Building a mutually advantageous alliance with South32



AusQuest is a multi-commodity junior explorer with major ambitions. The ASX-listed company has maintained the same philosophy since its original listing back in 2003, and that has been to focus on large-scale discoveries that would pique the interest of players from the mid to large-cap space. “We’ve never got into the small mine game,” admits managing director Graeme Drew. “The idea was always to retain an interest in projects that a major company would eventually develop. This is a niche which fits our background in terms of our people and their expertise.”


AusQuest has followed this principle closely throughout its history, establishing a number of promising joint ventures with large companies in Australia and overseas, at times coming close to fashioning a project with the legs to sustain the appetite of a major.


However, this changed when the company entered the Peruvian copper-gold exploration space in 2011. Six years later AusQuest was finally able to attract the major partner it had been searching for, signing a strategic alliance agreement (SAA) with South32, a giant of the Australian mining sector having been spun out of BHP in 2015.


The alliance with South32 was a momentous occasion for AusQuest and a realisation of a fundamental company aim, but what has the deal translated to during its first 12 months and what is in store for the future?


The art of the deal


“We have regular technical meetings with South32 and regular communication with their people. We work closely with them presenting the projects, discussing the results and agreeing the way forward including drill targets and programmes” reveals Mr Drew.


AusQuest’s technical team is strong and boasts over 200 years of collective experience in the mineral exploration space, a good fit with the well-documented technical experience of South32’s team.


“From a financial point of view, we now have ten projects under the SAA and they [South32] have so far provided us with in excess of $8 million and that is likely to increase over the next six months as we move into some exciting drilling programmes.”


In Peru, where AusQuest has identified three separate projects, over 8,000 metres of diamond drilling is planned for the first two projects in the next six months. This drilling is estimated to cost US$4 million with South32, as part of the agreement, providing the means to fund these campaigns along with capital to support additional drilling at some of the company’s Australian projects.


South32 provides technical and financial support to AusQuest’s various drilling programmes in Peru and Australia, earning the right to exclusivity over all these titles as well as the right to earn equity in each of them.


South32 can claim equity up to 70% by spending US$4 million on each project and has the right to go to 80% if it chooses to fund a pre-feasibility study on any project. Alternatively, South32 could choose to end its participation in a project, leaving AusQuest to fund pro-rata to maintain its equity.


“If we present a project to South32 and it is rejected twice then it becomes our project. But, our aim is to have all of our projects accepted because when you are looking for major deposits, the more frogs you kiss the more chance you’ve got of finding the prince,” Drew quips.


“Realistically if one of them comes in, we’ll be extremely pleased. If more than one comes in it will be a dream come true.”


AusQuest is also providing management for the initial drilling programmes, which is a major bonus for the company because it has already expended substantial time and effort developing the prospects and has the knowledge and commitment to successfully drive them through the early drilling stages.


“This is a little different to handing the projects over to a major or bringing another company in just to do the drilling, often without the same conviction that we would have.


“Overall, we think the relationship is working extremely well. The agreement is relatively unique in terms of the way it is structured as it gives us financial incentives (bonuses) to provide new projects and opportunities to South32 on an annual basis, which then helps us to undertake (pay for) the generative work to provide the pipeline of projects that they are interested in.”


Additional funding


One of the more recent outcomes of a strategic meeting between the two partners came in March 2018, when AusQuest confirmed that South32 would be extending its funding to cover four additional exploration opportunities, taking the total to 10 projects under the SAA and triggering a second bonus payment of US$500,000 to AusQuest.


This serves as further vindication of AusQuest’s strategy because when developing multi-asset ventures, junior explorers often fall into a momentum-sapping trap. They successfully raise funds for a drilling programme, achieve interesting but not compelling results and then have to wait for an extended period while raising more capital for further drilling.


However, in AusQuest’s case this common pitfall has been effectively bypassed by the SAA, as the funding arrangement gives the company the breathing space required to focus on testing several prospects at the same time.


“I think it’s almost unheard of to have 10 projects being funded under the one agreement. This is fantastic from our point of view. It gives us the chance to succeed and South32 multiple chances to have a potential development.”


While Drew concedes that it is highly unlikely all 10 will deliver viable returns, he maintains they will all be subject to the best scientific tools; mapping, sampling, geophysics and drilling, which gives them a fighting chance of discovering orebodies.


The Peruvian pipeline


In total, AusQuest has five projects that are currently at the drilling stage, two of which are in Peru. Generally, the Peruvian targets are large scale plays and occur undercover, particularly in the South where there is lots of soil, sediment and volcanic cover masking the rocks.


This is bread and butter work for AusQuest, having applied techniques learned from its experience searching for undercover mineralisation in Australia, including airborne and ground geophysical surveys.


Delving further into AusQuest’s Peruvian portfolio, Mr Drew highlights the Chololo Porphyry Copper prospect as first cab off the rank in Southern Peru. It was found through mapping and sampling, while ground geophysics revealed a large-scale IP chargeability anomaly, which bodes well for a new copper discovery.


The undercover target has never been tested, and AusQuest is excited to be starting a wide-spaced 5,000 metre drilling programme in May. Also at the drilling stage is the Cerro de Fierro prospect, an iron oxide-copper-gold (IOCG) target at the Northern end of AusQuest’s target area.


“We recognised its prospectivity based on the combination of magnetics and radiometrics from our proprietary airborne survey data. There was a large potassium anomaly which suggested regional potassic alteration of the rocks, and an isolated magnetic response several square kilometres in size sitting within it, making it an obvious target for IOCG mineralisation.”


Subsequent mapping and sampling has confirmed the presence of abundant copper in the area, not only in structures but also in the rocks as well, plus there is potential for the prospect to be sweetened by the possible co-existence of gold.


AusQuest is currently undertaking drill permitting for the Cerro de Fierro project and hopes to have this completed by mid-year at which point access construction can begin. This is necessary for both projects as they occur in elevated regions of the country.


“All of our projects in Peru are close to the coast, so infrastructure requirements are potentially less than for the larger deposits that occur inland within the Andes. Being close to the sea could provide a source of process water that would be useful when developing new deposits.


As drill programmes across five projects fast approach, AusQuest can look back upon its strategic alliance with South32 as a defining moment in the junior’s history. With the technical and financial support of a major industry player, the company has a golden opportunity to establish a world-beater of a project at home in Australia or in its new Peruvian frontier.