Short delay is a "storm in a Chalice" that shouldn't deter true believers

Plus, the disconnect between Sunstone’s $100 million market cap and its case for why it could be on its way to producing 10 million ounces.

Messing with guidance on dollars and dates and any ASX company sets itself up for some punishment. But wily types with Messi-type footwork can turn the punishment to their advantage by buying when others are selling.

That was played out during the week in Chalice Mining (ASX: CHN) when it announced it would be delaying the release of its scoping study into the development of its world-class Julimar nickel-copper-PGE project on Perth’s doorstep.

Disappointment with the delay prompted an 8% one-day sell-off in the stock. But those that focussed on the patently good reasons for the delay assumed there would be a bounce back in the following days.

They were right, and they pocketed a 6% one-day turn in the stock. Nice work in a market that is not exactly in the mood to be handing out such gains, albeit with Chalice still trading shy of its level before the delay announcement.

Chalice only made the Julimar discovery in early 2020. Given it is a rare polymetallic find, it requires deep thinking on processing and flowsheet options. It is stuff that should not be rushed when dealing with multi-decade projects.

As it is, recent metallurgical test work focussing on flotation tails leaching and staged grinding has pointed to the potential to “materially enhance overall metallurgical recoveries from the deposit”. Chalice MD Alex Dorsch said that was “very much good news”.

To fully evaluate all potential project sweeteners, including taking into account the impact of an updated resource estimate due late in the March quarter on scale/mining options for the development, there was a clear need for the scoping study to be extended/delayed.

“It is not the type of mega project you rush,” Dorsch said. He also said that it was worth reminding everyone that Julimar is a discovery that is “still in the process of being discovered”.

He has a point. While there are big differences between the two, it is worth noting that the West Musgrave nickel-copper project now owned by BHP (ASX: BHP) takeover target Oz Minerals (ASX: OZL) was discovered 23 years ago and is still not in production.

Julimar’s magic mix of metals and its easy access to infrastructure mean it could potentially be in production by about 2028, or eight years after the discovery hole, potentially with the help of a strategic partner.

A delay measured in months not years in the release of its scoping study doesn’t change that eight years discovery-to-mine potential. What the delay means is there is the potential for higher metal recoveries than first thought.

Macquarie’s equities desk (the capital markets arm has raised money previously for Chalice) was not alone in saying it was disappointed by the delay in the release of the scoping study.

“We believed it presented an opportunity to better define the scale and economics of the project and hence provide a de-risking catalyst,” it said. That will happen in the fullness of time.

And as Macquarie noted, the potential for increased recovery rates from its base case on Julimar could have a material impact on its Chalice valuation.

As it is, Macquarie has a $7.50 price target on the stock. That compares with Chalice’s closing price on Thursday of $6.21.

Sunstone Metals

Sunstone Metals (ASX: STM) had the opposite problem to Chalice during the week.

It met previous guidance in a timing sense by delivering a maiden resource estimate for part of its Bramaderos gold-copper porphyry project in southern Ecuador.

It didn’t disappoint either, coming in as it did at a pit-constrained 2.7 million ounces of gold equivalent at the Brama-Alba deposit, part of the broader Bramaderos project area.

It ranks as one of the biggest gold/copper deposits held by an ASX junior and is very much the start of the story as Sunstone has been able to set a compliant exploration target of 3.3-8.6 million ounces of gold equivalent in addition to the maiden resource estimate.

So Sunstone reckons there is good reason to think it is on its way to having a 10 million-ounce gold equivalent project down the road. Then there is what could come from the company’s porphyry /epithermal hunt in northern Ecuador at the El Palmar project.

Sunstone MD and known porphyry finder Malcolm Norris said he was “very, very optimistic about what we have got ahead of this (initial resource estimate)”.

“And this serves as a very good foundation, and we’ve got lots of room to grow,” Norris said.

But the stock was sold off on the release of the maiden resource estimate, falling from 4.6c to 3.5c on the day, and recovering slightly to 3.6c on Thursday. It seems that the very release of the estimate was enough for day-trader types to sell into rather than focussing on the resource itself.

Having said that, there could well have been disquiet in this market about the 0.53 g/t gold equivalent grade of the resource. But the grade is pretty much ballpark for porphyry systems, the major offset being they come with large-scale tonnage.

The grade is not all that different than that at two of Australia’s biggest and most successful mines of any type, the Cadia (Newcrest) and Boddington (Newmont) gold/copper porphyries in NSW and Western Australia respectively.

And unlike most of the big porphyry discoveries of recent times, the Brama-Alba mineralisation starts at the surface. In contrast, the Cascabel discovery in northern Ecuador - in which BHP, Newcrest (ASX: NCM) and now the Chinese have taken positions in - starts at a depth of more than 400 metres.

At Thursday’s close of 3.6c, Sunstone was being valued at $97m. Morgans' veteran mining analyst Chris Brown said that applying a resource metric of $US60 an ounce to the 2.7 million ounce gold equivalent to Brama-Alba (87.5% owned by Sunstone) would generate a number around $200 million.