Q: How would you characterize Cerro Caliche and how do you intend to develop the property over the next few years?

KM: Cerro Caliche is situated in the Cucurpe mining district. It is on-strike 9 kilometers northwest of the Mercedes Mine and 16kms south of Agnico Eagle’s Santa Gertrudis project. Like Mercedes and Santa Gertrudis, the Cerro Caliche property contains a low sulfidation epithermal gold deposit. As of May 2020, we have focused on completing an internal assessment to determine the economics and scope of a heap leach pilot operation under varying scenarios. This is something we hope to complete in the near future. We are also planning an additional 50,000 meters of drilling to evaluate the potential to expand the current shallow resource which we announced last summer and which is intended to support our proposed heap leach pilot operation. The drilling is also intended to identify the potential for numerous additional mineralized zones to also host resources. All of these zones of gold mineralization in quartz veining cover an area approximately 3km by 4km, so we have a lot more drilling to do. Until now our drilling has focused on the shallow lower grade bulk mining potential. However, low sulfidation, epithermal deposits often produce much higher gold grades deeper in the system, which is exactly what has occurred at Mercedes. Part of our plan this year is to drill deeper to test this potential.  A key part of our strategy is to build a pilot plant to start generating cash flow in two years. This is intended to finance future drilling and exploration at Cerro Caliche and our nearby project, San Marcial. Our exploration confirms that in total, the 1,400ha property is mineralized throughout all of the areas we have explored to date, representing less than 20 percent of the total surface area. More mineralized zones are being identified as we enter areas of previously unexplored territory. Two previous operators had drilled in Cerro Caliche. After we acquired the property in 2018, we purchased their databases, which enabled us to launch our database with over 13,000m of 43-101 compliant drilling. During 2018 and 2019, we drilled 96 holes to an average length of 105m.  Part of the results of this drilling were used to successfully define a NI 43-101 compliant resource to support our proposed open-pit heap-leach operation.

This initial NI 43-101 resource is mostly contained within the Japoneses zone of the property and it consists of 183,000 gold ounces at 0.495 grams per ton and 1,601,000 silver ounces at 4.3 grams per ton. We are confident that this is sufficient to go into production on a small scale and are proposing a 3,500-ton per day pilot plant, which would be scalable. We also have identified additional mineralization in another 30 percent of the concession, meaning a potential increase in the resource. The next phase of drilling will be aimed at delineating a resource in this additional area, with a focus on high-grade targets.

Over the next two years, we intend to expand the drilling program to potentially enlarge the size of mineralization throughout the property. The strategy is to connect peripheral zones with the central zone and create one large zone.

Q: What are the financial characteristics of Sonoro Metals’ growth strategy?

JD: At the end of 2018, we embarked on the opportunity in Mexico with three financing rounds. They were strategic financings, with a goal of defining a NI 43-101 resource which at minimum could support a heap leach pilot operation.  As is the case with most exploration ventures, financing in the public markets has been rather difficult. Therefore, as an alternative, we decided to pursue constructing a Heap leach Pilot Operation with a limited recourse project financing arrangement with an engineering company. The intention is to avoid diluting our shareholders’ interest. Also, and more importantly, the proposed arrangement is intended to enable us to go into production and produce cash flow. Due to the nature of the resource, we could be producing as early as two years’ from now.

Last year, we were approached by New Tigers Consulting, a Chinese group. New Tigers has been operating since the late 1990s and has done business with approximately 4,600 international companies in China. The founder was a senior official in the Chinese government so he is very plugged in. They looked at our management and the project and identified Sonoro as a company that could secure support from a Chinese EPC company. I think they had already shown it around a bit so they were not guessing. New Tigers then circulated a rough proposal of what we planned to some key relationships and several asked us to come to meet with them in China to discuss how we might proceed. So, last June we visited five EPC companies in China.  Basically, we still had a lot of work to do on our proposal but it was enough to get their interest and once we had completed our geological and engineering reviews, we went back the following October. Their respective technical teams took the information to decide if it was likely to be a viable project that they could do and if so, determine the criteria necessary to design and build a pilot plant.  An essential part of the talks was based on the understanding that any deal would essentially be financed by them. That is, the EPC companies would debt-finance the heap leach operations development and construction and be paid back later from revenues.

Two companies have already sent us Memorandums of Understanding, outlining precisely what they would do in terms of design, permitting and plans. We had subsequent meetings scheduled for February of this year to meet with the other two companies regarding the MOU’s and to plan for the respective EPC companies’ technical teams to visit our project, but then progress stalled with the COVID-19 lockdown. We are now waiting for the Chinese government to both allow foreigners to fly into China and their technical teams to travel to Mexico without having to go through extensive quarantines.  I think the expectation is this will occur by June. Once this happens, we will meet the EPCs with the goal of hammering out detailed agreements while organizing the respective EPC companies’ technical team trips to Cerro Caliche. The pandemic has slowed down the process but we keep hearing from the EPCs who say they are very much on board. New Tigers tells us that because business has essentially halted for them over the past four months, they are very motivated to do projects like ours.

Q: What are the details of your potential agreement with the Chinese EPC companies?

JD: While details are not fully defined yet, we anticipate the EPC companies will produce their own PEA to estimate the capital costs to build the pilot plant. Once we secure the, a conservative estimation for building and operating the plant is 24 months. We anticipate the capital costs will be augmented by additional funds to enable us to continue with the drilling program. We should highlight that we are not only in conversations with EPC companies, but also with Chinese equity investors. We approached them for an equity investment and have received a good reception. Most of the Chinese investors want us to enter into an EPC contract first because they want to make sure we go into production. They want to invest in a business, not in an endless exploration project.

The Chinese EPC companies are substantial. They have designed, built and operated mines globally – including Mexico. One is particularly motivated because they tell us they just completed a project similar to ours in Mongolia. They have a high level of confidence.  I think they have a very long-term view and part of the attraction to Sonoro is to establish a foothold in a mining intensive area like Sonora State while they participate in our potential growth from our proposed pilot production to what we hope will become a considerably larger operation.

KM: We represent a low-risk opportunity for them to enter into the Mexican market - their capital risk is relatively small given their size. Mexico’s political risk is relatively low compared to some of the orbiter areas they operate in, such as Sudan, as are the operating conditions. Really it is up to them to quantify all of the risks and if they have established the project is economic and a good one, one of the larger risks is they build our mine, get paid back out of production and there is no further business because our growth plans do not pan out. They have remarked on the evident quality of our team as the decades of discovering mineral deposits and building mines makes this obvious.

Sonoro is a well-structured company and we intend to grow shareholder value by developing Cerro Caliche and, if and when we have the heap leach operation underway, we will begin exploration at our nearby San Marcial property. Because of management’s decades of expertise in terms of discovering mineral deposits and developing mines, we have what it takes to identify and acquire larger projects. Venturing on this low risk smaller one opens the door to many more possibilities. Using it as a foundation for larger projects is one. Another, relates to some of the neighboring gold mines which are nearly depleted. In the future their operators might be looking to replace the lost production. If that is the case and we successfully expand the Cerro Caliche’s resources as we hope, it would not be unreasonable to expect Sonoro to become a potential takeover target.

Sonoro Metals Corp is a dynamic gold and silver mineral exploration company with a portfolio of exploration-stage properties in Sonora. The company has a highly experienced management mining team made up of business and finance professionals with a successful track record in discovery through resource development.