Sun Metals Corp. V.SUNM

Malcolm

[Nickphil]

https://hydracapital.ca/hydra-blog/shedding-a-little-more-light-on-sunm

By: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long SUNM.V)

Over the past few days, I've had time to do a little more reading/thinking/dreaming and have floated the Sun Metals (SUNM.V, last at $0.27) story by some close, and relatively hardened, fellow mining investors. After those channel checks, consensus seems to be that the new, thick, high-grade intersection at Stardust opens up a new chapter for an old project. I didn't discuss it in my first note, but hole 421 is the first and only hole drilled through a previously unknown fault at Stardust that puts SUNM into "new territory" in terms of the two-kilometre-long mineralized system that has been followed back to this point. 

SUNM is into something totally new in terms of grade-thickness in hole 421 and the observed textures and mineralogy suggest that the hole is still on the periphery of the "guts" (source) of the system. Having only one hole into it, true thickness is obviously unknown, but the odds of threading a 550-metre deep hole right down the throat of a narrow lens at depth after crossing a fault seems pretty low to me. Hey, maybe I'm just an optimist, or maybe Peter Megaw's "may be a game changer" statement is accurate. I guess we'll see. You need the "may be" in there because it's only one hole so far, but the "game changer" part can't be denied... especially when you see an intercept like the 36.5m of 7.8% CuEq from a partial assay report in a hole that exhibits textures and characteristics which indicate that you're still not in the heart of the system. Skarns can have irregular shapes, but can also be incredibly rich, which means you don't need a lot of tonnage to make a deposit worth mining. Starting by offsetting hole 421 and following the mineralization from there should be a nice way to start the next drilling program.

Access at Stardust is excellent, which means that drilling costs are coming in at or below $200/metre and apparently, if I had a Cadillac, I'm told I could drive it all the way to site. Camp costs were modest this year as a fishing/hunting lodge in the area served as a "camp" in a win-win for the company and the lodge. I like seeing good value for drilling dollars, so this was nice to hear.

Even though SUNM had to retract its statements regarding the $/tonne value of the 36.5 metre interval reported in hole 421, that doesn't stop me from being able to use them to compare different projects on a rock-value-equivalent basis. To do that though, I need some comparably a) "intriguing" (i.e., can catch the imagination of the market and industry players) and, b) compelling projects (from a technical standpoint). People reading this might be familiar with some recent exploration stories that may fit those criteria, like Westhaven Ventures (WHN.V), White Gold (WGO.V), and GT Gold (GTT.V) to name a few. Of those three, I would say that WHN and WGO are about one step ahead of SUNM in terms of having a "few" big hits into new and compelling targets and both are lightly followed. Technically, I think the market current looks at SUNM as having one "hit" and that's hole 421. Whether or not that characterization is fair to the many other hits in shallower Stardust holes isn't for me to say, but I can certainly say that hole 421 is the one that's driving the story right now.

So, how does SUNM's hole 421 stack up so far to something like WHN or WGO so far? To answer that, I think I have to move from copper equivalent to gold equivalent, because WGO and WHN are gold companies drilling gold deposits (there's nothing in B.C. copper exploration land that I'm aware of that can come close to touching 36.5m of 7.8% copper equivalent). Remember that published (and then retracted) rock value of USD$481/tonne? If I use that rock value to covert to gold equivalent (using USD$1220/oz Au), it comes out to about 36.5 metres of 12 g/t AuEq, so far, in hole 421. Hmmmm... What does WGO have in their best hole? About 24 metres of 25 g/t AuEq if my math is right (using US$15/oz silver). What about WHN? 18m of 25 g/t AuEq and 46m of 9.5 g/t Au eq (also using US$15/oz silver). It's easier if you calculate grade thicknesses to compare these holes. I'm ignoring recovery factors in this comparison, but I'll leave it to someone with a sharper pencil that me to figure out how many dollars per tonne that might shave off. I'm also not adjusting for true-thicknesses, as it would be impossible at this stage to do so for hole 421. All in all, I think my approach is fine for a finger-in-the-air method while I try to make some initial comparisons:

SUNM best grade*thickness: 438 (partial assays, Hole 421)
WGO best grade*thickness:  600 (JPRVERRAB18-014)
WHN best grade*thickness:  437 (SN18-15) and 450 (SN18-14)

So, a partially reported hole from SUNM already does a pretty good job of holding its own with two pretty solid-looking exploration stories; exploration stories that have $85 million (WHN) and $140 million (WGO) market caps.  What's SUNM's market cap today? Ummmm, about $20 million... for 100% of the project. Given that the project interest is being earned by SUNM via an arrangement with Lorraine Copper, who gets a 30% stake in SUNM if all goes as planned, the total EV of the project is only about $30 million right now. That is not a complaint... it'sexactly what I want to see, because it shows me how undervalued SUNM relative is to stories that are just a little bit more advanced. Give me one or two more hot holes through that fault that tag into more hole-421-like rock and it's going to be re-rate city because one hole is a "hit", two holes is a deposit starting to take shape; with a pretty solid exploration model and a top-drawer management/technical team wrapped around it.

If you can show me one or two more holes into this new zone after drilling resumes, I think I can show you SUNM trading closer to $1.00-1.25. That's 300-400% higher... for a start. Pick your own dream target. And what do I need to exercise? What magic ability must I wield? Maybe a little patience. I need the patience to wait for the next set(s) of assays, the patience to wait through quiet periods, and the patience to literally let the company do the work for which it has been created; exploring Stardust. I need the patience not to panic when the Dow Jones is down 500-1000 points in a day and I need the patience to know that no stock goes straight up. I need the patience to ride out the hits and misses along the way as long as there's a deposit taking shape. If the mining sector actually catches bid in the interim, all the better, but when you start pulling 50 metres of what looks like pure metal out of the ground, it doesn't matter much what kind of market you're in... people pay attention. As they say, grade is king. My only concern here would maybe be an all out market meltdown while I wait, but even those come and go, and the metal in the ground at Stardust isn't going anywhere in the meantime... I just hope there's a lot more of it down there.

Fortunately, I won't need to exercise much of that patience just yet. Assays from the second massive sulphide zone in hole 421 can't be far off, and I'd be willing to be that SUNM's hole 421 will be right up there with the best exploration hits of the year once the pending assays from the lower zone are added to the 36 metres of mineralized interval that's already been reported. There are also results pending from a number of other exploration and expansion holes on the property that should ensure news flow well into November, if not December. Getting back to appraising the 421 discovery zone will have to wait until spring, but that should give management time to do some marketing, tell the story, show some core, and plan the next drill program.

SUNM is a virtually unknown story aside from a fairly small and bloodhound-like group of people like me, so it has a long way to go in terms of market profile and formal research coverage. Some 16 million shares of SUNM have churned in the 23-25c range (god bless you warrant-clippers out there) and my guess is that SUNM settles into a range higher than this one for its winter break as words gets around, followed by some speculative interest going into the next drill program in the spring. After that, it'll be up to the drills. Given the team's reputation and capital markets expertise, I don't expect money to be a problem with what SUNM already has in hand in terms of results. The company probably still has around $3 million in the bank right now, so management can be selective about where and when they tap the market next for the next round of funding, be it before or after the next holes are drilled at Stardust. (Note: If the stock trades above 70c for 15 days any time from here on out, the company can force the conversion of the 35 cent warrants, which would bring in nearly $9 million of cash. A lot those warrant holders have probably already sold their stock given the volume that's been churning lately, so they are less likely to represent a significant overhang on the stock going forward.)

As always, limiting exposure and entry price on high-risk, early-stage, speculative junior mining stocks is always prudent, but with the right entry price, it doesn't take a large position to move the needle if things work out. Time will tell.

Now, while we wait, how about some vintage Bowie doing Ziggy Stardust...?