News & Analysis » Canada

Source Exploration research and analysis

Contributed by eResearch

By Bob Weir

Source Exploration Corp. (“Source Exploration” or the “Company”) is an exploration and development company with a focus on gold-silver-copper projects in Mexico.

INVESTMENT HIGHLIGHTS

Source Exploration is actively exploring its Las Minas gold-silver-copper property in Mexico. The property hosts several historic gold mines.

We estimate that the Company has drilled 7,500 m in diamond holes at Las Minas in 2011. Source Exploration now thinks that the mineralization at Las Minas has an on strike length of more than 2 km.

The Capricho property has multiple showings of visible gold. The Company plans to start drilling the property soon.

Source Exploration has $4.3 million in cash which should be enough to continue actively exploring the properties.

PROJECTS

Source Exploration has two properties in Mexico, Las Minas and Capricho. The Company struck an option agreement for Las Minas in December 2010 and is currently actively exploring the project. In early November 2011, Source Exploration announced that it had entered into a letter of intent for an option agreement to acquire the Capricho property. See the description of both properties below.

1. Las Minas Property

Location and Infrastructure: The Las Minas gold-silver and copper project is located in the core of the Las Minas district in the State of Veracruz, Mexico (see map below). The district is host to one of the largest underexplored gold -silver-copper skarn systems in Mexico, and has a production history dating back to the Aztec era. The district is prospective for bulk-tonnage gold-silver-copper skarn mineralization and high-grade gold-silver epithermal vein mineralization. The project is located about 270 km east of Mexico City and is accessible by road.

Geology: The Las Minas project is characterized by large exposures of thick packages of limestone of Lower Cretaceous age intruded by igneous rock of Tertiary age, which are granitic to dioritic in composition. The associated hydrothermal activity resulted in skarn development preferentially as contact zones located between the readily reactive limestone and the intruding rock. Mineralization and alteration were found both within the intrusive (endoskarn) and within the limestone (exoskarn).

Project Composition: The project covers about 1,271 hectares and is comprised of five mineral concessions. The concessions contain several skarn and epithermal vein mineralizations with historical production: Los Boquillas, El Dorado, Nopaltepec, Cinco Senores, El Alto mine, La Miqueta mine, Las Manillas, San Jose de Oro, Yanillo and Changaro (see map below). Descriptions of some of the mineralization follow.

Los Boquillas: The Los Boquillas mineralization is located near the town of Las Minas. Historical mining at Los Boquillas was focused on higher-grade mineralization in the endoskarn with some mining also in the exoskarn. The results from a rock-chip channel-sampling program by Source are listed below.

El Dorado: The El Dorado mineralization is located immediately southwest of Las Boquillas. Both endoskarn and exoskarn mineralization are present, with chalcopyrite being the main primary copper mineral. Alteration assemblage is similar to that at Las Boquillas. Mining was carried out at El Dorado around the turn of the 20th century and the mine has several underground adits and workings.

Nopaltepec: The Nopaltepec mineralization is located about 450 metres south of El Dorado in an area of rugged topography. Previous mining activity in the area included the development of several adits on strike over an area of about 200 metres. The adits and underground workings are located on both sides of a fault that bisects the mineralized skarn zone.

Cinco Senores: The Cinco Senores mineralization is located about 540 metres west – northwest of the town of Las Minas. The site contains several underground workings, its mineralization extends into the intrusive which suggests potential for porphyry style mineralization. Sampling results from a preliminary sampling program are listed below.

El Alto Mine: The El Alto mine is located within a steep limestone cliff face east of the town of Las Minas. It is reported that the vein system was mined over a vertical height of 200 metres.

La Miqueta Mine: La Miqueta encompasses an area of gold-silver-copper mineralization related to an epithermal environment and consisting of narrow quartz veins and silicified structures in a limestone package. Previous sampling of the vein structure by the Council of Mineral Resource (Mexican Geological Survey) gave assays of 7.1 g/t gold, 13.0 g/t silver and 0.41 % copper across a vein width of 0.67 metres. Recent sampling by Source Exploration included grades up to 8.92 g/t gold, 11.7 g/t silver and 0.32 % copper over 0.28 metres.

Recent Exploration: Source Exploration commenced its Phase 1 drilling program at Las Minas in February 2011. Phase 1 consisted of 2,500 metres of drilling and focused on at the El Dorado and Las Boquillas zones. Drilling  highlights from El Dorado include 21.1 metres of 0.88 g/t Au, 5.05 g/t Ag and 1.60% Cu or 3.79 g/t gold equivalent in hole LM -11-ED-9. Highlights at the Las Boquillas include 16 metres grading 1.35 g/t Au, 2.74 g/t Ag and 0.45% Cu or 2.20 g/t gold equivalent in hole LM-11-LB-5. At El Dorado, intercepts included 0.88 g/t gold, 5.05 g/t silver, 1.60% copper (3.79 g/t gold equivalent) over 21.1 metres. Phase 1 defined the zone over a 500-metre strike length and up to 30 metres in thickness. The identified zone is open on strike and down dip.

In July 2011, the Company announced a Phase 2 drilling program consisting of 5,000 metres. Phase 2 was designed to extend mineralization to the south in the area of the historical Nopaltepec mine workings, which are located about 1.0 km south of Las Boquillas. Drilling was also going to test the extension of mineralization beyond the zone outlined by the Phase 1 drilling. In August 2011, the Company reported some drilling results from the Cinco Senores and Las Minillas zones. The most significant intercepts were: 2.67 g/t gold, 37.9 g/t silver and 2.06 % copper or 7.03 g/t gold equivalent over 1.75 metres and 5.14 g/t gold, 8.6 g/t silver and 1.46 % copper or 7.84 g/t gold equivalent over 2.0 metres. The results of the drilling gave Source Exploration reason to assume that the mineralization at Las Minas may have an on-strike length in excess of 2.0 km.

2. Capricho Property

Location and Infrastructure: The Capricho property is located in northeastern Sinaloa, Mexico, about 120 km from Culiacan. The project is accessible by a paved highway, and is comprised of three mining concessions totalling about 652 hectares. The property is currently being mined for free gold by artisan miners using hammers, picks and shovels. Previous Exploration and Plans: The property has never been drilled before. A regional airborne magnetic survey, completed in 1994 by Servico Geologico Mexico, identified two pronounced magnetic highs measuring 1,200 metres and 2,500 metres in diameter and associated with the areas of identified mineralization. Source Exploration completed preliminary reconnaissance geological work and sampling at the property as part of its due diligence. Most significant intercepts included 99.28 g/t Au and 569 g/t Ag over 2 m, and 14.21 g/t Au and 58.44 g/t Ag over 18 m. The Company plans to commence a diamond drilling program at Capricho “at the earliest possible date”.

Geology: The property is host to multiple showings of visible gold, much of it occurring as free gold. The gold is found in the contact metamorphosed sediments and underlying granodiorite intrusive. The free gold is also found in shear zones, which were the focus of mining by the Spaniards during the Colonial period. The Company warns, however, that the presence of visible free gold is not necessarily indicative of higher-grade mineralization, and that further work is necessary in order to establish it significance.

Option agreement: The acquisition of the property from Empresa Minera Caprice, JC, S.A. de C.V. (EMC) is subject to completion of satisfactory due diligence by Source Exploration and the entering into of a definitive option agreement with EMC. In consideration for the option, Source Exploration has agreed to make the following cash payments to EMC.

(i) US$46,000 on the effective date of the signing of the option agreement;

(ii) US$64,400 by the date that is on or before six months following the effective date;

(iii) US$105,800 on the first anniversary of the effective date; and

(iv) US$165,000 on the date that is on or before 18 months following the effective date.

Additionally, Source Exploration will be required to complete exploration expenditures on the property, beginning with an initial expenditure of US$400,000 during the first six months of the agreement, with total expenditures of US$7,500,000 over the four-year period.

Provided that the Option Agreement is enforced:

(i) Source Exploration will earn a 27% undivided interest by making a cash payment of US$285,000 to EMC on or before the second anniversary of the effective date;

(ii) Source Exploration will earn an additional 11% by making cash payments of US$460,000 to EMC on the date that is on or before 30 months following the effective date;

(iii) an additional 16% by making cash payments of US$690,000 to EMC on or before third anniversary of the Effective Date;

(iv) an additional 18% undivided interest by making cash payments of US$920,000 to EMC on or before the date that is 42 months from the Effective Date;

(v) an additional 28%, for a total interest of 100 %, by making cash payments of US$1,380,000 to EMC on or before the date that is 48 months from the effective date.

EMC will also be granted a sliding scale gold and silver royalty on the project, which would be 3.5 % at current gold prices.

FINANCIAL POSITION

Source Exploration’s cash position grew from $310,000 at the end of June 2010 to $4.3 million at the end of June 2011 as the Company raised $5.7 million in equity in FY2011. This cash should be enough for around 72 months of operating burn. It should also be enough to carry out the initial drilling at the Capricho property and continue the exploration of the Las Minas property.

eResearch Analysts on this report:
Yuri Belinsky, B.A., M.A.
Bob Weir, B.Sc., B.Comm., CFA