Drilling At Zone 3 Returns 5m @ 20% Zinc; Tinka Resources Also Looking For The Source Of Ayawilca

Ayawilca project; drilling location

1. Introduction

Slowly but surely and piece by piece, Tinka Resources (TK.V, TKRFF.US) is unraveling the complex puzzle which is the Ayawilca mineralization. As they hit more mineralization at Zone 3, for example best intercept 5m @20%Zn in hole A18-111, and polymetallic mineralization in adjacent hole A18-109, drilled from the same rig location, management seems more and more convinced that the source of all mineralization might be located below or east of Zone 3. This will have implications for the drill strategy to follow, and each new drill result will help determining the geological concept. The latest drill results, coming from various locations at Ayawilca, and possible consequences for tonnage will be discussed, as well as the geological concept.

All presented tables are my own material, unless stated otherwise.

All pictures are company material, unless stated otherwise.

All currencies are in US Dollars, unless stated otherwise.

Please note: the views, opinions, estimates or forecasts regarding Tinka’s performance are those of the author alone and do not represent opinions, forecasts or predictions of Tinka or Tinka’s management. Tinka has not in any way endorsed the information, conclusions or recommendations provided by the author.

2. Drill results

The rainy season limited the drilling for Tinka Resources on their flagship Ayawilca project in Peru, as just one rig kept on going (as planned), and management recently delivered the latest set of drill results. These results weren't spectacular as mineralized intercepts had the grade but not the thickness needed to build significantly more tonnage, but nevertheless provided management with further information on where to go next on several targets.

A quick recap: four holes (107, 109, 110 and 111) were drilled at Zone 3. An additional five holes (with overlaps between zones) were drilled at South (103, 104, 108), West (105,106,108) and Central Ayawilca (104). Drilling of hole A18-112 at Zone 3 has now commenced, with a second drill rig expected to start up once the wet weather conditions improve in March. Here is a map with recent drill hole collar locations:

All holes besides 103 intercepted mineralization with often good to very high grades, but short intercepts as mentioned, as the longest intercept containing zinc mineralization was 6m long. The more shallow zinc intercepts are in line with earlier drilled intercepts of vein type structures in sandstone. I (again being a non- geologist) had particular interest in 107 as it was directed east from the platform, and could potentially prove up a wider mineralized envelope around Zone 3 discovery hole 91A, but this didn't work as no zinc was intercepted, just meaningful amounts of tin.

Hole 105 was also of interest as it could mean another "stacked manto-style" mineralization event like South and West, but so far intercepts were too short to be economic, just like 103, 104, 106 and 108. Interesting to see South mineralization spreading out to the south, indicating great continuity although thickness is much lower than standard mining heights (3-5m). You can't have it all of course, in my opinion this is the best way to drill test your concepts and theories on geology, and Tinka management has been quite successful so far. Also of interest for Tinka, besides hole 111, were the more polymetallic holes 109 and 110 directed south/south-east, containing high grade silver, tin and some copper (in red, best hole 111 in green):

High-grade zinc mineralization intersected in holes 110 and 111 at Zone 3 is associated with massive sulphide replacements of limestone (hole 110) and sandstone (hole 111), similar in style to the thinner zinc mineralization at South and West Ayawilca. In addition, high-grade vein-style polymetallic mineralization (zinc-lead-silver-copper-tin) has been intersected in phyllite basement rocks at Zone 3 (hole A17-109 and A18-110 at depth). These polymetallic veins are believed by management to be feeder structures for the zinc and tin mineralization in the overlying limestones.

3. Geological concept

To refresh the geological make-up a bit, here is a schematic section of Ayawilca:

CEO Carman stated the following about the latest conceptual thinking and exploration plans for this year:

"A new geological interpretation suggests that high-grade, thick zinc mineralization generally lies near the intersection points of northeast-trending faults and north-south trending folds in the strata. Tinka plans to drill an additional 25 to 30 step-out holes into a range of targets during the first half of 2018.The Company has two key objectives for 2018: (1) Continue our exploration drill program targeting additional zinc resources at Ayawilca with 15,000 metres of drilling planned; and (2) Advance the project with desktop mining studies and detailed metallurgical tests that will form the basis of a Preliminary Economic Assessment (“PEA”) planned for the second half of 2018. Exact timing of the PEA will depend on the extent to which significant new mineralization is identified in the first half of 2018."

Tinka management clearly sees opportunities to explore and grow Ayawilca further, as the PEA is pushed out into H2 2018, and likely into Q4, 2018, as a lot of drilling and met work is planned for this year. A recent geological review of drill cores by Tinka’s geologists, with input from consultant Dr. Paul Pearson of Latin Global Pty Ltd, has led to some new interpretations of the structural controls to the mineralization at Ayawilca:

"We believe that the lower contact of the Mesozoic Pucará limestone, the principal host to the zinc mineralization at Ayawilca, is a low-angle ‘thrust’ fault that can be traced over several kilometres and dips to the east, in contact with underlying phyllite basement rocks.

At South Ayawilca, multiple thrust fault ‘duplexes’ or ramps have caused repetitions of the limestone/sandstone, while at the far western end of South Ayawilca the limestone is almost ‘faulted out’ altogether. The low-angle faults are believed to have acted as conduits (= channel for conveying fluids, TCI) for the mineralization, with the ultimate source of the mineralization believed to be down-dip to the northeast towards Zone 3 (see longitudinal section). Fluids migrating along these low-angle faults mineralized the limestone sequence, while at South and West Ayawilca mineralization was ‘trapped’ near the axis of the anticline* fold where the limestone rapidly thins. The syncline* at Zone 3 may also be an important trap site for mineralization, with upcoming drilling to test this structure. Faulting was pre-mineral, but was important because it created good ground preparation for the mineralizing fluids to follow, particularly where the faults intersect fold hinges, such as the anticline at South Ayawilca or potentially the syncline at Zone 3.

(*An “anticline” is a geological structure whereby the strata (=layer of rock, TCI) are folded into an upside down ‘U’. A “syncline” is the opposite with strata folded in an ‘U’ shape)

Drilling at Zone 3 has also encountered significant intervals of pyrite mineralization near the bottom of the limestones, which further strengthens the similarities in mineralization styles between Ayawilca and the Cerro de Pasco lead-zinc-silver-copper deposit, located 40 kilometres southeast of Ayawilca.

The evolving understanding of the structural controls and likely reasons for the formation of thick zones of high grade zinc mineralization, such as at South and West Ayawilca, will aid in the selection of additional drill targets for 2018."

The existing mineralization is somewhat "folded" around pyrrhotite bodies (which show up on magnetic surveys because of high iron content), this pyrite body seems to be something new. According to the analogy with Cerro de Pasco, mineralization could be located above the pyrite body, following faults or more vertical conduits in the thick limestone, eventually outcropping at surface in Zone 3.

An older schematic section by Tinka could also still prove to be a possibility, with a feeder or source more to the east, as zinc/lead mineralization usually shows up in the periphery of copper/moly precipitation events (red envelope to the right indicating a copper porphyry):

This in turn could indicate a carbonate replacement deposit (CRD), and the concept behind this is described nicely by Peter Megaw PhD P.Geo, a renowned geologist who discovered several mostly silver deposits in Mexico:

"Carbonate Replacement Deposits (CRD) are bodies of metallic minerals formed by the reaction of hot magmatic fluids with carbonate rocks, such as limestone or dolomite. The hot, metal-bearing fluids are driven upward from the heat source, an igneous intrusion (Glover Mo-Cu Porphyry), and dissolves the reactive carbonate rocks when they encounter them. That reaction changes the chemistry of the fluid, causing it to precipitate metallic sulphide minerals that often contain lead, zinc, copper and precious metals such as gold and silver. The metallic sulphide minerals effectively “replace” the carbonate host as the reactive fluids dissolve a pathway through it.

Exploration concept CRD deposit (by Peter Megaw)

Nearer to the source of the fluids, mineralization is often in the form of copper - gold skarn, transitioning to zinc - lead - silver mantos and chimneys. In the periphery of the system, the cooler fluids drop out precious metals silver and gold veins (No.1 Vein Zone Ag-Au ±Zn±Cu) form in the edges of the system. The fluid path is always continuous, and therefore the metallic bodies are too."

Tinka management is searching for the Zone 3 equivalent of the skarn deposit described above, and the copper from hole A18-110 , and earlier on A17-091A seem to be the first indicators:

According to management,the zinc mineralization found to date at Ayawilca falls into the CRD type.  So far at Ayawilca, there has not been significant skarn style mineralization intersected in the drilling, although there remains the possibility for skarns at depth.  Skarn mineralization occurs with indicative minerals such as garnets and other calcium silicates. 

4. Implications, Plans

After contemplating theoretical concepts, what could these new results imply for Tinka's tonnage? In my view the guesstimated 50Mt target has to wait a bit longer, as the current drill results are not sufficient to support significant new tonnage, notwithstanding this these results are definitely serving as possible indicators for large potential. Regarding tonnage: for example, as I guesstimated a 500m long, 200m wide and 10m thick mineralized envelope in my last article between the area east of Central to the north east where A17-091A is drilled, based on hypothetical successful 107 results, this estimate is taken off the table now as 107 didn't return zinc intercepts.  I also hoped to see longer intercepts, indicating minable connecting mantos between Central, South, West and East, but mineralization is too thin in several intercepts to calculate additional tonnage on this for now. 

Tinka is far from done drilling as it still is early days on Zone 3 and other targets like stepping out at West, South and Central, and exploring Chaucha and Valley. Management has planned 15,000m for this year, and among other things is looking for mineralization at depth below South Ayawilca. Management explained to me that it might be the case that the basement they encountered below South might in fact be "false basement", meaning that other types of rock including favourable limestone  which is the favourable host rock for CRD and skarn styles of mineralization. This will probably be drill tested by extending one or two existing holes at South. The current hole underway is 112, being drilled from another location more to the south-east of East and Zone 3, east of a large fault running south-east to north-west, and the direction of the hole is west. If drilling at 112 is successful, the company will focus efforts there, if not, the area north of 111 will be followed up next.

As a knowledgeable CEO.CA user (Pamplonatrader) wondered if Tinka had further plans to explore the outcropping gossans to the east of 112:

management reverted back to me that they have more confidence in the geophysics they are using at the moment (magnetics and gravity) as they have been successful with this approach so far, and don't want to change this at the moment. The question was a good one, as gossans (literally meaning "iron hat") can be very good indicators for underlying mineralization. For the interested layman, here is more on gossans and why they could be important (it is a translation of a dated article (1979) from the Great Soviet Encyclopedia, but still the best explanation I could find fairly quickly):

"A gossan is a residual formation that occurs in the surface parts of ore (primary sulfide) deposits of copper, lead, zinc, and other metals as a result of chemical weathering and oxidation of the primary minerals of the ore body. Gossans consist primarily of iron oxides and hydrous iron oxides, and as a result they are usually dark or light red, ocherous or brownish red in color. The formation of gossans is associated with the oxidizing action of surface waters and is accompanied by the secondary enrichment of ore deposits. In the process of weathering, the sulfides of copper, silver, zinc and other metals oxidize to easily soluble sulfates, after which they are leached and carried to deeper parts of the ore body. At the same time the iron in sulfurous compounds (pyrite, chalcopyrite and other sulfides) is only partly removed in the form of a soluble salt (sulfate or iron oxide); most of the iron is oxidized and hydrated and remains in place in the form of hydrates of iron oxide (brown iron ores).

These secondary brown iron ores, occurring as a result of the transformation of original pyritic and other ores containing iron sulfides, are what form the gossans near the earth's surface. The depth at which gossans are found beneath the earth's surface is usually restricted to the groundwater level and may extend to dozens or even hundreds of meters. In comparison with initial sulfide ores gossans are richer in iron in their upper parts and in gold in their lower parts. Contrasting strongly with the enclosing rocks, gossans serve as an important indicator in explorations for sulfide ore deposits and in identifying the primary ores concealed in the depths."

As an aside, I wondered myself what was happening to hole 081 which didn't reach target depth last year, and would have gone straight through the biggest gossan indicated in the map above. According to management the hole was stopped due to difficult drilling conditions, but could be deepened or extended later in the year once more rigs are available on site.

After completing 112, plans are to drill targets to immediately follow up on hole 111 which hit 5m grading 20% zinc, with a second drill rig to start during March.  The second drill rig will test extensions of South Ayawilca as well as the Ayawilca deeps target.  There are plans to drill the Valley area, which has had strong initial zinc intersections in past holes, with a third rig starting sometime in April. 

Management is eager to accelerate this year's 15,000m drill program, but this will cost exploration dollars. With the warrant conversion executed by Sentient and IFC a few months ago, the treasury is estimated to be C$5.5M at the moment, and this is enough cash to do most of the ongoing 2018 drill program, but not enough, and additional funds are needed for met work, resource update, and a potential PEA in the second half of the year.

The share price for Tinka was range bound for quite some time now, as it is anticipated by me and other newsletter writers, that institutional investors are refraining from buying in the market with the expectation that there could be an opportunity in participating in a financing. Today represented a break away from the trading range, as heavy selling saw the stock drop to C$0.47 and closed at C$0.50, levels we haven't seen in almost a year. According to well-informed sources the selling took place in a relatively short time frame:

It was also just one party, and most likely from the US according to the same sources. Why this party had to dump so many shares in such a short timeframe will likely remain a mystery, as spreading it over a week would have generated a much higher return. Usually when such large dumps occur, especially on Fridays which are traditionally weak trading days, it seems like a deliberate attempt to bring the share price down, but let's not bring out the tin foil hat conspiracies as there have been many instances where it was just redemption or portfolio rotation which had to happen quickly for some reason. Notwithstanding the potential reasons behind this selling, the fundamentals haven't changed for Tinka since the latest news, a lot more drilling is about to start, and therefore I view this share price level as an excellent buying opportunity.

Coverage is increasing for Tinka at the moment, as 4 firms are providing analysis on the company now (most recently Canaccord), which is good to see.  

In the meantime, Sentient continues to demonstrate its keen interest in the project.  Sentient has made a board change  with Pieter Britz, a senior member of Sentient's management team, joining the Tinka board.  A former (until May 2017)  partner of Sentient, Ben McKeown, became Chairman of the Board recently as an independent non-executive director.

As a reminder, the considerable economic potential of Ayawilca remains intact, not the least at current zinc price levels ($1.59/lb Zn). Have a look again at the sensitivity table I estimated when the updated resource came out:

So the current market cap of C$130M might seem high for a zinc junior with no economic study, but Ayawilca isn't your average zinc project, and has lots of upside and margin for error. When management decides it has found enough zinc, the PEA will be on its way shortly after that and I am certainly looking forward to this. 

5. Conclusion

The latest drill results on Zone 3 didn't really impress the markets as grade was good but the intercepts were short. However, instead of instantly building tonnage and already breaking through the 50Mt barrier, Tinka is collecting bits and pieces of evidence of a potentially larger mineralization event, which in turn could add much more tonnes. The journey of Tinka, which involves a dynamic, constantly evolving geologic concept of Ayawilca, is a fascinating one. I believe a financing is coming up within the next few months, and I also believe this financing has been baked in the share price already. I view the sell-off from today as an isolated event as fundamentals haven't changed, and see this as a blessing in disguise as it represents an excellent buying opportunity as long as it lasts. We could see a recovery happening soon, and a further re-rating as soon as this financing is done at decent terms, especially when Tinka hits big at Zone 3 and other targets.

I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter, in order to get an email notice of my new articles soon after they are published.


The author is not a registered investment advisor, and has a long position in this stock. Tinka Resources is a sponsoring company. The views, opinions, estimates or forecasts regarding Tinka’s performance are those of the author alone and do not represent opinions, forecasts or predictions of Tinka or Tinka’s management. Tinka has not in any way endorsed the information, conclusions or recommendations provided by the author.

All facts are to be checked by the reader. For more information go to www.tinkaresources.com and read the company’s profile and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.

Ayawilca project surroundings

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