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7/23/2019 Amarillo Gold – Developing Brazil’s Next Gold Mine - Junior Stock Review

www.juniorstockreview.com/2019/07/19/amarillo-gold-developing-brazils-next-gold-mine/ 1/20

Amarillo Gold – Developing Brazil’s Next Gold Mine

I’m constantly searching the junior resource sector for companies whose share price istrading for less than their value. In January of this year, I became an investor in AmarilloGold, a junior company which I believe is trading for far less than their value.

A couple of weeks ago, I had the chance to travel to Brazil and see Amarillo’s flagship MaraRosa Project, which is located in the northwest portion of the State of Goias.

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Rafael Silveira, Myself, Frank Baker

The site visit was highly beneficial because it confirmed for me why I’m invested inAmarillo and why I believe it will be Brazil’s next gold mine. My reasons are as follows:

The Amarillo management team is well suited to moving Mara Rosa to and through construction,as their pedigree reveals a history of developing projects in Brazil. From the CEO to the teamlocated in Brazil, each member has been in the mining industry a long time and has a speci�c skillset which is applicable to the development of Mara Rosa.The Mara Rosa Project is advanced with an updated Pre-Feasbility Study (PFS) completed in thefall of 2018. The PFS revealed an after-tax NPV@5% of $US 244.3 million at $US 1300/oz gold, whichmeans, at the time of writing, with a MCAP of less than $30 million CAD, the company is currentlytrading at less than 10% of its PFS after-tax value.Expansion of the resource – There is a realistic probability of expansion of the Posse Depositresource at depth and to the northeast. Examining soil sampling, geophysics and historicaldrilling, the northeast portion of the property looks particularly interesting to me, given its size.Drilling isn’t a priority at the moment for the company, but could spell more upside potential inthe future.While a controversial �gure, Jair Bolsonaro will bring about a positive economic change to Brazil.This is already evident with the pension reform bill which is moving through the Braziliangovernment’s approval process, as I write. Ultimately, I believe Amarillo’s current price to valueproposition is well worth the risk.The town of Mara Rosa and its people, from what I could tell, view the construction of the minepositively and look forward to the jobs that it will bring. There are many active and former minesin the northern region of the State of Goias, making it a great spot for development.

https://www.amarillogold.com/W0p23B/wp-content/uploads/2018/10/1a-ARO001_Posse-Gold-Project-NI-43-101-Technical-Report_Rev2-FINAL.pdf



Takeover Candidate – while I believe Amarillo is currently a takeover candidate, I believe that uponthe completion of the De�nitive Feasibility Study (DFS) it becomes much more appealing to senioror mid-tier mining companies, as the DFS will bring more con�dence and validation to theeconomics of the project.

Amarillo isn’t without risk; I believe there is at least one hurdle which the company mustovercome in order to be fairly valued by the market. That hurdle is the metallurgy of thePosse Deposit, which has been a major focus for the company since they purchased thedeposit from Western Mining in 2003.

While the mineralization is complex, I believe the company is on track for proving up andoptimizing the metallurgical process that is needed to economically extract the gold fromthe Posse deposit ore.

In my opinion, Amarillo Gold is trading for less than its value. I was a buyer at 20 cents andbelieve a re-rating in the share price is just around the corner.

Without further ado, a look at why I am a buyer of Amarillo Gold.

Enjoy!

Amarillo GoldMCAP – $28.8 million (at the time of writing)

Shares – 140.8 million

FD – 185.6 million

Cash – $3.0 million (as of June 30, 2019)

Insider Ownership – 10%

Institutional Ownership – 60%

Bolsonaro’s A�ect on BrazilIn the fall of 2018, I wrote an article on Brazil and why I’m optimistic about its future. Mythesis was primarily based on, at the time, presidential candidate Jair Bolsonaro winningthe election and taking control of the country.

For those who are unaware, Bolsonaro was victorious and is now the President of Brazil.

http://www.juniorstockreview.com/2018/10/22/look-brazils-mining-investment-attractiveness/



So now, roughly 9 months later and with the basis of my thesis fulfilled, what do I thinkabout Brazil and its future, now having spent close to a week there? Am I still optimistic?

Determining the answer to this question has been much harder than I would have guessedprior to my trip. I believe Bolsonaro will have a positive effect on Brazil’s economy, becausehe is seemingly dedicated to minimizing the amount of corruption in the government and toappointing leadership within it based on merit, not to fulfill a favour or bribe. This willhave very positive effects.

During my trip, I actively engaged as many Brazilians (who spoke English) as I could tolearn about their views of Brazil, mainly where it is as a country and where it’s headedunder the leadership of Bolsonaro.

Interestingly, much like Trump in America, Bolsonaro has a polarizing affect on people;they either love him or they hate him. Even some of the Brazilians who said they voted forhim, hate him. I found this particularly interesting and wanted to know why.

Most often, I was told that there wasn’t anyone else to vote for and, bottom line,government corruption has to be reduced for Brazil to be successful.

Of the younger generation, let’s say under 30, I met only one person who thought thatBolsonaro was good for the country. The rest hated him and said that he is going to destroyit as he takes away some of the services and “privileges” that many of the Brazilian peoplehave come to rely upon.

Further, the same younger generation yearns for former President and now convictedcriminal, Lula Da Silva, who is currently in jail for his involvement (while President) withOperation Car Wash. In my opinion, this is truly bizarre, but goes to show you that peopleonly see what they want to see.

There is much more to this discussion, but I will leave it here because it’s out of the prevueof this article. My conclusion on Brazil is this; I believe Bolsonaro will have a positive effecteconomically on Brazil, which, ultimately, should make it a more desirable place to dobusiness during his reign.

What I have seen, however, only strengthens my thought that it takes multiple generationsor hundreds of years to change a culture and, therefore, while Bolsonaro will have animpact during his term, it will be minimal and short lived, as I do expect to see a return to aleft-leaning government in the future.

With this said, in my opinion, investing within a “risky” jurisdiction is always a matter of arisk adjusted price to value comparison. Meaning, am I getting enough upside potential towarrant investment?

https://www.bloomberg.com/news/articles/2017-07-12/brazil-s-lula-sentenced-to-prison-on-corruption-charges



Additionally, remember that there is risk in every jurisdiction, even the ones that arewidely thought to be tier 1 locations for mining investment. I will quote Rick Rule, CEO ofSprott U.S. Holdings, who recently said to me,

“Mostly the controllable aspect of political risk is price and probability…I would argue withyou right now that the People’s Republic of British Columbia, which is regarded as a superbplace for politics, is extraordinarily risky. The BC provincial legislature is a joint venturebetween the Socialists and the Greens. Not exactly mining’s best friend… Yes, Brazil has along standing history of formal corruption. I would ask you what the difference between acampaign contribution and a bribe is.” ~

Therefore, with regards to Amarillo Gold, in my opinion, there’s enough upside potential towarrant investment in the company, as it’s currently trading at less than 10% of its updatedPFS after-tax NPV of $US 244.3 million.

Amarillo’s LeadershipAmarillo is led by CEO, Mike Mutchler, who is a mining engineer by trade. Mutchler’sexperience in the sector relates well to the needs of Amarillo, as he is an experienced minebuilder. Most recently, Mutchler was COO of Largo Resources, which built a vanadium minein Brazil.

Although he hasn’t been a CEO, his skill set and education, in my opinion, should be theperfect recipe for what Amarillo needs to be successful in completing their FS on the MaraRosa Project and, most importantly, making it Brazil’s next gold mine.

Next, we have Roland Uloth, who is Amarillo’s Executive Chairman. Uloth has extensiveexperience within the business world, with the last 20 years focused on the mining sector.Notably, Uloth has been a key executive with both River Gold Mines and Wesdome.

Additionally, I think it should be noted that Uloth has been a major buyer of Amarillo stockon the open market, as the SEDI insider buying report is littered with his purchases.According to SEDI, Uloth currently owns over 6 million shares, excluding warrants.

Finally, and arguably the most important member of the Amarillo team at this juncture, isArao Portugal, who was just officially named Amarillo’s Country Manager. Country Managerisn’t a common position within a junior mining company, but makes complete sense in thiscase.

Portugal brings a unique set of skills and experience to Amarillo, which I believe are vital tothe overall success of the company as they look to attain their final 2 permits – theInstallation License (IL) and the Operation License (OL).

https://www.amarillogold.com/news/amarillo-appoints-arao-portugal-as-country-manager-for-brazilian-subsidiaries/



There are a few more important players on the Amarillo team: Frank Baker – Metallurgistand Project Manager, Luis Carlos F. Da Silva – Geology Manager, Alexandre Elisel and RafaelSilveira – Geologists.

Mara Rosa ProjectThe Mara Rosa Project encompasses roughly 60,000 ha and sits just a few minutes’ drivefrom the centre of the town of Mara Rosa, which is located in the northern portion of theState of Goias. This region of the State is very familiar with mining, as there are a numberof former and currently operating mines in the region.

Most notably is Lundin’s Chapada copper-gold Mine, AngloGold Ashanti and Kinross’Serra Grande Gold Mine, and Anglo American’s Barro Alto nickel mine, to name just a few.The point is, with these mines being within 100 km, the people of Mara Rosa and thesurrounding area are very familiar with mining and the benefits that come with it.



Amarillo’s Main Office and Core Shack – Located in Mara Rosa

As well, given the amount of mining in this portion of the State, infrastructure is good; inparticular, power is readily accessible with a sub-station within 4 km of the Mara RosaProject. The hydro power in this area is supplied by the 450 MW Serra Mesa Hydro Electricdam.

Pre-Feasibility Study EconomicsIn September of 2018, Amarillo released an updated PFS on Mara Rosa and revealed somevery robust economics.

Contractor Mine Scenario

Gold Price Assumption – $US 1300 per ounce

After-tax Net Present Value (NPV) at a 5% discount – $US 244.3 million

After-tax Internal Rate of Return (IRR) – 50.8%

CAPEX – $US 122.9 million

AISC – $US 655 per ounce

Reserves (Proven and Probable) – 1.087 Moz of gold

https://www.amarillogold.com/W0p23B/wp-content/uploads/2018/10/1a-ARO001_Posse-Gold-Project-NI-43-101-Technical-Report_Rev2-FINAL.pdf



Resources (Measured and Indicated) – 1.3 Moz of gold

Satellite Image of Mara Rosa Project

In my opinion, the Mara Rosa Project has great economics, with good downside riskprotection in terms of the gold price. Robust economics at the PFS stage of development isa really good sign, as there is a higher degree of confidence that the Project can deal withissues that may arise given the rigorous analysis which is yielded by the DFS.

Site Visit – July 2019My trip to Mara Rosa, Brazil from Toronto was very straightforward. I flew overnightfrom Toronto to Sao Paulo, which is approximately a 10.5 hour flight. To note, Sao Paulo’sGuarulhos International Airport has seen some great upgrades since I was last in Brazil in2011. I’m guessing that the 2016 Rio Olympics brought about this overhaul.

Next, I had a short 2 hour flight from Sao Paulo to Brazil’s capital, Brasilia. Interestingly,after doing a 17.5 hour flight from San Francisco to Singapore in April of this year, I foundthese flights to be easy!



Brasilia Airport – Domestic Terminal

From Brasilia, a company representative picked me up at the airport and we headednorthwest to the town of Mara Rosa, which is roughly a 4.5 hour drive. The drive betweenBrasilia and Mara Rosa is pretty good considering the amount of heavy truck traffic thoseroads appear to receive.

R



Rest Stop Along the Road Between Brasilia and Mara Rosa

Along with the multiple 2 lane highways that head north out of Brasilia, there is also arailway which runs right beside the Mara Rosa Project. Rail is a great way to reduce theamount of truck traffic, however, it sounds like this railway isn’t used to its full extent,which is too bad as it would save the roads and, ultimately, make them safer for commuters.

2011 View from Sugar Loaf Mountain – Rio de Janeiro

My previous trip to Brazil was spent in and around Rio de Janeiro, which is much differentthan what I encountered in the capital region. Rio is a very mountainous and lushenvironment, which clearly gets an optimal amount of sun and rain, as it is a veritablejungle surrounding you as you drive into Rio.



Future Mine Site in the Distance

By comparison, the Federal District of Brasilia and the Northern portion of the State ofGoias is much different. In terms of topography, it is much flatter, drier and open, withfarmers’ fields lining the highways. The region, however, does have a rainy season wherethe rain fall is very heavy, which allows for the endless farmers’ fields and well-establishedjungle-like vegetation.

N



Northeast Corner of the Posse Deposit

NOTE: The area surrounding the town of Mara Rosa is known for its production of turmericspice. While walking the property, one of the geologists pointed out some turmeric bulbslying on the ground. There are fields of these plants, their bulbs are harvested, dried andground into a powder, which is then packaged and sold in grocery stores. Farming is themajor industry in this part of Brazil and is what currently drives (economically) towns suchas Mara Rosa.

Expansion of the Posse DepositAs per the 2018 updated PFS, the Posse deposit has 1,087 koz of proven and probable goldreserves at an average grade of 1.42 g/t. While this is great, more ounces would be evenbetter and, given what I saw onsite and reviewing historical exploration data with thegeological team, there’s reasonable probability that the Posse Deposit could be extended atdepth and to the northeast.



Reviewing some of the past geophysics on the deposit, you can clearly see that theanomaly, of approximately twice the size of the existing deposit, extends out to thenortheast. The focus of previous drilling campaigns has been on the main deposit, however,there is historical drilling data on a few holes that have been drilled along the northeastextension.



As you can see in the image above, there hasn’t been much step out drilling, but what hasbeen done has returned some decent hits. I believe it will be well worth the time and moneyto see if it’s something of significance.

One other note, while an extension to the northeast of Posse would be great, under thecurrent Preliminary License (LP), the seasonal creek that cuts perpendicularly across thestrike of the northeast extension would prevent Amarillo from expanding their current pitto include the new discovery.

However, the company does have the option to apply for modifications to their existing LP,which, if they choose to, could include the temporary re-routing of the creek so that thisnortheast area is available for mining.



Seasonal Creek in the northeast of the property

Tailings DamThe tragic failure of Vale’s tailings dam in the neighbouring State of Minas Gervaisresulted in the death of 300 people. Talking to many mining engineers, the design of thedam that failed has long been known to have some major weaknesses and, thus, in my mind,was preventable.

Moving forward, similarly designed tailings dams can be upgraded to prevent this fromoccurring again in the future. It sounds like the Brazilian government, however, is going astep further and will announce the banning of all tailings dams in future construction,regardless of the design.

In my opinion, this is a knee-jerk reaction to an issue which is solved through properengineering and, most of all, the diligence of the companies that operate these mines andtailings facilities. Banning the construction of this integral part of a mine is crazy.

In saying this, there are alternatives to the traditional tailings facilities and, with this inmind, Amarillo’s leadership has decided to proactively pursue one of these alternativesgiven the potential direction of the Brazilian Government.

https://www.cbc.ca/news/world/brazil-vale-tailings-dam-collapse-1.4993711



Reviewing the location of Tailings Mat Storage

So how does this new approach affect Amarillo’s mine plan and economics? That’s a greatquestion. First off, the company is pursuing a horizontal filtration technology which isproven to reduce the moisture content of the tailings. The end product of the process yieldswhat the company reps were describing as tailings mats.

These tailings mats are still required to be stored in a lined storage facility, meaning thebasis of construction for the original tailings dam will still be used to dry stack the mats.The company reps tell me that this change in process shouldn’t cause any issue with theiralready issued preliminary license (LP).

In all, the cost for the filtration system is roughly $US 10 million in CAPEX dollars and isestimated to require another $US 1 per tonne in operating cost per year over the course ofthe life of the mine. I haven’t added this new cost to my discounted cash flow model yet, butgiven the economics of the project, I’m guessing this won’t be a huge issue.

Archeology TestingStandard practice in Brazil is to conduct archeological studies on the properties that aremoving toward construction. This process requires a certain amount of area on a propertyto be studied for historical significance.

During my visit, a team of archeologists was on site performing the study. For someone whofinds these studies really interesting, it was great to have the opportunity to see part of theprocess in person.



At the dig site I visited, they had just discovered some remnants of bowls and an areawhich had been used for fires at some point. In the image below, to the right of the tealpan, the bowl artifacts have been outlined in small white pins. These artifacts will beremoved from site and stored in a museum.

While the archeological study is not over, it is expected to have minimal to no impact onthe Mara Rosa Project construction plans, which is good to hear.



MetallurgyAs I mentioned in my intro, the metallurgy of the Posse Deposit is most likely the largesthurdle to the success of Amarillo moving forward. I am, however, personally veryencouraged by what I see in the testing the company has performed to date, and believethat the metallurgical testing performed for the FS will turn the tide, in terms of how themarket views the risk associated with the economic extraction of the gold.

There’s much to cover with regards to the metallurgical processing of the Posse Depositmineralization, so I’m going to cover this in a separate Part 2 of this article.

Concluding RemarksCurrently, Amarillo Gold is selling at a fraction of its updated PFS NPV, which, I believe,gives an investor plenty of upside potential given the risk associated with the company. Amarillo’s focus is completion of their DFS, which will pave the way for the remainingpermits and, ultimately, the construction of Brazil’s next gold mine.

Stay tuned for Part 2 of my Amarillo Gold Site Visit article, where I will cover the PosseDeposit’s metallurgy and why I believe the company is on the right track to put this riskbehind them.

Don’t want to miss a new investment idea, interview or financial product review? Becomea Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. Iam not a certified investment professional, nor do I know you and your individualinvestment needs. Please perform your own due diligence to decide whether this is acompany and sector that is best suited for your personal investment criteria. Currently, Ido own Amarillo Gold Corporation stock.

All Amarillo Gold Corporation analytics were taken from their website and press release.Junior Stock Review has NO business relationship with Amarillo Gold Corporation. Amarillo Go

July 19, 2019


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i’ · and project manager, luis carlos f. da silva – geology manager, alexandre elisel and...

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