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Barry FitzGerald writes his legendary Garimpeiro resources column weekly for Stockhead

Last week Garimpeiro wrote about the strategy of following equity investments made by mining groups in selected junior explorers.

The idea was that as the mining groups have obviously done their homework, drawing on their in-house expertise, it is a fair bet that the chosen junior has a better chance of success than a junior not the target of a similar equity investment.

Last week’s example was the $2 million equity investment in April at 20c a share by Sandfire in Adriatic Metals (ASX:ADT).

Adriatic is now a 55c stock, moving up from 49c since last week’s report.

As an aside, Sandfire this week made a $2.5m equity investment in Alaskan zinc explorer White Rock (ASX:WRM) at 1.2c a share. That compares with its current 1.1c market price.

Today’s interest though is the alternative strategy of following in mining groups which have formed an alliance with juniors at the prospect/project level rather than at the corporate level through equity investments.

The classic example out there at the moment is AusQuest (ASX:AQD), trading at 3.3c for a market cap of $16 million, and its strategic exploration alliance with the $18 billion mid-tier miner South32 (ASX:S32).

Ausquest shares (ASX:AQD) over the past year.
Ausquest shares (ASX:AQD) over the past year.

The alliance was struck early last year and essentially involves AusQuest hunting for greenfield exploration projects which a company the size of South32 could be interested in.

To attract South32’s interest, the exploration targets are necessarily big. But like all targets, they have to be tested with the drill bit before anyone gets too excited.

Under the alliance arrangement, AusQuest and its team of project generating consultants have to date come up with 10 projects of interest in Peru and Australia.

What’s more, the alliance has agreed that drilling should proceed at five of the projects, with AusQuest managing the initial program with funding from South32.

South32 can earn a 70% interest in each project by spending $US4m, and it has to be said that there is nothing wrong with a company of AusQuest’s size having a 30% stake in a potentially major find, if things go that way.

Drilling underway

The alliance with South32 has just got to the interesting point, with drilling underway at the first of the big copper prospects in southern Peru identified by AusQuest.

The 10-hole drill program at the Chololo copper prospect in itself makes AusQuest one of the most leveraged to exploration upside amongst the juniors on the ASX at present.

Two drill rigs are whirring away at Chololo, 30km from the port of Ilo.

Preliminary work by AusQuest suggests the potential for a buried porphyry copper system in a region where such systems are measured in the billions of tonnes of copper and gold mineralisation.

Should Chololo disappoint, there are plenty of other prospects for the alliance to test, both in Peru and Australia.

‘Key milestone’

Announcing that drilling had started at Chololo, AusQuest managing director Graeme Drew said it was a “key milestone for AusQuest and an exciting time for our shareholders.”

“The target being drilled at Chololo has the potential to be a company-maker and we are keenly awaiting the outcome of our first drilling program in Peru, where many large copper deposits are known to occur.”

Cerro de Fierro is expected to be the second Peruvian project to be tested with the drill bit later in the year. It is an iron-oxide copper-gold target.

Three projects in Western Australia are also due to be drill tested in the months ahead. They are the  Blue Billy zinc project, and the Balladonia and Jimberlana nickel prospects.

For a company of its size, newsflow from AusQuest for the rest of the year is set to be particularly strong. Whether it snags a big one for the alliance remains to be seen.

But it is having a crack, that is for sure.