is a “feasible” depth. If you find a massive high-grade orebody in the middle of nowhere under 500m of cover, then you have to spend the money to build the infrastructure to get to the location, put in power, water facilities, processing plant, accommodation, etc etc. You also have to spend all the money to build a decline or shaft or whatever to get down to the orebody before you can start mining, processing and selling it. However, if you have valuable near-surface patchy mineralisation, perhaps in a series of pipes grading 6%-28% Cu, and you can show that these coalesce at depth (perhaps at 150m, perhaps at 350m, perhaps somewhere in between), and you are close to an operation that already mines and treats material of similar mineralogical composition, then the depth at which an “orebody” becomes feasible could vary considerably. Basically, if the prize at the bottom of the exploration endeavours was of sufficient tonnage and grade, and there was intermittent mineralisation of good grade (albeit not of sufficient tonnage to constitute a commercially mineable body in its own right), then the economics of mining that intermittent mineralisation and processing it through a nearby plant to contribute cashflow as you developed a shaft, or decline, or whatever, on the way down to the main deep orebody, then those economics would be considerably more favourable than the first scenario I described – 500m of barren cover.

      Tony is comfortable that if THX continues exploring the way it’s done to date, and if the models continue to hold true and we can discover more of these “pipes” and track them deeper, then our first hope is that, at some stage, two or more of them will coalesce to form a bigger, thicker body that will be easier to follow deeper because it should in theory be larger, and then the next hope is that at some subsequent stage we find the source of all the near-surface chalcopyrite and that it proves to be a body of size and grade, or a body of huge tonnage and lower grade! The depth? 700m ± 500m vertical is as good a guess as any. Whether or not it proved to be “feasible” would depend on the grade and tonnage and actual depth and whether or not we’d found consistent mineralisation in the pipes / vents that we’d followed to lead us there.
    In the end Tony re-iterated that patience is the name of the game. The mineralisation, if present, is not going anywhere. Tony said "We just have to patiently work our way through this complex geology". He also re-iterated that "it is exploration and it is speculative".

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