Azarga Metals CEO Gordon Tainton: Well Positioned to Supply the Asian Market

Thank you, Stuart. Thank you.

Okay. Again, thanks for having me on. Appreciate the opportunity to chat with you today. The company purchased 60% of the Yunko project in March 2016, and at that time it had the right to acquire the remaining 40% for considerations in the future. By late July that year, the company was on site drilling, and by April 2017 the company released its maiden mineral resource estimate. Swinging into March, the company consolidated its position, and in March 2018 it acquired the remaining 40% of the Yunko project. At the same time, Azarga came up with an inferred initial resource, and in August we released the PEA, a preliminary economic assessment. In 2019 and 2020, a second major phase of work at Encor was conducted by Azarga, which consisted of a property-wide magnetic survey as well as further drilling. We drilled 15 diamond holes, which both expanded and better defined the copper-silver mineralization through the western part of the property. In addition, new and more extensive metallurgical test work was completed on both oxide and sulfide from the most recent drilling. Then fast forwarding up to February this year, 2021, we appointed Wardell Armstrong to complete an updated PEA on the property, and earlier this month we were able to release the outcomes to the market.

The key outcomes are the following: The base PEA case proposes an average annual production of 11,700 tons per annum of copper and 2.9 million ounces per annum of silver, both in concentrate, with a mine life of over 14 years. Second highlight, we have a four-year open pit mining opportunity at 2.75 million tons per annum, followed by 10 years of underground mining at 2 million tons per annum. In the early four-year period, we use a cyanide start processing technology to work through the oxide material, and when we move underground, we move to conventional sulfide flotation. On the economic side of the PEA, using consensus pricing of US$3.86 a pound copper and US$25 per ounce silver, we come up with a post-tax net present value of US$205 million and an internal rate of return of 26.7%. What we also applied in the PEA were spot prices, and Wardell Armstrong used May 21st, 2021 spot prices, which were at that time US$4.50 for a pound copper and US$28 an ounce of silver. That pushed our post-tax NPV up to $380 million US, and the IRR correspondingly went up to 44.4%. Next highlight: Our post-tax NPVs on this updated PEA are between 39% to 158% higher than in the previous PEA, the PEA outcomes prepared on Encor in 2018. Substantial improvements include lower production capital – pre-production capital, excuse me – higher average annual output, and a 75% longer mine life. As mentioned above, the PEA also considers an alternative open pit only case, i.e., four years mine life of oxide to mine and process the oxide material. If we use that as a standalone base case, our post-tax NPV comes up to $95 million, and the IRR is 46.3% at consensus prices. If we apply the spot May 21st price, the NPV pushes up to $162 million, and the IRR goes up to 70.1%. Last couple of points on the PEA update is the following: Our inferred mineral resource has actually lowered from the original PEA; it's gone down to 51.1 million metric tons, but the copper and the silver values have gone up to 0.5% copper and 40 grams a ton silver. And the final point on the PEA is only that what we're looking for is to do some further resource additional drill work. And what we intend to do is the following: Based on last year's reconnaissance geochemical program, which confirmed the presence of extensive copper and silver mineralization at Encor East, we firmly believe we've got a highly prospective drilling area. If we can drill it, we intend to in this year. Any additional mineralization defined on the Encor East area would be highly complementary to our mine planning efforts across the core, as expressed in the updated PEA.

I think our optionality on that question is wide open. I do believe that the opportunity to build and operate a mine is there for us. We've got above average infrastructure for such a remote location. There's available grid electricity along with both river and groundwater. Within the company we have the senior management team with solid project experience in mine development and operations. Now, if we went to the build, we'd certainly have to augment and staff up on technical and operational personnel, as our projected annual throughputs are quite large for both the open pit, 2.75 million tons per year, and the underground, which is 2 million tons a year. These are both significant amounts of volume which would require several hundred people to be working there. On the other side of it, if we decide to look at a strategic alliance or a vendor alliance, this could also happen. We could tie ourselves to a major or a mid-sized industrial group. What I can share with you is that the company is currently in discussions with a few interested groups primarily based in the Russian Federation.

Okay. In general, Stuart, it's pretty rigid. The ministries that we work with have their protocols, their guidelines that we must work within and follow. So, for example, we annually must present our work program outcomes, such as meters drilled, trench work, geophysics, to the regional branch office of Rosnedra, which is the Federal Agency for Mineral Resources. Their regional branch in our region is in the city of Chita. We also work directly and in contact with GKZ, which is the Russian State Commission for Reserves Mining Research. We basically get allocated the conditions for exploration under a work program, and then we present our reports to them. This year we'll be presenting probably one or two cut-off grade estimates with the associated economics behind it. The outcome of this should give Azarga a resource approved by GKZ, which will then become a temporary condition. This condition gives Azarga the right to conduct further detailed exploration and, if you like, keep on moving forward on developing the project. It's kind of an ever, an evolutionary process leading up to what we would call in North America or Europe a definitive or a bankable feasibility study. Once we have that, this gives us the right to apply for a mining permit. And working and doing business there, because we're in the Russian Federation and we've got cooperation from the surrounding neighboring countries. Recently in our most recent drill program, we awarded the assay work to a Kazakhstan-based technical institute, and they did all of our assay work, which was really well done, and it came out to complement the PEA outcomes. The last thing that we've got for doing business there is right now the company has a valid exploration permit in place. So basically we can move into the east side of the concession, Encor, and start our drill program later this year.

Yeah, look. We run our administrative and our Russian corporate out of the regional center I mentioned in the previous question. The city is called Chita, it's about a two-hour flight away. Encor is located right next to the small town called Chara and a second small town called Novochara. Novochara is where the BAM line railway station is. So, using that, we have full access to use the rail line down through the bottom part of the region, through the Mongolian and the Chinese border, and then directly into the Chinese northeastern markets, or smelters if you'd like. We could also use the BAM rail line and take it out east and go all the way out to Vladivostok, and then put it on ships and move our products to other Asian destinations such as Japan and Korea. So that works very well in terms of logistics.

We're definitely will be needing to further fund this project forward. For example, the CapEx estimate made by Wardell Armstrong for the first four-year open pit mine life is estimated to be about $159 million. So we'll need to go out and source those funds. Now I think it'll be a combination of equity and debt. I don't want to put those in any order yet, but from my experience, the split most probably will be minority basis equity for dilution purposes, and the remaining amount would be in debt, if you like, the majority. We do know and we're in touch with project debt finance groups in Russia that are active in the mining sector, so those discussions have already begun. And to move the company forward to get to where we've got an indicated and measured mineral resource and finally a mineral reserve, so we can get a GKZ and we can really go forward with our operation, we still got a serious amount of geological, geotechnical, and exploration work to do, i.e., drilling. So we'll be coming to the market or to the investment community to see if they'd like to come along with us on this ride and continue to develop this project. We're excited about it and we're excited about the opportunity that is presented at Encor.

We've got a large, fairly unexplored license which has very good mineralization. We are literally 30 kilometers from the world's third largest known copper deposit. We've already picked up very good grades. And there is, if you'd like, blue sky on the eastern side we believe can come. Infrastructure wise, we have access both to Far Eastern and the Chinese markets. So, although it's remote, this is not in an area which is going to present to us any significant hardships to deliver products to those end user markets.

Yeah, I can. But only on the basis of what has been released for the public market today. Azarga has signed a term sheet with Gold and Predator, it's another listed group. They have an asset in the central Yukon territory. It's known as Mark. M-A-R-G. And it's an unexplored VMS. We're currently going through a very rigorous due diligence process: legal matters, technical issues, and of course we're in discussions with the territorial government of the Yukon and the First Nations in that region of the central Yukon.

Yeah. What we like about these two projects, Stuart, is that if you look on your atlas, you'll see very clearly the position of Encor being in the Far Eastern Siberian area just above northeast China. It's ideally situated with infrastructure to get those copper products and precious metals, i.e., silver, down to those end user markets. The railway network is astoundingly well done, to be honest with you. And as I said earlier in the call, we can also export our products through the BAM right out to Vladivostok, and then we're opening up Japan and Korea notably. On the Yukon side, we're only about 600 road kilometers from the port Skagway, which is on the northwest coast of the Pacific. Now, again looking at the atlas, you can easily see concentrate sales – or a cathode, but we probably would go to concentrate sales – from there to the Asian markets are easily done. Such markets as Japan, Korea, and of course the Chinese smelter system are a very logical footprint and workable way forward. So both projects, although they're far away from each other, they both have the logistical location to really join the supply to China and other destinations in Asia.

Thank you. Thanks, Stuart. On behalf of the company, appreciate you having me on today. It was a pleasure to come. It would be a pleasure, excuse me, to come back and give you an update. I would think the best time would be – it's up to scheduling and everything – the later part of the third quarter or the fourth quarter this year. We will certainly have a news flow and many more things to discuss in that time period.