Dr Bob Foster, CEO of gold exploration group Stratex International plc, speaks to Stockopedia News

Dr Bob Foster, CEO, Stratex International

Since turning his attention away from pure play mineral exploration during 2009, Dr Bob Foster has orchestrated a string of partnership deals that could see his company become a gold producer by the end of next year. For the chief executive of AIM listed Stratex International (LON:STI), the key has been to blend his team’s core skills of notching up significant gold discoveries with winning over strong support from top-tier industry backers.

Since joining AIM in December 2005, Stratex, under the stewardship of Bob Foster and chairman David Hall, have built a portfolio of projects in Turkey and are now embarking on a major exploration push into Ethiopia. At its Turkish projects at Inlice and Altintepe, the company has secured support from local engineering group NTF Insaat Ticaret. Meanwhile, Canadian major Centerra Gold (TSX:CG) is bankrolling the Öksüt project and Teck Resources (NYSE:TCK) is doing the same at Hasançelebi.

Moving on, a joint venture signed last year with Sheba Exploration (PLUS:SHE) secured a foothold in Ethiopia, a country that Stratex believes has considerable potential for the discovery of gold deposits, particularly in the emerging epithermal district in the Afar / Eastern Africa Rift Valley. If the East African Rift Valley rings a bell, this is of course the geology which has proved such fertile hunting ground in Uganda for oil explorers like Heritage Oil (LON:HOIL) and Tullow Oil Plc (LON:TLW) and which is being actively explored in Ethiopia by African Oil Corporation (CVE:AOI) and Victoria Oil & Gas (LON:VOG) .

Bob Foster spoke to Stockopedia News about the company’s drive towards production in Turkey and the prospects for its exciting new exploration projects in Ethiopia.

Bob, the last time we spoke you were striding ahead with a new strategy to blend your exploration skills with the prospect of actually getting some of your projects into production. After a torrid year for miners in 2008/2009, what sort of shape was Stratex in at the start of 2010?

We had regrouped and reorganised ourselves. Early last year we realised that we needed to get our strategies across to the market – and those strategies were to ‘monetise’. We could not afford just to be seen as an exploration company which was waiting for ‘the big one’. That was never our intention but we did get the impression that the market was beginning to see us in that context. The turning point for us came just over a year ago when we decided that we had to make every effort to head towards production. To cover our risks we decided to get a couple of joint venture partners in on some of our key exploration projects in Turkey as well. There were two reasons for that approach: the first was to reassure the market that we knew what we were doing and where we were going and, second, it eased up potential financial pressure and gave us some flexibility to look elsewhere, including Ethiopia, which is what we did.

By the beginning of this year we were close to putting to bed the deal with NTF – although that only finalised in April. It was a painful process, not because of our partners, but because of the way the whole deal was structured at their request. It was a complicated share pledge relinquishment deal, which is the equivalent of an earn-in but just more complicated. But we are home and dry now and moving to feasibility on the Inlice project and a scoping study on the larger Altintepe project. Both of those technical elements are being funded by NTF as part of the earn-in to the joint venture company. So we are very comfortable now, we are going to production in Turkey and we have got a couple of good exploration projects there. In the meantime, we have got a really good foothold in Ethiopia and the excitement level of dropping down into the Rift Valley and making brand new discoveries there, which has really got the exploration world hopping around a little bit.

We have turned around massively in many ways. It is the same strategies and the same ideas but we have managed to embed them in terms of deliverables and in terms of the market seeing them.

In Turkey, your deal with NTF involves fast-tracking the Inlice and Altıntepe gold projects. What progress is being made there and where do those projects stand?

There are two arms to the deal with NTF: Inlice and Altintepe, along with the possibility of putting other projects into it if we want to. In both cases, our partner is earning into 55% by completing the technical studies. At the Inlice project, which is just under 100,000 ounces of oxide gold, the feasibility study will be completed by October this year and they have committed up to $2m to fund that.

Inlice is a small project and we have got the best, most focused consultancy group in the world  actually doing the work for us, Kappes, Cassidy & Associates, who are based in Nevada and have a reputation second to none in taking small to medium sized heap leach projects into production. Together with the feasibility study there will be a matching environmental study, which will be completed in January but we will know by October if there are any problems. So we will be well placed by the end of this year to press the button with our partners and start the construction phase in the new year. We don’t know the capex involved at the moment, but is will be low and no more than around $10m. It is a low-tech operation, as all open pit, heap leach operations are, and there is a high degree of confidence that we will be in production by the end of next year. The level of production depends on the feasibility study but we have talked about 20,000 ounces per year over three to five years – and talking to our consultants that is not an unreasonable figure.

The Altintepe deal is slightly different but our partners still have the right to earn in to 55%. The project is bigger – at almost half a million ounces of oxide gold – so it is a substantial project in almost anybody’s book. Because of the complexity of the geology and the lack of comprehensive drilling, NTF are committing to a $0.5m scoping study as part of the deal, which is currently under way. That study primarily involves infill drilling, just to confirm the resource, and that should be completed in September or October. Subject to a resource being satisfactorily identified, and we’re pretty comfortable about this, then the decision will be made to go to the full feasibility, which will take about a year. There is a realistic projected start up date of the end of 2012 or early 2013. So, as Inlice reaches top production, Altintepe will begin to kick in. Again, production levels will depend on the feasibility study but we and our partners want to maximise output from both Inlice and Altintepe. We want cashflow to do other things and build the company.

You are working with Centerra Gold at Öksüt and Teck Resources at Hasançelebi. How are those partnerships going?

It is running very well – they have got the money and we are managing the projects on the ground. Of the two, Öksüt has got the most immediately obvious potential and we declared a small resource of just under 150,000 ounces of oxide gold earlier this year. We started work on the Ortacam zone in the south east of the project which is where by far and away the best gold valley is. With the approval of Centerra we are close to completing a five-hole infill drill programme on Ortacam and we should be releasing those results in the next three weeks. We are encouraged by what we have seen already. The next step will be to drill other zones in the project and if any one of those begins to kick in we will be home and dry. The upside of all of this is that in the Ortacam zone alone we have 150,000 ounces of oxide gold, which is a conservative estimate – we have played it very safe on this. If by the end of the year we have drilled the other projects and none of them are standing up very well, which is unlikely, and Centerra decide to walk away they would walk away with nothing and we would field the Ortacam project into our partnership with NTF in order to grow that company. So it is a win-win situation from that point of view. We are very excited by the potential in drilling the other zones in the project, as is our partner, and work there should be under way in three weeks time.

Centerra can earn up to 50% in Öksüt by spending $3m and up to 70% by spending another $3m. A question often asked by people, like your readers and our shareholders, is ‘why are you giving away 70% of a good project?’ Well, the fact is that you do not know it is a good project until you start drilling. If a company like Centerra, which is looking for at least 1m, if not 2m ounces, has drilled it to acquire 70% that means that it is a major project. In that case, we are sitting with 30% of a big resource that hasn’t cost us anything. The same is true at Hasançelebi. Teck Resources, which is a major shareholder in Stratex anyway, has decided that they like this project sufficiently and drilling is under way. We have confirmed the continuation of mineralisation at depth and are due to release drilling details by early September.

Turning to Ethiopia, you started work in the country last September by buying into Sheba Exploration and since then things have moved fast. Talk us through those projects.

David Hall and I have been looking at Ethiopia for some time for various reasons. For a start, there was the possibility of finding gold mineralisation in the Rift Valley and, second, the geology itself. David and I have worked a lot in African countries and we knew it was under-explored. In the central and western parts of the country, which is the highland area, you get the old geology that dates back a long time. Then there is the young geology and the Rift Valley, which is the Afar depression. So having taken this view that Ethiopia would be a good place to be in, last year we felt we had the cash and the resources to do this and that we needed a foothold rather than starting from scratch. The foothold was doing a small deal with Sheba Exploration, which had the Shehagne licence in the northern part of the country. We entered a joint venture with them to earn-in to 60% of that for £350,000. At the same time we collectively established the Tigray licence just to the east, in which we can earn 70%.

The reason for going into northern Ethiopia is that just across the border in Eritrea there have been some major discoveries, including Nevsun Resources’ (TSX:NSU) Bisha Project, which is a substantial copper, zinc, gold deposit that it is taking towards production. Immediately across the border, due north along the same geology, Sundridge Gold (TSX:SGC) has also got some very nice discoveries. So we felt it was the right place to be but it also gave us a physical presence in the country where we could step up in our own right into the Rift Valley and do our own programme there.

We liked what Sheba had discovered at the Shehagne project, which was a 1km-long soil anomaly. They put some trenches in, which we have extended, and they put three short drill holes into the project, which have around about 1gram per ton values. We felt that as a foothold presence it wasn’t a bad start. So this is going to be quite a straightforward decision – over the next two to three months, when all the data has come in, we will either decide to drill it or move on. It has got the makings of a low grade, large tonnage resource, but we’ll wait to make the final decision.

At Tigray, which is just under 1,000 sq km, we have done some initial sampling and seen some interesting, very early stage indications that suggest that there might be something similar to what has been found to the north in Eritrea but that is very early stage. The excitement is really now in the Rift Valley itself, where Saudi Arabia is drifting away from Africa and the Red Sea is rushing in. This is where we have got the Tendaho project, which is the licence area that holds the Megenta project, our first discovery, within it. As a result of what we have found there we have moved into Djibouti, which is a former French colony and now a stable republic with a fairly big US and French military presence just because it is a stepping off point for the region. We have got a big land package there with exactly the same geology and some exciting projects.

Now, in these areas we are seeing hot springs bubbling up and bringing gold to the surface – perhaps 0.01 grams per ton, so clearly the gold is there but it is not enriched. If you were to look at a cross section of the ground you would see an upward-flaring funnel. Originally, there was a fracture in the ground which was allowing hot fluid to rise to the surface and, perhaps a million years ago, there was a hot spring bubbling away. Now, the whole system has now cooled and there is no longer a hot spring, but that same hot water that brought a little bit of gold to the surface deposited gold on its way top the surface – and that is our target. The key thing about this type of mineralisation is that they can be any width, from tens of metres narrowing down to just a metre or two. But they are steep cracks in the ground that are now full, we hope, with gold together with brecciated rock and mineralisation.

Megenta is a metre wide, broken up gold vein that is sticking out of the ground. Early sampling gave us 0.3-0.4 grams per ton of gold so we knew we had a gold bearing system. The ultimate upside is that we drill down into these systems and hope we come across bonanza gold. There is no way of telling that there is bonanza gold there or not but the upside is that we are finding gold at surface in significant quantities at around 0.5-2.0 grams per ton at surface, so we know there is gold in the system. There will be gold at depth but the question is whether we have got moderate grades or spectacular grades.

There are a number of points to make here. These things stick out of the ground and the reason why we have been able to move so quickly is that you can see them clearly on satellite imagery. We have established licences over as many of these prospect areas as we can, so we have got a big licence area in Ethiopia and we realised, of course, that it is the same geography across the border in Djibouti, so we have got a huge land package there now, about 3,000 sq km. How do you explore it? Well, we use satellite imagery and go straight to the identified areas; we sample them and if they have got gold we are going to drill them. It is a very simple, relatively low risk targeting exercise. We have got multiple of these targets so what we argue is that we can only put our hand on our heart and say it is a 50/50 chance that any one of them will have spectacular gold at a few hundred metres depth. But we think the statistics are edging in our favour at the moment.

The second thing is that it is very simple exploration. Gold bearing rock at surface means we drill at depth – and it is as simple as that. Our teams have been working flat out and we are currently having a complete data synthesis. One thing for sure is that we are going to drill a number of these targets later this year and into next year depending on the availability of drill rigs. You’re going to ask me about working in this area and, in fact, access is by the main road which goes from Addis Ababa in a roundabout route to Djibouti. It goes straight through the Tendaho licence area and between the licences we have in Djibouti. We can drive to these. It couldn’t be easier despite appearing to be a remote part of Africa. We are really upbeat about this.

Are there any near term plans to bring partners on board with these Ethiopian projects?

A couple of companies have expressed considerable interest because this, in many ways, is a big company play. It is exactly what the big companies want – hundreds of square kilometres with multiple targets. It doesn’t surprise us at all that there is an interest level there. At least one company has taken the level of interest to the next step. But we are in the happy position to consider the right partner.

We anticipate more results coming out of both northern Ethiopia and the Rift Valley exploration over the next two to three months. A decision on drilling at Shehagne will be made in September or October and if that happens we could well be drilling there early in the new year. But the biggest excitement for us is the results we have been getting at Tendaho and particularly Megenta. We will be starting exploration again in Djibouti during October so there will be news flow from there towards the end of the year. The real kick start will be when we start drilling Megenta.

Do you get a sense, particularly given bullish market forecasts over the price of gold, that larger mining companies are showing more interest in partnering on these sorts of projects? Has that improved your negotiating position?

Yes, without a doubt. Because we are 99% gold focused – with gold production, good gold targets. Look at the fact we have got a top mid-tier company like Centerra Gold coming into one project in Turkey and Teck Resources, at the bottom end of the top-tier, also coming into a future gold project. We have also got serious interest in what is happening in the Rift Valley, so I think it has put us in a very neat position. We are fortunate that we are not too diversified commodity wise at the moment.

Staying on the subject of gold prices, has the performance of prices influenced your strategy in terms of expanding exploration projects and driving ahead with production plans?

Absolutely. I’m bullish about gold but not the $1,500 that people are talking about by the end of the year. I think there is a line now at $1,200 - central banks are taking more interest and there are a lot of pluses that will keep us at $1,200, and I’m more than happy with that. In terms of costs, we think that our small projects will comfortably come within the $200-$300 range, so the margins could be very exciting indeed.

There is a sense that the moment that Stratex makes the transition from explorer to producer a re-rating of the shares is likely. What are your views about that?

We recognise that we are not going to get re-rated without anything other than really good drill intersections. We see that potential around the corner. But the real re-rating will come when feasibility is completed and the button is pressed to go to construction at Inlice and we go forward to advanced feasibility at Altintepe. The market likes resources going to development.

Thanks for speaking to Stockopedia News.