Capitan Mining (CAPT) - High-Grade Silver with Gold Oxide Kicker

Matthew Gordon had a chance to speak again with Alberto Orozco, CEO and Director for Capitan Mining. Also present in the conversation was one of the larger shareholders of the company, Michael Gentile. The company has had some recent drilling success, particularly with regard to silver. Gentile gave us some savvy views on the precious metals market.  Orozco filled us in on the recent success and the plan forward to build a sizable number of ounces in silver at the company’s Cruz de Plata Project.

Company Overview

Capitan Mining, Inc. is a Canadian gold and silver mining exploration company currently focused on the exploration of the Cruz de Plata Project in Durango, Mexico. The company is led by a group of highly experienced professionals with a proven track record on the exploration, development, and operation of similar mining assets elsewhere in Mexico. 

Gentile on the State of the Market

In April 2021, Capitan received a key strategic investment from Michael Gentile, who also raised his stake in the company to 15.3 percent. His comments on the state of today’s markets proved quite insightful. 

Volatility has returned with a vengeance since the beginning of the year. Looking back to January 1, rate hike expectations along with the higher inflation numbers prevailed in the U.S. Rate hike expectations rose almost on a weekly basis. The Russian War against Ukraine coupled with the rate-hike scenario took the wind out of the market in January and February. 

This news flow dramatically increased the price of commodities, due to supply disruptions, the inflationary nature of war, and other impacts of that conflict. In fact, commodities are trading day-to-day on every headline out of Russia and Ukraine. 

Gentile believes that the Fed is really in a very difficult spot right now. The effect of every $10 increase in the price of oil is basically equal to a 25 basis-point rate increase by the Fed.  Over the last three to four months, there has been a $50 move in the price of oil, equivalent to a 125 basis-point increase. Gentile’s view is that the Fed is likely to be in a very difficult spot, maybe having to raise rates more slowly or choosing to orchestrate a recession, in order to cool things down. 

This overall scenario, according to Gentile, is very bullish for precious metals, because it's likely to be very hard for the Fed to complete its rate hike cycle. Indeed, he said, negative real rates may go even lower from here on the back of that fear. 

He foresees pressure on other commodities as well, although the duration of this, in part, depends on how long Russia is going to be shut out of the markets and how much the supply disruptions are going to continue in the future. That should keep the prices more elevated than normal, but they will be vulnerable to pullbacks as the Eastern European situation develops. 

Gentile believes that the Fed may be engineering a recession if they continue to raise rates into a rapidly escalating inflationary commodity price environment. In such an environment, most of the cyclical commodities like oil and copper will do poorly because people will see demand destruction and therefore those commodities will roll over. Gold, however, will benefit because it is more insulated from that type of risk compared to more cyclical commodities.

Should Investors Stay In Cash?

Gentile admitted that holding cash might be a smart move in the short term. Over the long term, however, the value of paper money will continue to be devalued second-by-second with the continuation of money being printed out. This effect is likely to be exacerbated if the Fed decides to slow down the rate-hike path and let inflation run hotter than expected. Therefore, the longer investors hold cash, the less valuable it's going to be in the future if inflation persists at these or even lower levels. 

Gentile on the Effect of the Current Market On Junior Explorers

At the time of this conversation, the gold price has gotten quite high again, but the value of the junior explorers, as measured by the GDXJ, has lagged. Gentile believes that this is in part due to a lack of belief that the price of gold will sustain at these levels. 

Broad retail participation in gold equities is still low, especially when compared to the technology names and even the general equity market. There is still a lot of room for the retail segment to come into gold. 

Against this backdrop, Gentile sees developments on the M&A front in the gold sector. He believes that investors are going to start seeing that early-stage companies like Capitan Mining will begin to get acquired. His reasoning is that the bigger producers’ currencies and cash flows are hitting all-time highs and they have already done all the big mergers they possibly could do. Now they've got to fill their pipeline to make sure the resources stay flat or grow for the next ten to twenty years. 

He envisions that as soon as a few of those Capitan-like companies start to get taken out, then the whole sector is going to rerate higher. The market could see fifty to one hundred percent premiums in the junior exploration space and these deals would still be wildly accretive for the buyers. 

Gentile on What a Good Investment Looks Like

Finally, Gentile shared with us what an ideal investment in the junior explorer space looks like in his eyes.  He looks for companies in their earliest stages with the lowest valuation possible that, in his view, have all the earmarks of a commercial producing mine in the future. They need to have a great team, the superb assets, the exploration upside, and be located in a top jurisdiction to be a producing asset in the future. That's how one makes twenty to thirty times one’s money in the junior exploration sector. He believes that Capitan is one of these companies. 

He stated that investor’s opportunities are currently right there in the marketplace. According to Gentile, “You sell the fear, you buy the fear, and there's a lot of fear” in the last four or five years in the precious metals sector. That creates incredible opportunities to cherry-pick quality assets. 

Capital Mining: Management and Exploration Expertise

Turning to Orozco, the CEO believes that at Capitan, he has gathered together all the components of a great company. The team is composed of top-notch people, most of whom worked together previously at Argonaut Gold, Pediment Gold, and Linear Gold. During these experiences, the team has had successes in early discovery and development of companies in Mexico. 

Silver Takes Centre Stage

Capitan has recently undergone somewhat of a metamorphosis from a company that was chasing lower-grade bulk gold oxide to one that is full-throttle on hunting for silver ounces. From day one, Capitan recognized the potential for high-grade silver at its project. That was known from previous operators of the project. As examples of these occurrences, one 7 m intercept had close to 1 kg of silver, and another found 0.9 m of over 3 kg of silver. The silver was part of Capitan’s initial evaluation but the company wasn’t ready to drill that earlier. 

Orozco described the change in emphasis, indicating that in 2021 the company was drilling the gold oxide portion of the project. During the course of drilling through part of the gold oxide, the drill bit penetrated a high-grade zone of silver mineralization with the same signature that is seen in the Jesus Maria silver deposit immediately to the north. In essence, the company unintentionally encountered a 350-m step-out of the Jesus Maria silver occurrence. This opened up the silver potential for the property and that's when Capitan decided that silver would take centre stage.

Before moving on with the silver evaluation, a bit of land consolidation was needed. In January 2022, the company entered into a $1 M agreement to buyback, fully paid for after two years, all outstanding royalties at the project. Additionally, other adjacent properties were also locked up. Further land acquisitions are being evaluated.

Initial results on Capitan’s 5000-m silver drilling program, which was focused on the Jesus Maria zone, have already been announced. Ten holes were drilled in late 2021 and assays on the first four of these have revealed high-grade results. Drilling continues today. 

Because of the major change in focus, Capitan has also changed the name of the project from "Peñoles" to "Cruz de Plata." The new name reflects both the scale and high-grade silver potential of the project. The new name also eliminates any confusion that may have arisen with another prominent mining company that shared the same name. 

Capitan Mining: A Silver Company or a Gold Company?

Orozco ensured investors that Capitan loves the gold potential at the project as well as the silver.  Up to mid-2021, it had not yet begun a systematic evaluation of the silver potential. Previous operators drilled 10,000 m into this project, 7,000 of those were in the gold and only 3,000 were in the silver. But now, the company realises that it has a high-grade silver resource on its hands in addition to the gold. 

This Year’s Plan for Pursuing Silver

The 5,000-m drilling program will continue this year. This is not the full drilling program that will be needed to fully evaluate the silver resource. The initial 5,000 m are meant to understand the structural controls of the deposit and show that it has scale. 

So far, Capitan has focused on a specific single vein target of the Jesus Maria zone. It also has been doing additional work including surface evaluation of the drilling and on geologic modelling. At this point in time, the company has four distinct targets just in the resource area alone, five if the San Rafael area where the historical mine is located is also considered. In addition, there are high-grade samples to the north that have not been drilled, which represents an additional brand-new target. 

Gentile added two points to this plan: 

1.   The distance between the silver high-grade silver encountered to date is about 1.5 km. If the company can put holes over a kilometre and a half of strike showing high-grade silver, that's already showing significant scale. The market will be able to connect the dots and see this is a significant silver system, as yet not fully evaluated.

2.   Having numerous ounces of gold oxide, right next door to high-grade silver, lowers the hurdle for economic production. Because of the gold, scale already exists to a certain degree on this project. Now Capitan is adding high-grade silver on top of it, which dramatically increases the project being an economic proposition. 

Budgetary Notes

The 5000-m drilling program, expected to finish in April 2022, is fully funded. Capitan Mining closed the year with $2 M in the bank. 

Expected Outcome After the 5000-m Program Is Completed

Orozco believes that once the results of the current drilling program are completed, assayed, and digested, Capitan will have demonstrated that it has a major high-grade silver system on its hands. It will also have shown that there are additional structures to be drilled in the silver system as well. In addition, it will be relatively clear that this system is only going to get larger with additional drilling. 

Furthermore, Capitan will conduct a resource estimate for the gold oxide part of the project. The company has added 12,000 m of drilled penetrations from the initial 7000 m that were there. The footprint of what Capitan calls the main zone has been expanded. Also, a significant volume of resource has been added at what is now known as the hanging wall zone of the gold oxide deposit as well. Although the gold is at an average concentration of just under 0.5 g, it’s close to the surface and amenable to open-pit mining. 

Orozco summarised the current situation by pointing out that there are other projects that are very similar and have made companies a lot of money. El Castillo, with very similar grade and dimensions, was Argonaut Gold’s first mine, commencing in 2015. It made a lot of cash, especially in the first years, and continues operating today. Open-pit gold oxide deposits are all gone; there's not a single one to be found today.

Getting the Story Out

The story is now quite intriguing to investors and both Gentile and Orozco are excited to continue to get that story out. Gentile believes that the combination of the great team in place, the quality of the asset and the jurisdiction, and the likelihood of the project becoming a commercial producing asset is compelling. He also believes that the financial picture is a strong selling point as well. Capitan has 57M shares and basically zero warrants outstanding. The tight shareholder register, with 10 or 15 high-net-worth holders comprising sixty to sixty-five percent of the company, is also a major value proposition. 

Adding the high-grade silver opportunity to the gold-oxide occurrence has clearly made a step-change for Capitan. Be sure to review Crux’s earlier conversation with Orozco back in July of 2021. 

To find out more, go to the Capitan Mining website