Ur-Energy (TSX: URE, NYSE: URG) – Two Can Really Ease the Pain (Transcript)

Interview with a candid Jeff Klenda, President & CEO of Uranium producer, Ur-Energy (TSX: URE, NYSE: URG).

Ur-Energy is one of the two companies that submitted the Section 232 Petition to the US government, Department of Energy. Klenda tells us why he felt it was the right thing to do at the time. And with an announcement expected this week, he expresses his hopes for the Nuclear Fuels Working Group decision.

Klenda is a forthright speaker and doesn’t shy away from the reality of the numbers in the market and for Ur-Energy. Klenda is clear about how long Ur-Energy can run before it needs to go to market and raise more capital. We discuss the implications of cost cutting, inventories and dwindling contracts for Ur-Energy.

Klenda also opens up about his peers and some of the barriers and hurdles that they will have to overcome.

Interview highlights:

  • 2:08 – Company Overview
  • 4:08 – Section 232: Drivers Leading to the Petition
  • 10:39, 25:06 – DOE Announcement: $150M Distributed How and For What?
  • 12:52 – Business Plan: Decisions, Cost Cutting Measures and 2019 Sales & Inventory
  • 18:06, 27:17 – Contracts vs Spot and the Likelihood for Junior Company Funding
  • 19:37 – Value Creation and Moving Forwards: Where Will UR-Energy sit in 2021?
  • 37:06 – Struggles Fuelling M&A Talks: A Look at the Unfolding Situation

Click here to watch the interview.


Matthew Gordon: You are one of the big names in this Uranium space, and we’ve been keen to talk to you. Here you are today. Jeff, could you start off and give us a 1-minute overview of the business so people can sort of put that in context then we’ll pick it up from there.

Jeff Klenda: You bet. Well, Ur-Energy, we started now, come the end of the month, we will mark 16-years since I and a couple of other guys founded this company. And I don’t mind telling you, we spent the first 7-9-years as a permitting and licensing story. We finally got our record of decision in October of 2012. We spent the next 9-months building out our processing plant. We you completed it on time and on budget, spent the next 2 months in commissioning, and we’ve been producing now since August of 2013; so for the last six and a half years, we’ve not only been producing but we’ve emerged as the lowest cost producer globally outside of Kazakhstan. I won’t go into the details as to why Kazakhstan is the lowest cost producer, but it sure helps when you devalue your currency by 90%. So anybody can look like an economic marvel when they can do that and still sell into the US market.

 But beyond that of course we were, I think forward looking; our board was, and so was I. Back in 2011 through 2015, we put contracts in place that we still have and are still delivering into to this day in 2020, and a couple into the next year and 2021. That’s given us consistent cashflow, but more importantly, it’s allowed us to navigate this minefield without blowing up our shareholders. And by that, I mean blowing up the cap structure. We’ve only raised USD$22M since Fukushima occurred, and that’ll be 9-years come next week. So, I think that that’s one of the strongest points about our company.

By the way, I am the largest shareholder in this company, unlike most, or virtually any of my peers. I’ve got USD$3.5M of my own money in this, so I am the gatekeeper. I hate issuing shares and we are a very shareholder friendly company.

Matthew Gordon: Thanks very much. Good summary. Can we kick off, there’s a lot of topics to discuss and you are well known for having a view on these things, strong views on these things. Can we just kind of kick off with the Section 232 petition? You’re one of one of the two companies that submitted that petition along with Energy Fuels with Mark Chalmers, who we have spoken to a few times on this program.  I’ve read the press releases; we are talking about adversarial behaviour in the market and security and so forth. I mean, what was the, what was your actual driver for that petition?

Jeff Klenda: Well, for me, the driver was that I met with Rick Perry in his offices along with the UPA, the Uranium Producers of America, and that was in July of 2017. Before we left the building, I decided that I would start the section 232. We actually did it, we made the decision before we ever hit the curb that morning.

Matthew Gordon:  Why do you say…what had been said in those meetings that riled you?

Jeff Klenda: What was said in the meeting was that Rick Perry acknowledged that when we were making the case that, look, we’re dying. And we were formerly the largest producer of Uranium on the planet back in the early 1980s, late 1970s, producing 43Mlbs, 44Mlbs a year, meeting all of our own personal needs. Unfortunately, that changed over the years and it really changed with the accelerated production coming out of Kazakhstan. We believe that it is very, very dangerous to become this reliant on Russia, Kazakhstan, and Uzbekistan, and so we filed a section 232 basically opposing that and suggesting that we needed to preserve the fuel cycle in the United States, and we thought that the best, most benign way to do that would be by simply imposing a quota, saying to the US utilities, you can go out there and you can buy whatever you want from whomever you please, but you have to buy a 20% to 25% from domestic producers. We’ve got to keep the fuel cycle alive. And Rick Perry agreed.

He used the term, ‘this is a national security issue’, no less than a half a dozen times in that meeting. And effectively said to me, bring me a 232 Petition because he wanted something that would bypass a deeply divided and extremely partisan Congress. Of course, everyone knows that characterises our extremely dysfunctional government here in the United States and give me something that I can put on the President’s desk. We did just that with the 232.

Now, unfortunately on July 12th of last year, we did not get the outcome that we had hoped for. But nonetheless, it gave birth to the working group, and we are we’ve seen positive outcomes from the working group. Obviously, the line item that went into Trump’s 2021 fiscal year budget; that’s a good start. But we are now waiting for what we are told is going to be immediate short-term relief to come out of the working group. That was as of last Monday. The Government functions on its own timeline, so we continue to wait.

Matthew Gordon: If you don’t mind, let me just finish off the 232 component. You have given lots of reasons that, I mean you genuinely believe that this is a security issue, not an economic one. So, what is to stop the US Government going and getting everything, they need from the Australians, the Africans?

Jeff Klenda, Well, the problem is that the general belief in this, this isn’t the first section 232, the first one was brought in 1988 because we had actually gotten down to the point where we were only providing 37.5% of our own needs, down from 100% less than a decade earlier. So, we found ourselves in a position back in 2017 where approximately 93% of our fuel needs were coming in from outside the United States. And the utilities would make the argument that, well, this is not a problem because of course, we can get all that we need from our good friends; the Canadians or the Australians or others around the world. Well, sadly, we all have come to believe and understand that that’s not true. Australia’s production is really basically down to whatever BHP produces there as a by-product. And the Canadians are only producing now out of one facility, at cigar Lake. They have shut down the largest production facility in the world because the economics simply do not support it and they don’t have long-term contracts to support it.

So the sort of harsh reality is, is that now, especially after there was no action taken on 232, we find ourselves in the just dangerous position of being 100% reliant on outside sources, foreign sources for all of our nuclear fuel, and yet it supplies 20% of our base loads. So while I am I am grateful that we have Donald Trump in the White House, because he is a supporter of nuclear, and it’s nice to have that for a change, we understand we were not the constituency of the Obama administration, I don’t want this to become political, but it’s nice to have a friendly in the White House for our industry, and I think that when he is saying now that we have become energy independent – well, yes, except for that 20% that nuclear counts for our base load, which we are 100% reliant on foreign powers for.

And sadly now, because of the closure of McArthur River, whereas before we were about 40% reliant on Russia, Kazakhstan and Uzbekistan, we are now well in excess of 50% reliant on those 3 countries. And keep in mind, this something that is imperative to understand and that is that the Russians actually control and own a significant portion of the Kazakh production. So when you take a look at this, this is not just, well, we are getting the bulk of it from Kazakhstan, and they are a market economy, they are a relative friendly and so we can rely on them; well, no; Vladimir Putin owns it. He controls it and he will dictate where that material goes and when. So, this is something that is not well-understood but we like to think that we have done a pretty good job of making the Department of Defence, Department of Commerce, and the Department of Energy well aware of this. So now, as we are facing a whole new battle with the Russian suspension agreement, these things are coming into play and the battle lines have been drawn.

Matthew Gordon: Like I said, before we started this interview, I think you suggested that perhaps there’s another conversation to be had there before we get drawn into the politics and geopolitics of this. So, let’s come on to the recent announcement: the USD$150M a year for the next 10-years. The statement, to me, and the subsequent articles, they seem vague; there’s no real clarity as to who that’s going to, where that’s going to, how its being divided up. It’s just a number that seems to have been plucked from the air.

Jeff Klenda: That’s correct.

Matthew Gordon: What do you know?

Jeff Klenda: Well, here’s the situation, we had the same questions, by the way, we were taken through the process. Right now what is happening is that there are appropriation companies on the Senate and on the House of Representative’s side; they are kicking this thing back and forth, and as you, here in this country, when appropriations are added to the budget, we just normally refer to it as ‘pork’, and the negotiations take the form of, ‘My pork is better than your pork, so my pork needs to stay in, your pork needs to come out.

What we have been told is that Congress is hoping to have a joint budget. Now, take that for what it is, by some time in April but no later than May. The problem is that we are now in an election year so Senators like Mitch McConnell and others high profile have said, we will not take that up, even when we have a budget we think we can move forward with we will not take up the real intense negotiations until after the elections.

So, to paint a bit of an, unfortunately, ugly picture here, if you can imagine, we get into the first week of November, whatever the outcome of the election is, now we are really going to start fighting over the budget. Now it is more, ‘my pork has to stay in, and your pork has to get out’ becomes much more strident, becomes much more intense. So that’s okay, the problem is that you’ve got the Thanksgiving break, which we’ll send them all home for five days, and what I think will happen then is that it’s going to be a knock-down and all bloody fight all the way up until the day before Christmas Eve, and they’ll come up with something last minute that everybody thinks they can live with, and mainly so that they can go home for Christmas. So sadly, that’s the way we do things in the United States.

Matthew Gordon: I think that’s fascinating. And I do want to get into your business model, your plan. You’re working and operating in a very complex but also difficult commercial environment right now, okay. And I’ve got to admire all of the CEOs who are having to do what they need to do to survive. Well, except for the ones who are perhaps being economical with the truth; not so much them, but there’s a great group of hardworking CEOs who are trying their best to do the best for shareholders. And I want to talk about what you are doing. I’ve read you’ve been through a cost cutting exercise, you’ve renegotiated payment terms and I suspect contracts, and that’s not easy. I’ve been in that situation myself. These are commercial and human decisions you’re making. I mean, can you talk people through some of the things that you’ve had to do over the past couple of years, two, 3-years to actually get to this point?

Jeff Klenda: Sure. Let’s keep it down to a manageable timeframe; 4-years ago I was just under 100 employees. Today I’m 30 and that represents 4 reductions in force and the last one was probably the most difficult of all. And that was because you’re starting to, when you get down to that low, you’re starting to cut into guys that have been with you for 8, 9, 10-years. That is extremely hard for people.

Matthew Gordon: That hurts, that hurts.

Jeff Klenda: So, what we did, most importantly, is that we have not waited for somebody to kick us in the behind and say, look, you guys need to cut costs. We have always been way out in front of that. We’ve always been very proactive on that. When everyone else decided, look, we’ve been slaughtered because we didn’t get what we wanted. Our shares have just, you know, cut by 40%, we’ve lost 40% of our value, we’ve got to get out there. We’ve got a market. We’ve got to try and get our share price back up. We didn’t do that. Frankly, I didn’t see much point. I didn’t think there was a very big audience. A lot of folks have just been burned because they had been speculating on what the outcome of 232 would be, so we decided to stay home, clean off our own front porch.

We went department by department. We engaged in cost cutting. That was extremely severe but very, very effective. We did a reduction in force where we took down into another 12 highly experienced, long time employees that came out as well. In addition to that, we restructured our debt with the state of Wyoming, our industrial revenue bond, where we now have gone from making a quarterly payment from USD$1.5M per year, a quarter to where it’s USD$178,000 per quarter, and for the next six quarters that will save us USD$7.8M. So, it’s been things like that that we’ve had to do, but we felt that it was critical.

Matthew Gordon: That’s, just to clarify, that’s deferred, right?

Jeff Klenda: We had it out on the runway.

Matthew Gordon:  You had it on the runway; i get it. But that money’s been deferred, it hasn’t been written off ..?

Jeff Klenda: That’s correct.

Matthew Gordon: Okay. So you’d need, you’re basically saying, we’ve got some revenue coming in, which is great, and I do want to talk about that in a second, but the cost cutting is, is the bit which is, it gets you the runway, to use your phrase, down the line, so that you are not going to shareholders and asking for more money to sit around doing nothing. Okay, let’s talk about the production then and once we’ve understood the revenues coming in and the cost, maybe we can have a useful discussion about what that looks like today. So, last year, 2019 look like what, in terms of sales?

Jeff Klenda:  Well, we had a good year last year and we just came out with our financials last Friday. We ended up delivering into the market 665,000 lbs Uranium at an average price of USD$48, USD$50, just under USD$49 p/lb. We chose to purchase more than 2/3rds of those pounds and we purchased them at an average cost of USD$26 in the marketplace. And so, we were able to effectively scrape the delta out of that between the shares that we were delivering into our contracts and then our purchase price in the marketplace. So, we actually had a quite good year. We did USD$32M in gross revenues. We ended up with gross profits of USD$12.2M. And unfortunately, most of that was wiped out because we no longer have the large scale contracts moving out into 2021, we had to now write down our inventories to a level to reflect current market prices, whereas before, as long as we could say to the auditors, well, I’ve got USD$48 contracts out there, these pounds have a value of USD$48, now I have to say they have a value of USD$25 because just like Cameco and others in the industry, we’re coming to the end of this contracting cycle and so we have limited contracts moving forward, both this year; when we’re going to deliver about 200,000lbs pounds at USD$42lbs, again with a purchase price of USD$26lbs. And next year, we go down to virtually nothing. It’s under 100,000lbs we have.

Matthew Gordon: Okay. Well firstly, I like the fact that you’re being honest about the inventory levels and what it represents on the balance sheet. Again, we interview too many companies who try to deceive.

Jeff Klenda: I’ve been accused of being too transparent.

Matthew Gordon: Okay, that’s never a bad thing. Let’s talk about these contracts so that people understand them. Again, because there’s going to be a wide range of understanding here; there’s some guys who watch this thing who are wonderfully informed, and the others are coming new to it, looking at the macro story for Uranium and thinking, well maybe now’s the time, with prices as they are, to be getting in here. So, let’s try and describe the contract versus spot for those people, if you may.

Jeff Klenda: Absolutely. At the present time, spot price, let’s just call it USD$24.50. I think that that’s probably a good workable number, and while there are a number of reporting services in terms of pricing, I think that it would probably be a usable number of right around USD$31 to USD$32 now on term price. And typically, you’re going to have that kind of a delta between spot and term. Now what we’ve seen over the last several years is that we’ve seen kind of a reversal; it used to be 10-years ago that 90% of the material that was sold into the market was done so under term contracts. Of course, that’s no longer the case. You’ve seen the reports probably out of UX / TradeTech or others where now the vast majority, or the majority of the material that is being transacted is being transacted in the spot market. So sadly, that’s the situation we find ourselves in right now. And that does not lend itself to entering into any new contracts moving forward. Not for us, not for Cameco, not for anybody.

Matthew Gordon: Okay. So, break that down for me; you said obviously you’ve had a few contracts for 2018, 2019, you’ve got this 270,000lbs, which you said will be sold at your discretion. That means there’s no contracts against those and that’s more likely. Contracts typically are higher than spot price, again for the 40 and so you sold a quite significant average. Your average, your pounds were sold at about USD$60. You obviously bought in the market, you sold the delta, your average was somewhere in the 40s, so you had a good year last year, right?

Jeff Klenda: Very good year in the fourth quarter, yes.

Matthew Gordon: This year, with your 270,000lbs, that’s going to be somewhat different. So how much value are you attributing to that?

Jeff Klenda: Well, here’s the situation: the last time I gave a public presentation, I had one of our existing shareholders and say, ‘Hey, what kind of a year are you going to have in 2020?’, and I said, ‘Well, not trying to be evasive, but that depends. And what that depends on is if we sell our inventories and if we do at what price we sell them’. So, I think it’s important to understand that first of all, we do have solid cash coming into the year and we’ve got revenues from our many contracts. Those are enough to get us through to the remainder of the year. Now, once we get to the fourth quarter of 2020, the question will become, have we been able to sell our contracts? This is why we’re waiting for the most recent report that is due any time now. We were told it was going to be coming out on Monday or Tuesday. It’s Government – I don’t place much stock in that. I’ll believe it when I see it. I’ve been at this long enough to know what my government means by immediate is not necessarily what I mean by immediate, and what they mean by relief may not mean relief.

Matthew Gordon: Then I’ve got a small anecdote for you: I was working in Africa and when I was told by government officials it would be done now, they didn’t mean ‘now’; the phrase you’re looking for was, it will be done ‘now now’, which meant now. So, I have some sympathy.

Jeff Klenda: One of our Directors spend a lot of time in Africa and he said that the phrase in Africa is, ‘it can happen anytime from now.

Matthew Gordon: Right, sorry to interrupt, but yes, if we could just talk about contracts just a little bit longer here because you described earlier on in this interview, your scenario; what you think the scenario would be politically this year. There’s a lot of events which would possibly prevent Government from making any meaningful decisions. So, we’re looking towards the end of the year. I think that’s an honest appraisal. You’ve got enough money at the start of this year, and the end of some of these contracts to generate revenues to see you through to the end of the year. Plus, you’ll have your 270,000lbs at your discretion to do something with if you can get a contract or a spot price, which reflects your value, your desired value for that. Where does that put you in 2021?

Jeff Klenda: Well I think you’ve driven down to the heart of it now. It all comes down to the contracts and what we’re hoping for, and this is why when, if you were to watch, for example, Secretary Brouillette, when he was testifying in front of the Senate Energy Committee on Monday morning, we had Senator Barrasso in there peppering him with questions, asking him, well, when are we going to see this report? It’s critical to us because one of the things that we’ve been talking to these guys about is the fact that, look guys, it doesn’t do me any good if you help me two years from now. It doesn’t do me any good three years from now. I’m in a better position than anybody else in the industry, and I know that by the time I get into the second quarter of 2021, whether by that time I will have sold my inventories, I’ll need to raise money, most of the players in our industry have lived equity, race to equity race. That’s just how it is and they have done that ever since Fukushima.

We haven’t had to do that. We have only raised USD$22M since Fukushima; we have been very fortunate. But what we are hoping for, and what we have spoken to Kudlow about and what we have spoken to each of the members about the working group about; this is the fact that we need immediate relief. Now, what form might that take? Well, for the two producers, the two legitimate producers that remain: us and Energy Fuels, that immediate relief, we hope will take the form of the purchase of existing inventories. Does that solve all of our problems? No, but if you give me a higher price than spot price for the sale of those inventories, those are domestically produced pounds, they can be used to convert and enrich and become what is called, ‘unobligated material’.

That’s critical because if you’re going to use it for military purposes in any way, if our government is going to use it for their purposes, it needs to be an obligated material. So what we are hopeful of is that we will see something out of the working group that it will provide immediate relief in terms of purchasing our existing inventories and that will extend our runway and give us more time to see things like the line item in the budget for those contracts.

Matthew Gordon:  Right. Okay. Again, a lot of a lot of things in there. The question was what happens in 2021 and I think you’ve gone back to; well it depends if there are any meaningful announcements between now and then.

Jeff Klenda:  Well, our inventories are pretty good to go right on through to about 2H/21.

Matthew Gordon: Okay, fine, and that gives me a sense of what the margin, your expected margin is on the 270,000. Okay. Just on again, the USD$150M, this whole discussion and you know being, pressing the government. You said the government works on its own timeline and whatever it says doesn’t equate to a meaningful economics in any way. And so yes; until the money’s in the bank, it’s not in the bank. Right? So, what do you think you’re going to be able to persuade the government to buy from you at? Or what do you want, what price will you need for them to buy at? Because they’re taking guidance from you guys, aren’t they? They don’t really know this space.

Jeff Klenda: They’ve asked and we have provided this data to them, not only during Section 232, we provided a lot of data to the Department of Commerce, but even the working group itself, we have provided, we formed our own core working group and that included not only ourselves and Energy Fuels, but the conversion and the enrichment as well. And we presented our own white paper to the White House through Larry Kudlow, as chairman of the working group, to make our case. Now at what price they may purchase. That of course is the complete unknown. They, I think that if you talk to somebody like Tim Gitsel, over at Cameco, he has been quoted as stating, look, I wouldn’t even look at restarting production in the United States unless I could get somewhere around USD$$60lbs or greater. And so, I’m going to say that if that’s a number that’s good enough for them, that’s what’s good enough for me. But we have demonstrated that we can not only function well at USD$$60lbs, I think people have seen how we functioned at USD$50lbs.

One of our concerns quite candidly in this space, something that I don’t know if it is a bit indelicate for me to share, is that there are others out there that are not producers, and there are only two legitimate producers left in the United States. What representations they may make, and what contracts they might be willing to enter into, whether there’s a reasonable prospect for them to be able to deliver into those contracts is another matter. So, it’s a bit of a wild card for us.

Matthew Gordon: This is something that we talked about before with other CEOs. You’ve produced, you’ve sold to utilities, you sold into market. Tell me this, what do you think the chances of a utility sitting down with a Uranium junior whose pounds are in the ground and saying, I’ll give you something. I’ll give you a contract for something. Is that reality?

Jeff Klenda: I think that they may, but I think that they’re going to be very guarded. I think what they’re going to do in this, and look, I know all the utility buyers, I see them at all the conferences. We’ve done business with six of them when we had all of our contracts in place extending all the way out through the end of the decade, which by the way, in 2014/15, seemed like a long time. Okay. So 5-years went by quickly. But you know, when you talk to those guys, I think a couple of them said, well, you know, you guys haven’t produced yet so we won’t give you maybe the 200,000lbs that you’re asking for, but we’ll go 100,000lbs with you, or, we won’t give you the 300,000lbs you are asking for, we’ll go 150,000lbs. And you have to prove yourself. I mean, look, these guys have seen it all.

And one of the things you need to understand about the utilities is that the buyers are, they’re smart guys. They’ve been in the industry a long time. They’ve seen it all. They know all the players. I mean, the one thing about our industry is that the BS doesn’t go very far, and the reason being is because they know those projects as well as we know them ourselves. Not only are we getting to be a very small fraternity at this point of producers or prospective producers, but the utilities, they can look at a project and we can say, well, you know, we think we can produce this project, let’s call it Shirley Basin, and we think that we can have a cash cost thereof under USD$15lbs, and they’ll say, well yeah, but that’s in this area, in that area. But then by the time you get over into this area, don’t you expect a little higher cost by the time you get there?

Well, you wouldn’t expect them to know that much about your projects, but that’s their business; they’re supposed to. And so, I think that unfortunately, our industry is one that has survived on, I mean this has levity, I call it BS squared: blue sky times the other BS. And unfortunately, it’s been true. But I think that what’s happening here, and I think this is something else that your listeners should probably understand, while pounds in the ground may have meant something five years ago, we are rapidly entering a time where fundamentals are going to be pretty much all that matter. If you can’t demonstrate that you can produce, do it in a timely manner, do it efficiently, and remember something else; It’s not just about getting to that level. You’ve got to get there and got to stay there. That’s really tough.

I mean, you’ve got to get to 1Mlbs, and you’ve got to stay at 1Mlbs, come hell or high water, rain or shine, doesn’t matter, you got to stay there. And utilities when they’re giving you those contracts and trust me, they’re going to assess that. And so I think that you might be able to smoke them to a minimal extent, but not to a great extent. I think that, look, we’ve had utilities sit down with us recently and say, we know what you can do. We know what Cameco can do. We know what Energy Fuels can do. Anybody else? – we don’t know.

Matthew Gordon: It’s an interesting area for debate as well because again, we have spoken to a lot of Uranium juniors CEOs from all around the world, and you know, the management teams have varying degrees of ability and they are absolutely working hard. The tough bit here is walking into, not getting some fund to invest in your equity because they’re taking a bet on the Uranium space. But funding the capex to develop these things out. These are some pretty big numbers here, right?

Jeff Klenda: You’ve got to be the real deal.

Matthew Gordon: Yes.

Jeff Klenda: I think, I mean, look, I’ll tell you, for us personally, I mean we went to one of the big French lenders, right? I won’t designate who they are, but they said to us, look, you guys seem like you’ve got a great project here, great management team, but you’ve never produced before. You need to build this thing out. So they just told us quite candidly, we won’t fund you the first time around, but come to us the second time after you’ve been producing for four or five years and we’re all over it. And so we have those type of capital options open to us.

Matthew Gordon: But that’s the gap I’m concerned about in the marketplace with, you know, 50 players now, down from the heights back in the day, 500, 400 – 500 Uranium companies, but down to 50, more manageable. But I just feel that initial hurdle is the biggest hurdle. You know, of course I used to say the same phrase, we’ll give you the money after you’ve got it going. You know. Bankers offer you an umbrella when it’s a sunny, and I think it’s a little bit late then, you know.

So, some of these companies that we’ve spoken to can’t give us the answer to how they get that initial either cornerstone investor or institutional, from wherever to get this thing going. You know, getting a couple of small contracts is not going to be enough to get some of these banks to move because it’s too risky. It’s far too risky. So, do you see, how do you see these small companies enabling themselves to get funded? What do they need to say? What do they need to do?

Jeff Klenda: Well, unfortunately, first of all, I think that your numbers are a bit high; are there 50 companies out there? I would say there’s less than 50, and the vast majority of them are explorers, usually in Canada or Australia. When it comes to those that are actually capable of producing, that number gets down to a dozen or less. When it gets down to the number in the United States, that may actually have the capability of producing, and particularly for government purposes, say under the $150M line item in the budget, or something else that may come out of the working group or whatever the case might be. Well now that number gets still smaller, and unfortunately that is…

Matthew Gordon: What’s the number, Jeff?  Is it 2?

Jeff Klenda:  I think that there are potentially, and I say potentially, 4. And I think that, but now keep something in mind here; this is something that we, by the way recently received a request for information from the Department of Energy that we filled out. One of the things that we had to list in there as a caveat was, we’ll keep in mind this depends, because if the United States were to ramp up to expose production capability, you can’t do that without Uranium One coming back into production. And you can’t do it without Cameco coming back into production.

So, the question here becomes, what are we capable of producing? Well that depends on a couple of the foreign players that are right now on standby. And so, of the other guys -how did they get there? Well that’s, now you’re asking the question that every, frankly intelligent fund manager should be asking, look, you know as well as I do when you’re an issuer, I walked through a lot of portfolio manager’s doors and invariably the smart ones, the good ones anyway, ask you one question before you leave: what am I not asking? What am I missing? What am I overlooking here? What is the potential landmine you could trip on that could blow all this up for you? And what they’re not asking right now is what is your capex to get to any minimal reasonable level of production that you can sustain? And that is the question that’s not being asked.

And so what I’ve done, and what we’ve done as a company is what we’ve looked at everybody and we’ve looked at the players that we believe even have a reasonable shot of getting into production. How long it would take them to get there and we’ve just decided, okay, let’s come up with a number that we apply to everybody. Let’s call that a 2Mlbs per year run rate. Okay, 2Mlbs per year. What’s it going to cost for you to get there? Not just get there but sustain it. We know what that number is. It’s in our PowerPoint. It’s on our website. For us to get there, we can get to 1Mlbs, 1.25Mlbs per year, out of Lost Creek, I can do it for about USD$14M to USD$15M.

Shirley Basin is going to cost me about USD$25M because I have to build a satellite plant there.

So, for me that number is over a 2-year period of time. It’s about USD$40M. More than likely I would go out there, I would probably do debt financing against contracts. I won’t build out. Nobody’s going to build out without contracts and they simply will not. So, what we will do is that we can get there for about USD$40M. More than likely, at least half of that will be debt, and we would only be very selective.

Like I hate issuing shares. Everyone knows that about me. I’m very stingy when comes to that. And that’s what my shareholders like about me. I mean the last proxy, I got 99.6% of the vote. I’m not even sure Warren Buffett gets that, but they know that I don’t issue their shares willy nilly. I won’t.

So, I think that it comes down to it, I can do it for USD$40M. Now you pick a name, what’s that number for them? What’s their timeline to get to that 2Mlbs of sustainable production. So, I think that what we need to do here is, we need to change the dialogue a little bit in terms of let’s just assume, let’s just give you the benefit of the doubt and assume that you can get to this 2Mlbs per year. What’s your timeline? What’s your cost? More importantly, what’s your dilution to your shareholders in getting there? I know what mine is.

Matthew Gordon: That’s the name of the game. It’s the name of the game.

Jeff Klenda: At the end of the day, it’s the only thing that matters. Right?

Matthew Gordon: Absolutely. Well done. On that basis, some companies are going to struggle. Are you seeing, or have you had any discussions about mergers, JVs, acquisitions, asset sales? Possibly, but I can’t say, right?

Jeff Klenda: Well, in the last 5-years, we’ve had three offers for the company and of course none of them were adequate. They were all, I would classify as opportunistic. That’s fine; you would expect guys to do that. And that’s been other players in the space, and it’s been private equity. So you know, look, I mean, look, I’m a lean, clean machine. Everyone knows that I’m the lowest cost producer. I’ve got years of production ahead of me. If you’re going to make a grab for anybody in the space where you’re going to buy, well, we know who we are.

We have no illusions about that. So, for us, I think that yes, there’s always those ongoing conversations. There’s absolutely nothing imminent. And the problem is, is that over the last three, four years, as we have evaluated a number of these opportunities, the harsh reality is as well, this guy will sink me in about a year. If I merge with this guy, he’s won’t be quite as bad, he’ll sink me in about a year and a half. And this guy, he’ll sink me about two and a half years. So, but the one thing they all have in common is they’ll sink me. So, I can’t, for me it’s all about, you know, guys, I know what I can do. I know that I can sustain myself in a very difficult environment. We’ve demonstrated that and we’ve demonstrated we can do that without diluting our shareholders to oblivion. The only reason you’re interested in doing something with me is because you know, you can’t do that.

So, it’s the harsh reality of the market that we find ourselves in right now. But I like to believe that the fundamentals are actually turning, that I believe that the supply of fundamentals will begin to reassert themselves. We have a lot of new reactors starting up at a faster pace and they’re shutting down where we are. Technically we are a growth industry and, but the bottom line for us, and this is probably the most crucial to understand; is that our government, we put this thing in the national dialogue, we’ve put it on the national stage with 232 and with the working group. And the one thing that our government has been forced into it, they’ve been forced into an uncomfortable position. And that uncomfortable position is, is what are we willing to do to save the fuel cycle in the United States? Because if we don’t save the fuel cycle, we lose our seat at the table.

We’ve been the primary gatekeeper; we’ve been the primary deterrent to nuclear proliferation for the last 70 years since the beginning of the nuclear age. And what are we going to do? Countries like the Saudis, Russians are going to build their first few reactors. They’re going to build them out, they’re going to design them, they’re going to fuel them. They’ll re eventually decommission them and hey, we’ll buy and pay for the first 2 or 3.

We can’t say anything like that. The Saudis have said to our state department, well, why should we do business with you? You guys don’t even have a fuel cycle left – they are right. And so if we want to continue to be players in the game, and particularly if we want to continue to be that deterrent to the nuclear proliferation, I mean, look, the bad guys around the globe right now that are going rogue and causing a lot of trouble: whether it’s North Korea or Iran, Pakistan, or whomever, they didn’t get it from us. So, what are we going to do? We’re going to cede that seat at the table to the Russians and the Chinese? You can’t do that.

Matthew Gordon: It kind of feels like the Americans already have ceded that seat in reality, but hey, Jeff, that’s a conversation for another day. That’s a conversation for another day. Jeff, I want to say thank you very much for being so candid and refreshingly honest and straight forward about what you see is going on here. I’m interested in your timing.

Jeff Klenda: It’s funny; the utilities find my candour to be a bit off-putting. Thank you for appreciating that.

Matthew Gordon: Well I guess shareholders and buyers would have two different sets of goals. But we should catch them again and talk about that geopolitical component because that does, I think that’s fascinating.

Jeff Klenda: I’ll tell you when I’ll be willing to do that when I would feel like really getting in trouble with the utilities.

Matthew Gordon: Okay. We might have to defer then.

Jeff Klenda: Look there are a lot of positive things going on and I’ll leave your viewers with this thought: we tend to understate, we’re not overly promotional. In fact, we’ve been accused of being too transparent and not promotional enough. But the one thing I know for a fact is that I’ve given myself great runway. I wouldn’t trade positions with anybody else out there in the industry. And I know every other player intimately. I can run faster than anybody else. I can do it at lower-cost, and I can do it at less pain and dilution to my shareholders. There’s only one of us that gets to say that. That’s U-r Energy.

Matthew Gordon: Let’s finish on that note. Thank you very much for your time. Let’s stay in touch. Great to hear from you. I hope there’s some news. It looks like it won’t be necessarily be today, hopefully next week and I’d love to get your view on that when it does come out.

Jeff Klenda: Let’s do it. Yes. Once we get something from the working group, let’s hope that it’s something that’s positive, we’re hoping that it’s going to be, and doing another one of these on the heels of that would be quite instructive.

Matthew Gordon: Beautiful. Thanks for your time. Have a great weekend.

Jeff Klenda: We will. In our warm temperatures here. Thank you so much


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Neometals (ASX: NMT) – Shoot Me Down, But I Won’t Fall (Transcript)

The Neometals company logo
Neometals Ltd
  • ASX: NMT
  • Shares Outstanding: 545M
  • Share price A$0.14 (18.03.2020)
  • Market Cap: A$76M

A conversation about Titanium with Paul Wallwork, General Manager of Project Developer, Neometals (ASX: NMT), who helps us to understand the Titanium market and how it works.

So, if you are thinking of investing in a Titanium company, you need to understand supply / demand in that market. We suggest you listen to this explanation of Ti02. We’re fans of the Neometals story so far. Its patented battery recycling process looks like an intriguing way for investors to make money, and it appears to have the corporate infrastructure in place to facilitate big deals and give investors returns.

The management team’s track record of success extends to the Mt. Marion Lithium Project, where they timed their exit to a tee, selling their 13.8% stake for AU$103.8m. The story so far seems indicative of an encouraging idea: Neometals doesn’t get involved with projects unless they are going to work.

In this interview, Wallwork was also keen to talk about yet another option at Neometals’ disposal: The Barrambie Titanium And Vanadium Project (Barrambie). It has been granted a mining permit and has had exploration and evaluation expenditure totalling AU$30M (courtesy of Neometals) since 2003. But not before we had made him download what he knows how the Titanium functions.

So, all things titanium: it is found in nature as titanium dioxide; the most common mineral it is found within is ilmenite. When someone says titanium, most of us think of exotic supercars and fighter jets. However, the titanium metal industry only accounts for around 5% of consumption. 90% of titanium dioxide supply is turned into a pigment, titanium white. It is used in paints, protective coatings, plastics, etc. There are plenty of big players in the titanium market, including Rio Tinto, Iluka Resources and Kenmare Resources. Companies like Tronox are big producers of titanium pigment. Where does Neometals slot into all of this?

Wallwork claims the Barrambie Project has the scale, longevity and grade to stand out from the competition. Neometals also has “co-product credits.” The most valuable that is found in sand deposits is zirconium. However, in the hard-rock case of Barrambie, Neometals has vanadium, which is a “valuable metal” used in the steel industry. The ore body is forecasted to produce 9,235t of FeV80 and 6,337t of V2O5 a year, with an average plant feed rate of 2.66Mtpa, over an estimated mine life of 15 years. Neometals has an additional advantage, in the form of the mining jurisdiction that Barrambie occupies, Western Australia, a safe, stable mining region. This is something that is becoming increasingly rare. While a DFS was completed in 2009, which confirmed primary vanadium production from the conventional salt roast-leach process, the Barrambie project was temporarily suspended due to stagnant vanadium prices in the six years that followed.

Investors will hope Neometals can make things happen economically this time around. This will be aided by an MoU with the Institute of Multipurpose Utilization of Mineral Resources of the Chinese Academy of Geological Sciences, which was signed in October 2019 to develop the Barrambie vanadium-titanium mine through a 50:50 joint venture. Once again, Neometals is developing a project without the shouldering the burden of CAPEX alone. We are impressed with the business minds at Neometals, who seem to keep finding answers when it comes to making developments affordable. With Neometals currently valued at AUS$100M, with a share price of AUS$0.18, dilution looks a very unlikely outcome for investors.

Everything Neometals touches appears to be turning to gold at the moment, but investors will remain concerned the market is only valuing this company at cash. Neometals needs to up its marketing efforts.

CLICK HERE to watch the full interview.

We Discuss:

2:23 – Titanium and its Applications

5:22 – Titanium Grades: One Better Than the Other? Which Does the Market Prefer?

9:49 – The Market at Present: Supply and Demand

15:35 – Breaking Into the Market: Barriers for Getting into Production

22:07 – Barrambie Asset: Strategy, Scale, and Grades

28:18 – Extracting the Bi-Products and Talks with Partners

30:38 – Pilot Plant in China vs Australia

33:02 – Timeline of Progression: Deliverables for 2020

Matthew Gordon: Good morning Paul. How are you, Sir?

Paul Wallwork: I’m well, Matt, how are you?

Matthew Gordon: Not too bad. I see you’ve picked up a bit of sun there at the weekend, have you?

Paul Wallwork: Yes, it was nice and sunny here in Perth on the weekend, at this time of year it is often the case.

Matthew Gordon: Very jealous, very jealous. Paul, you are the general manager for marketing and product development for Neometals, but today you’re going to teach us about the world of Titanium, because I do have to say, apart from a song, I don’t know too much about it. So if you don’t mind, first of all, what don’t you sort of help people understand what Titanium is and what it covers, first of all, then we’ll talk about the demand and supply side of things.

Paul Wallwork: Well, when you talk about the Titanium industry, you are commonly talking about 3 key industries: Titanium Dioxide pigment, which is the largest consumer of Titanium minerals and accounts for about 90% of demand for Titanium feed stocks. You have the Titanium metal sector, which is basically that sector that produces Titanium metal, or a host of applications, primarily in aerospace and industrial applications. And then there’s the welding industry where Titanium is used as a flux in welding electrodes. So they’re the 3 main industries, the most important of which is TiO2, from a volume perspective because that consumes by far and away the majority of the raw materials consumed by the industries.

Matthew Gordon: Right. So that’s interesting because most people think of it as a hard, well one of the hardest substances on earth, rather than pigments, which is huge. So, give us an example of some of applications of some of the pigments again, just so people understand the context.

Paul Wallwork: Okay, well, Titanium dioxide pigment is a white pigment and it’s used in paint, it’s used in plastics, it’s used in textiles. So where you need a white pigment, TiO2 is the pigment of choice, and that’s because of its physical properties: it has a very high refractive index, much higher than most other pigments. And so it’s very good at scattering light. And so it gives you good opacity. It’s a product that is what’s the word? It’s non-injurious; so it’s something that can be put into food stuffs and cosmetics. And it’s a durable material and it imparts durability to a lot of the pigments and coatings that use TiO2. But what you’re looking for basically is brightness, opacity and the ability to provide a good colour in a pigment or in a paint. And there’s basically two types of TiO2 pigment: there’s different crystal structures, there’s the rutile crystal structure, there is the anatase crystal structure. In theory, these are interchangeable. Anatase is more suited to some applications, like for example, in textiles, and in cosmetics.

Rutile is more suitable in other applications, where you know, you have a requirement for high thermal stability. And I think the rutile TiO2 pigments are consumed primarily in industrial and automotive applications, but of course, across a wide range of pigment applications.

Matthew Gordon: Okay. And are there different types of grades of Titanium? Like is one ore better than another? I know you end up with a concentrate or an intermediate, but in terms of the ore bodies themselves, it just comes back to, you know, grade et cetera, but are there those sorts of quality issues?

Paul Wallwork: There are a few different Titanium minerals that are used as feed stock in the Titanium industry, and the most abundant of these is ilmenite, which is a Titanium iron oxide mineral. And there’s probably about 13Mt to 14Mt a year of this material mined annually. And roughly half of that goes directly into pigment processing. The other half gets beneficiated into higher grade, higher value TiO2 two feedstocks. Now I’ll come to those in a minute, but aside from ilmenite, there’s also rutile, which is a high value TiO2 mineral; up around 90% or 95% TiO2, and this is the most valuable of the TiO2 feedstocks because it has relatively low levels of impurities and it’s a reasonably pure product for the consumer to purchase.

There’s also an intermediate product which is something between ilmenite and rutile, and that’s leucoxene, and this is basically also an iron Titanium oxide but with progressively lower levels of iron, which have been leached from this material over time, in situ, and you end up with a product that could have a TiO2 content somewhere between 70% and 90% for example.

So you’ve got ilmenite at the bottom end of the spectrum with a TiO2 nominally 50%, but anywhere in the range of 45% to 65%. You’ve got leucoxene, which sits between about 70% and 90%, and then you’ve got rutile which sits high end at 95%, and they’re the natural Titanium minerals that are commonly mined and processed.

The beneficiary products include Titanium slag and synthetic rutile, and also a product called upgraded slag, which is something that Rio Tinto produces, which has a TiO2 content quite close to rutile, and that’s probably the most, that’s the second most valuable of the TiO2 feed stock. And when it comes to Titanium slag, you basically produce two types: you produce a sulphate slag and a chloride slag, and the naming convention comes from the end use. In other words, if that slag is consumed in the sulphate route process for pigment production, it’s a sulphate slag. If that slag is consumed in the chloride root process for pigment production, it’s a chloride slag. So you tend to talk in terms of chloride feedstock, sulphate feedstock, to service those two types of processes.

Matthew Gordon: Okay. And what does the market prefer? You told us rutile then leucoxene and then ilmenite in terms of order preference, with regards to the two different types of slag: sulphate and chloride, is there any preference in the market for either of those or are they treated exactly the same?

Paul Wallwork: The preference depends firstly on the process itself. The companies that are using chloride technology, except for the largest company, Comores, like to buy chloride slag, rutile and synthetic rutile. The sulphate pigment producers quite commonly will buy ilmenite, especially in China or they’ll buy sulphate slag. And their preference has to do with their ability to tolerate impurities and you know, the actual dynamics of their particular operation. The pigment companies, for example, do like to buy the beneficiated products because they’re higher TiO2, which enables them to produce more product for a given raw material input. It can reduce the energy consumption and reduce their requirements of storage. It can reduce their waste and by-product production. So there are benefits and therefore, the beneficiated and higher value TiO2 minerals achieve a price premium per unit TiO2 compared to ilmenite, which is at the bottom of the tree.

Matthew Gordon: Can you give us a sense of the size of the market today and what it’s projected to do? And I know when I look in the Neometals PowerPoint slide, you know, there’s, as with all of these things; we’re running out it says. These diagrams always do. So can you give me an idea of who’s producing today? At what levels, what the demand side of things tells us?

Paul Wallwork: Okay. When you talk about supply and demand of Titanium minerals, you talk in terms of TiO2 units, and it’s just a way of standardising the quantities. So for example, if you’ve got a 50% TiO2 ilmenite, you need two times of ilmenite to produce one TiO2 unit effectively. Whereas if you’ve got a ton of rutile, which is 95% TiO2, you need a little more than a ton of rutile, or one TiO2 unit. Collectively, the Titanium industry consumes around 7.5M TiO2 units annually. So that’s the size of the market. As feed stocks, the value of these materials would be off the order of USD$6Bn or USD$7Bn annually. Once you’ve converted those materials to pigments, the value of that sector would be of the order of USD$15Bn to USD$20Bn, depending on market pricing. And then of course, the highest value Titanium sector is the Titanium middle sector where you may be paying USD$10 per kg for Titanium sponge and even higher prices for milled or fabricated products.

Matthew Gordon: So I’m going to guess that the main consumer of TiO2 is going to be China, in terms of production of all the things that produces, would I be correct?

Paul Wallwork: You are correct. China has grown quite rapidly in the last decade or more to become the world’s largest producer and consumer of TiO2 pigment. I think it probably consumes about 40% of TiO2 pigments globally. The other large markets of course are North America and Europe where the per consumption of pigment is higher. In the advanced economies of North America and Europe., you’re consuming close to 3Kg of pigment annually per person. In China, that level is much lower; of the order of one kilogram per person, but that level has increased significantly in recent years. So the consumption of pigment really is a function of, I guess, affluence or GDP per capita. And so at some point you do reach a saturation point for pigment consumption, but China presumably hasn’t reached that level yet, given their consumption is much lower than these other advanced economies

Matthew Gordon: That’s interesting; so China is a significant 40%, it is significant, but it’s nothing compared to say, rare earths, which is, you know, up around 90%. So they’re not necessarily controlling the pricing in the market at the moment. So maybe this is a good time to get onto the supply side of things, and try and understand what the big producers of Titanium are, and then we can maybe merge the supply-demand conversation together at that point. So I know you’ve got a big project, we will talk about it in a second, but where does most of the Titanium supply come from?

Paul Wallwork: Basically, there’s two types of Titanium mineral deposit; there’s an Illuvial sand if you like, and that’s a heavy mineral sand deposit. And you also have a hard rock mineral, which is hard rock ilmenite primarily. Now, the mineral sand deposits are mined around the world in mostly in coastal regions of Australia, India, some of the Eastern and Southern and even Western African countries. And that’s probably where most of them, the heavy mineral sand is coming from. The hard rock is mined in places like China, Russia or Ukraine and Norway. And these are all relatively long-term markets that, you know, for example, in Western Australia where I am, mineral sands have been mine probably since the late 1950s here, that’s more than 60-years of operation now, nearly 70. And so they’re the two different types of mineralization that are commonly exploited.

And it is a global industry. You know, you’ve got producers in all parts of the world. As you also have pigment producers all over the world. The largest producers are in North America and Europe. China is rapidly growing in terms of its stature in the pigment industry and Lomon Billions is now the largest producer in China, which is of a scale now which is rivalling some of the larger Western producers. And so, you know, that industry is maturing quite rapidly. It’s also moving away from sulphate processing to chloride processing, which is the more modern technology; it produces less, less by-product and waste, and hence, it’s probably a desired position as far as a lot of the Chinese pigment companies are concerned.

Matthew Gordon: Okay. That’s interesting. So in terms of the market, you’re saying it’s a fairly global production supply commodity, it’s readily available. And if someone wanted to get into production, are there any barriers to people getting into, like, could new entrants come into market and kind of help with this supply-demand gap?

Paul Wallwork: The barriers relate to the quality of the ore bodies, I think. You know, beneficiating ilmenite or mining heavy mineral sands is not that complicated. And so in terms of mining operations, there’s nothing unusual about them. And for example, in the case of heavy mineral sand deposits where there’s no drilling and blasting required, where you simply have a free digging material, you know, mining’s quite simple. So the real barriers to entry relate to the quality of the ore body, and you know, where you have valuable by-product credits, that contributes to the profitability and likelihood of developing a new resource. And when I’m talking about by-product credits, I’m talking about Zircon for example, which is not used in the Titanium minerals industry, it’s mostly used in ceramics, but that’s a valuable co-product, if you like, from a heavy mineral sand mining operation.

In the case of the hard rock mining operations, if you can also extract Vanadium, which is commonly associated with these deposits, that’s another valuable co-product, and this is what we have at Barrambie, in Western Australia, which is a second valuable metal in the ore body that we will be looking to exploit in due course.

Matthew Gordon: Let’s come back to what you just said; so in terms of barriers, I’m trying to understand the barriers because if you look at things like Lithium, it’s readily available everywhere, and it’s a question of, do you have the technical know how to get that asset into production? It’s, again, it’s not hard. You’ve got your hard rocks kind of like this, but it’s not hard, so the barriers are low. The problem in that market is the supply. So for Titanium, you’re saying technically it’s not difficult. Where do the barriers come in? So technically getting it out of the ground is not difficult, but do the problems come later on, in terms of how you get your concentrate, how you develop the chemicals, et cetera? So what’s stopping people coming, piling into this space?

Paul Wallwork: Yes, well I think what stops people piling into the space is you know, the strength of some of the main producers who have quite dominant market positions and some pricing power in that respect. And even though Titanium is one of the most abundant elements in the Earth’s crust, I think it ranks number 9, it’s not necessarily available in deposits that are commercially useful.

So you need to have elevated concentrations of these Titanium minerals in the deposit to make them valuable and to be able to develop them. And you know, the industry overall is growing at roughly GDP rates of the order of 2.5% per annum. So you’re not seeing very rapid growth like we’re seeing in the Lithium industry. We’re seeing a fairly mature industry that’s growing steadily over time along with GDP. So in that respect, the companies that are incumbent in the industry can plan well ahead and they position themselves well you know, to meet growing demand or future demand. Where that becomes a challenge, and where there’s an opportunity for new market entrants is the traditional mining companies, with the exception of some of the hard rock guys, are now finding it harder and harder to find good high-quality ore bodies that they can continue to expand their mining life and operations with.

And so the industry I think is faced in the future with higher cost, lower grade ore bodies going forward, and that’s where efficiency of operation becomes very important. The location of the ore body becomes very important. And the industry is more and more looking to probably non-traditional types of ore bodies, or Titanium molecules in the future. And this is probably our situation at Barrambie where we have a hard rock deposit. Most of the mining, and most of the Titanium minerals mining in Australia is actually heavy mineral sands. So this is something a little unique for Australia. But this project, because of its very high Titanium values, has potential and it’s probably maybe one of the first of this style of ore body that will be exploited in Australia to recover the minerals that have traditionally been won quite freely from the heavy mineral sand deposits.

Matthew Gordon: Okay. We’ll talk about it in a second, but I guess what I’m trying to help myself understand and the viewers understand is, you know, what are the types of companies you should back? Because if I look at again, another example: the Uranium space, when the last cycle happened, we started with 50 Uranium companies, by the peak of that cycle, there were 500 companies, and most of them didn’t know what they were doing, but that you put the word Uranium in front of your project and you were going to get funded. And it’s those companies which lost investors a lot of money because they had no idea how to get into production. They didn’t understand how to fit into the chain, the supply chain, nor indeed, you know, monetise or create value. And that’s why I’m saying, you know, if this is quite a prevalent commodity, Titanium is say ninth on the list, why aren’t there more people sort of piling into what seems to be a steadily growing space?  Are there, there must be not only economic barriers but technical barriers further down the line in terms of how you put a project together; i.e. the kind of project which is going to make people money. That’s the question I’m trying to try to answer. So I guess now would be the time to talk about Barrambi and understand how you are piecing this together. Because again, I’ve had a couple of conversations with Jeremy and Chris and I like the project developer model. I know you guys are sitting on a lot of cash, you’ve got a lot of optionality, but the model of getting an asset to a point where you bring in strategic partners with cash and capital interests me. Is that what you’re doing at Barrambi?

Paul Wallwork: Yes, well, what we’re doing at Barrambi is, we’ve got an ore body that is a little atypical in Australia, and so what we’re having to demonstrate to the market is that this ore body is valuable because you can recover saleable products from it and you can develop a market for these products. Now, what we’ve looked at is a couple of different development pathways and we’ve piloted these pathways here in Australia and in China to determine which is the best way forward. Now, what we’re able to do; we are able to go down a pyrometallurgical route where you mine the ore, and maybe you roast the ore; you perform a reduction roast to produce a certain quality of mineral that then you can sell.

What we’ve also looked at is a hydrometallurgical route, which enables us to recover not just the Titanium but the Vanadium as well. The pyrometallurgical root can do that as well. And there’s different ways you can go with these materials, but what we’ve wanted to do is demonstrate to the market that, but it’s a little unusual Australia, but in actual fact, here’s the pathway to development, here’s how you can do it. And now we’re talking to partners about developing this ore body and we’re still in the process now of putting together a demonstration plant up in China for the purpose of proving, not just the technical viability but the commercial viability of these processing works.

Matthew Gordon: Let’s bring this back for people who haven’t read up as much as I have on this; so you’ve got an ore body in Western Australia, this Titanium ore body called Barrambi, how much have you spent on it to date? What have you done and what do you know about what you’ve got today?

Paul Wallwork: I think all up, we spent about USD$30M on the project on exploration and Feasibility Studies and metallurgical development work.

Matthew Gordon: Over what period?

Paul Wallwork: Oh, this is over probably a decade or two. I joined the company a couple of years ago and I know there’s a history of project evaluation, and with the acquisition of the project, the drilling that we’ve done, the metallurgical assessment work that we’ve done, we’ve probably spent about USD$30M. We’ve drilled extensively and that’s where there’s a large component of the cost. We’ve drilled 55,000 metres of real hole on that project. So it’s very well-defined now. It’s actually a very big deposit and it’s opened at depth. So we think there’s a very large resource there.

Matthew Gordon: Have you got an idea of the scale of that project, of the grades? I mean, what do you know? With 55,000 meters, that’s a lot of data.

Paul Wallwork: Yes, the ore body that we’ve identified is about 11 kms in length. We believe it’s about 4kms deep. It is large. And what we’ve identified is a global resource at about 280Mt. Now, there are high grade areas to this global resource that I think that we would look to develop in the first instance. In what we call the Eastern zone, there’s about 55 million tons of high-grade Titanium mineralisation, and that’s around 21% TiO2. There’s also some Vanadium.

In what we call the central bands, there’s another 65Mt which grades about 16% TiO2. If you were to compare those grades with your average heavy mineral sand operation, their heavy mineral content may be of the order of 2% to 3% in situ. We’re talking about significantly higher levels, almost an order of magnitude higher. So you’ve got that mineralisation, we’ve got some additional costs because it’s hard rock, there’s mining involved, there’s blasting and so on and there’s crushing and milling and, then you need to get to the port. I was mentioning before; a lot of the heavy mineral sand projects are on the coast, so they’ve often quite close to port. We’ve got a little bit of a trek into the port of Geraldton, which is one of the main mineral sand exporting ports in Western Australia. But, our high-grades supports this hard rock operation to produce concentrates that we’d shipped to China for further processing and value recovery.

So that gives you an idea of the scale of the operation. And the Vanadium resource we’ve already identified. We updated a definitive Feasibility Study last year and we looked at making Ferro-vanadium from this deposit; mining exclusively the central zone. We didn’t consider the Eastern zone or at least not until the very end of the operational life. And we determined that yes, you could put a standalone Ferro-vanadium operation on this deposit, but it was a relatively high cost operation compared to some of the low-cost producers out there. So what we’ve decided is, that in order to really extract the full value from this resource, we need to be recovering Titanium as well. And so that’s why we’ve gone down this pathway of looking at the Eastern zone, particularly identifying processing options for the Eastern side that will give us a whole of ore body solution for a covering value.

Matthew Gordon: Right? So you’ve got Titanium, you’ve got Vanadium, and say, you made a point whether Vanadium could stand on its own, especially in today’s market, but have you found a way of being able to extract both those in any other by-products in one solution; that’s got to be a big driver for you in terms of understanding the economics, hasn’t it?

Paul Wallwork: Yes, we have two solutions; we have a pyrometallurgical solution and we have a hydrometallurgical solution. 

Matthew Gordon: But which one are you going to end up with? I mean, what does the DFS tell you? Are you still working on it or do you need partners to come in and, you know, discuss this?

Paul Wallwork: We do need partners to develop the project. It’s a very large project and it’s not one that our company could develop independently.

Matthew Gordon: But not technically. Are you saying to any partners coming in, look, we understand what we need to do here, but you know, do you want to come in as a funder and an off-taker, or however you structure that, and I assume it’s going to be Chinese from what you’re saying, and your past track records. So you know, have those conversations started?

Paul Wallwork: What we’ve done is, we basically identified a couple of production pathways and we’ve gone to the market and said this is what we’re capable of with this deposit. We’ve received a fair bit of interest from China in particular and we’ve actually worked with our partner up there, one of the metallurgical institutes known as IMUMR, who is looking to work with us to develop a robust metallurgical process for extracting the valuable components of the ore. Now, they, under our recent agreement, are planning to put a demonstration plant in China to prove that the processes that we’ve identified as being the best way to go forward. So we’re still in a developmental phase, but the objective here is to end up with a joint venture where we have a shareholding, they have a shareholding, and we mine and concentrate in Australia. We ship the product to China and it’s further processed in China and we both share in the value there.

Matthew Gordon: Right. So they, they have a balance sheet which they can use.

Paul Wallwork: Yes, that’s correct.

Matthew Gordon: Okay. Why build the pilot plant in China versus Australia?

Paul Wallwork: If you’re looking at the capital cost of investment, if you’re looking not so much in respect of energy costs, but certainly in reagent costs you can get raw materials, reagents at low prices in China that make a big difference for the overall economics.

Matthew Gordon: Okay. So, right. So there’s a relationship that has started, is that an MOU stage? I mean, when you say you’ve got an agreement in place?

Paul Wallwork: Yes. We have an MOU with IMUMR. We have the ability to work with other companies, other companies that have looked at our products that we’ve produced at pilot stage here in Australia, and we’re entertaining discussions with a number of parties now.

Matthew Gordon: Okay, well I know you guys have got a lot of cash here, about USD$100M in cash so that, you know, you’re the envy of a lot of development companies in Australia and elsewhere in the world, I’m sure. But with regards to the pilot plant in China, is your partner paying for that 100% or is that a 50/50, or what? What are the terms of this MOU? What’s your commitment, liabilities, et cetera?

Paul Wallwork: The demonstration of this plant is essentially being built at their cost, and there is a mechanism for us to recover money spent and so on, on the development of a process that will take us through to commercialisation. So not all the i’s have been dotted and T’s crossed yet in respect of future joint venture arrangements, but what we’re looking to do for the time being is prove that technology, prove the commercial viability of the technology. And that’s where our MOU takes us. And beyond that, we’d be looking at a joint venture arrangement.

Matthew Gordon: Okay. The reason I wanted to speak to you was, if I look at Mount Marion, the model you’re employed there and the battery recycling that Jeremy took me through recently, you guys spend USD$2M, USD$3M, USD$4M, USD$5M taking it through to a point where you prove technical competence or economics, you bring in a strategic partner with capital and you retain or you’re carried for a large portion of the project going forward. So I liked the model. I just wondered if that is what you’re trying to do here with Barrambie, and if you are, you know, what’s that timeline look like? What are you hoping to achieve this year, for instance?

Paul Wallwork: That is the model we are looking to develop here. You know, we’re looking for strong partners to work with, and during the course of this year, we hope to have a demonstration plant built in China, and we’ve prepared raw material for processing in that demonstration plant, I think we’re in the process of finalising the preparation of those materials now. So we’ll be putting product on the water and shipping it to China during the course of maybe this quarter or next; I’m not sure exactly, but you know, during the course of this year, we’re hoping to go a fair way with the commercial proving of this project, I suppose.

Matthew Gordon: And what do these partners IMUMR, right? What did they need to see? I mean, they’re not going to commit money to build a pilot plant if they didn’t think they can do it. You know, I think that’s obvious to everyone. But what would they need to see at the end of the pilot test phase? What are they trying to prove?

Paul Wallwork: Well, what they’ve already seen from the piloting we’ve done in Australia is a project that’s technically feasible. It actually works. You can produce high quality products from the processes that we’ve adopted. What they’re now looking to do is, with the demonstration plant demonstrate this technology on a larger scale, which then gives more information about the commercial probabilities I suppose.

Matthew Gordon: Okay. And what are they producing? Is it a concentrate?

Paul Wallwork: Well, you know, I suspect that there’ll be wanting to run some process development in parallel. We have demonstrated a process whereby you take the Titanium mineral and you convert it to a product known as Titanium hydrolysate. Now this is an intermediate material that’s used in the sulphate process for producing TiO2 pigment. It’s very pure. If a pigment plant was to buy the Titanium hydrolysate, they would not need to buy ilmenite. They would not need to operate the front end of their processing plant. They could take the hydrolysate, re-dissolve the hydrolysate, re-hydrolyze it, and so on and produce a finished product. So that’s one option for a company that takes Titanium hydrolysate. And of course, I think they will also be looking at pyrometallurgical options as well, which we’ve already demonstrated in the laboratory.

Matthew Gordon: Okay. So the pilot phase lasts how long? Number one – they’ve got to build it. How long does that take?

Paul Wallwork: Things are happening in China much more rapidly than they happen here in Australia, and probably, you know, I imagine we’ll be seeing something built within the next six-months or so.

Matthew Gordon: Okay. But the point is, a process has started, someone else’s committed their cap a little to take your work to date, your tests to date, and see if they can reproduce those are at a commercial level. Maybe it’s one of those things we’ll come back to you on because I am genuinely fascinated by the business model you’re employing and the fact that you’re able to secure these, you know, quite meaningful strategic financial partners to move projects along. And I know this one’s a little bit further behind the battery recycling component, but I’d like to see what you guys do this year. And I think a lot of, I imagine your investors and certainly people of the show, you know, watching this would want to see where are the points at which we start to understand the economics of this. I know you’ve got to DFS to a point, but you’re going to now have to produce some numbers and share some numbers with the market as to what you think this thing could be because 280Mt is as big. That’s a lot.

Paul Wallwork: Yes, it’s a big long-life project and I think that’s part of the appeal for some of the people we’re talking to in China.

Matthew Gordon: Right. Okay. Well look, Paul, thanks for that run through and I appreciate you making the time to kind of help us understand that Titanium space and the market and the supply demand. It’s not something we know too much about, but we will definitely be following with very keen interest going forward. Thank you.

Paul Wallwork: Brilliant. Oh, well, I hope that the discussion has been of interest to your viewers, and certainly happy to address any queries you might have going forward.

Company page: https://www.neometals.com.au/

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First Mining Gold (TSX: FF) – I Sip On 24’s, You Sit On 24’s (Transcript)

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First Mining Gold Corp.
  • TSX: FF
  • Shares Outstanding: 629M
  • Share price C$0.15 (17.03.2020)
  • Market Cap: C$94M

Interview with straight-talking Dan Wilton, CEO of First Mining Gold Corp. (TSX: FF).

First Mining Gold Corp. (formed in 2015) is a North American gold development company with a diverse portfolio of gold projects. First Mining Gold Corp. has a large resource base of 7.4Moz gold in the Measured and Indicated categories, and 3.8Moz of gold in the Inferred category. Its assets are in ‘mining-friendly’ jurisdictions: Eastern Canada, Western America and Northern Mexico (one in the south). First Mining Gold Corp. is focussed on advancing its assets towards production. It holds a portfolio of 24 mineral assets. Is 24 too many? Will it look to cash in on some of these soon?

What was the business plan on day one? Wilton says it wanted to find value in projects that companies had given up on. By adopting a roll-up strategy, and trying to excite the market with promising, underdeveloped projects, First Mining Gold Corp. hoped to create something of a PR frenzy via aggressive promotion.

How has it worked out? Investors may be worried, based on market performance. First Mining Gold Corp. had a share price of C$0.41 in March 2019, but sits at C$0.21 today; this from a company that reached C$1.18 in July 2016. The market cap stands at around C$124M today. So, why this decline? Wilton seems to be aware that First Mining Gold Corp. has suffered from its legacy as a promotional entity. As is always the case in mining, investors have long memories, and a full transition to becoming a project development company seems to have gone unnoticed. Wilton remarks that the stock has good liquidity, but this will mean little to investors if the share price continues on its current trajectory. Wilton states that First Mining Gold Corp. needs to find a way to maintain investor enthusiasm throughout the project development phase. The story of project development seems less attractive to the market, but is this because if the way the story has been told?

One worrying stat is the CAPEX needed to get First Mining Gold into production: c. C$800-850M. Wilton states the fundamental value of First Mining Gold Corp. will come by reaching “value milestones” and de-risking the project. Investors will wonder why Wilton is so hell-bent on starting with a portfolio of this size, but Wilton sees the opportunity as too good to pass up. Could First Mining Gold Corp. have started smaller and scaled up? Wilton states that history has shown single asset projects to be risky…

Wilton talks through their two main projects, and the plans for 2020: raising capital and getting permitted. First Mining Gold is currently finalising the second half of its private placement: c. C$5M. Wilton plans to spend the money on conducting a PFS, and edging the two main projects closer to permitting, construction, and eventual production.

We think Wilton needs to give the market more detail in the meantime about what the company is doing to work towards these permits and to further develop these projects. This vacuum of information is being filled by negative sentiment at the moment. Investors need to be made comfortable that this play isn’t set up to fail. Let’s see how First Mining Gold proceeds in 2020. It’s sure to be interesting.

CLICK HERE to watch the full interview.

We Discuss:


2:35
– Company Overview

3:38 – Original Plan: Changes Made Throughout the Years and Options Available

9:21 – Dan Wilton’s Background: What Was He Brought on to do?

12:44 – Legacy Issues and Low Share Price: Re-Modelling the Story

15:29 – Business Strategy: Have They Considered Less-Costly Means Forward?

17:17 – 8 Assets Altogether: What Are the Plans for the 6 Smaller Ones?

24:46 – The 2 Main Projects: Building Value for Shareholders

27:51, 35:29 – Raising Money and Getting Permitted

30:54 – 2020 Milestones: Convincing Investors of Future Success

39:45 – Diversifying the Company and Getting Noticed

Hello Dan, how are you sir?

Dan Wilton: I’m well, thank you. I’m well, thanks for having me here today.

Matthew Gordon:: Good, good. Now I know you’ve hot-footed it back from Bemo, Miami, in the sun, back up to base and then shortly off to PDAC, which is obviously going to be a very different experience for you. Are you are excited about what PDAC is going to bring?

Dan Wilton: Very excited, you know, having just kind of come back from Miami, I think the one thing, the real takeaway that you get is where we are as an industry and you’re starting to have the largest mining companies in the world talking about how they’re struggling to replace their reserves and they’re going to need to find new projects and add more productive capacity. So that all bodes well for a company that’s holding 6 projects in Canada with a total of about 11Moz of Gold in them.

Matthew Gordon: Okay, we’ll get into it, well, let’s do a one minute summary of the total story there and then we’ll get into some of the details. So why don’t you kick off and do that for us?

Dan Wilton: Yes, so First Mining is a project developer that was originally put together in 2015, 2016 by Keith Neumeyer as kind of a on an acquisition strategy, and put this portfolio of Gold projects together. Six main projects are in Canada, four of them are in the same area of North-western Ontario. Total resource is about 11Moz of Gold, and we’re actively advancing two of our key projects. One of them is Springpole, which is a 5Moz open pit project that we’re advancing through pre-feasibility, which we hope to have done by the end of the year. And getting our environmental impact statement completed and submitted early next year. And our Goldlund project where we’re actively drilling right now, is right now 800,000oz of Measure & Indicated, 875,000oz of Inferred at just off the highway between Dryden and Sioux Lookout. So we’re actively growing and exploring what we think is a very impactful project.

Matthew Gordon: Excellent. Thanks for that. Can we just kick off by talking about what the original plan was; obviously, Keith Neuymeyer, you know, a reasonably well known guy and you know, you start off with a plan in mind. Is that still the plan or have you had to evolve and change?

Dan Wilton: You know?  It’s interesting; we hear a lot about that because the company was started in 2015, and originally the original game plan was they were going to consolidate a bunch of exploration projects in Mexico; Greenfields exploration projects, but at the time, and we all remember how difficult the mining industry was in 2015, they looked around and said, we can spend USD$30 or USD$40 per oz exploring to try and find ounces, but you look in the market and you can buy ounces for less than USD$10 per oz in these really good projects that a lot of people had given up on.

And so, you know, they raised a bit of money and used this company; First Mining Gold to start acquiring projects with the theory of being a land bank. So the original strategy was we’ll acquire it, we’ll do just kind of minimal holding costs, the environment will get better and, you know, then we’ll be able to monetise these projects, retain interests, hold onto royalties, things like that. And so they were very aggressive in the acquisition phase and bought eight companies or projects in 12-months from 2015 to about mid-2016, and that really gave us the portfolio that we have today.

And people really kind of bought into this mineral bank concept, to the point that when they completed the last acquisition, the market cap of First Mining, with the exact same portfolio that we have today was about CAD$630M. You know, today we’re sitting, having raised a bit more money, having done 40,000m of infill drilling at Goldlund, having done two PEAs at Springpole, a really transformational metallurgical program to, I think, unlock a bunch of the recoveries and we’re trading at CAD$150M market cap, you know, four years later. So it continues for us to come to the point that we think that there is real, real value in this portfolio.

Matthew Gordon: Why I’m asking this question, I just want to get an idea of what’s going on in the minds of the management team. So, you know, I do remember that period in 2012 to 2015 when people were coming to us about giving them money to do this land banking, not just mining, but also, you know, oil & gas. And it was not something, I guess we were a little bit more conventional and couldn’t really sort of see the upside there, but some people were able to raise money. So you guys; that was the genesis of this, but you’ve had to pivot at some point. Was there a realisation that the market was not rewarding you as it once did; that must have been a big moment, big discussion?

Dan Wilton: Yes, it was. And listen, that happened before I arrived so it was really late 2017 as they finished up our previous PEA on Springpole that they came to realise, you know, we’re sitting with this world-class asset and we’re not getting the value that we think we can get from it. There’s been an enormous amount of work done already at that point, de-risking it, that we’ve continued doing. But the only way that you’re really going to surface the value from this project is to get it permanent. And it’s because Springpole sits under the deposits; it’s under the bay of a Lake and the development plan is building a couple of small cofferdams and de-watering the bay of this Lake, which all the technical and environmental data that we’ve compiled over 8-years says is entirely possible. And so they embarked on a strategy then and really kind of changed the message; in some senses, maybe a little bit too aggressively, they changed the message that we are going to build Springpole

Matthew Gordon: Okay. So before we get into Springpole, and we do have time to talk about it, so let’s park that for now. I’m just kind of coming back to that moment. So what do you know, I know you weren’t there, but you’ve been brought in for, when did you arrive actually? Let’s start with that.

Dan Wilton: Yes, I started on January 7th of last year, so I’ve been here just a little bit more than a year.

Matthew Gordon: Okay, but in 2017, they started seeing these changes in the markets and they knew they had to do something different to be able to raise capital, to be able to survive and what the market was doing then, which was a whole bunch of nothing, right? So you’re sitting on these cheap assets. So do you know what were the options available?

Dan Wilton: Well, I think at the time, the options are do nothing; just kind of hold and, you know, wait for better environments. But the company had raised USD$27M in 2016, and you know, even going through the due diligence in acquiring the assets, there were sort of opportunities identified that, you know, whether it’s at Goldlund, you know, firming up the resource or you know, hopefully adding to it, but certainly converting some of the inferred into indicated led to a 40,000m infill program that allowed us to really much better understand the deposit. And you know, the company at the time was reasonably well funded to execute on a couple of these sizeable plants. So they just kind of looked a little bit at the incremental risks and said, okay, well, we’ll fund this program, we’ll fund that program, just to try and answer some of the questions that investors and other potential partners would have about the projects.

Matthew Gordon: Yes, okay, but the cash is also a big driver that, you know, either access to it or whatever you had left after your various programs there. So, okay, well, let’s talk about you – why did they bring you on board? What were you going to do for them?

Dan Wilton: Yes, so I mean my background prior to joining First Mining, I was one of the three executive partners at a private equity fund called Pacific Road Capital, and we had USD$800M under management in two funds: investing in largely late-stage mining projects around the world. And you know, it actually, at Pacific road, looked at most of the projects in the first mining portfolio before they bought them. But I hadn’t really spent a lot of time you know, looking at First Mining as it came together because it was, you know, it was the whole mineral bank strategy, which I thought was kind of interesting, but then it was pretty aggressively promoted at the time and, you know, lots of momentum as they built up this portfolio. But it was targeted away from, not exactly targeted toward institution, it was really targeted towards more of a retail audience.

And so someone had said to me in 2018, after I left Pacific Road, you should really look at some of these assets at First Mining, right? So I did, and sure enough, I recognised that we’d looked at Springpole in 2013, we looked at Goldlund twice you know, down to drill databases and block models, like at a pretty good understanding. And we couldn’t get deals done in 2013, 2014, sort of as the market was rolling over and valuation expectations hadn’t quite adjusted yet. But I really liked these projects and so come late 2018, my predecessor had left as CEO of First Mining, and someone said, ‘Oh, maybe you should talk to Keith.’ So I more or less cold-called Keith. I didn’t know him very well. I’d met him a couple of times and said, you know, I think this is the most interesting portfolio of Gold projects sitting in a development company and in this sector. And I think as much as you need a CEO, part of what you need is someone to help you manage this portfolio.

So that’s kind of what I saw. And then I joined in early 2019. The first thing that we did was look at inside this portfolio, what are the best risk return investments you can make to surface the most value? And as you look at everything you could do to the assets in this portfolio: whether it’s drilling, whether it’s doing economic studies, the single biggest driver of value, if you believe that you can get a permit for Springpole, and we do, the single biggest driver of value is getting a permit for that.

Matthew Gordon: Okay. Again, we’ll come on to that. Again, I’m trying to get a sense of the management team here. So, I get your background, I think I might have actually come across you as well. There seems to be a sort of a, a kind of where two seas meet moment here where you’ve got an extremely, by your words, promotional team previously. I don’t know why the former CFO left, but you are coming along with a much more institutional mindset. And I’m just sort of wondering, you know, where it is today? Because I’m looking at your share price, it’s been falling away and you’re going to tell me it should be worth a lot more and we can have that discussion as well. But you know, NPVs don’t necessarily count for much, but the market cap is the market cap, and the share price is the share price. So do you think you have suffered from that legacy of being perceived as a promotional entity previously? I appreciate your telling me that there is a fine line now, but you’re now having to tell that story to the market that actually you’re bringing us a bit more rigour and process into the company now?

Dan Wilton:  Well, you know, when you go back to the history and how the company was kind of put together, we’re still the beneficiary of a lot of that, right? We have a lot of great long-term shareholders who bought into this idea and the value of this portfolio in 2015, 2016. And the other thing that a lot of people don’t appreciate is that by buying all of these companies and projects, we actually provided a lot of liquidity to the shareholders of these other companies who were kind of stuck in 2015. And the one thing you can say when you look at our stock, it is nothing if not liquid. You know, we still trade a million-ish shares a day in the TSX and another half a million in the US, so we have this great base of shareholders who we kind of acquired or you know, bought into the vision.

The challenge has been when things are, you know, aggressively promoted and they achieve certain values, you know, in enthusiastic times and with great enthusiasm, maintaining that enthusiasm as you get into like doing the real work can be hard sometimes. And so I think that’s where we’ve had, you know, people are sold to dream and I think that dream and the value of this portfolio is absolutely intact. I think the way going to realise that value, just I think comes a bit more from, you know, my background is fundamental value; I’ve spent my whole career trying to understand or, you know, invest in fundamental value in mining.

Matthew Gordon: Yes. Okay. I’ll take that as a yes. Fundamental value is a phrase that you use in your PowerPoint, actually. And you know, it stuck out to me and I know you have to throw the word potential in there. But what do you think is missing here in terms of the story? Because you look at the NPV, you look at the AISC, well, I guess the one big number in there is obviously the capex number; you’re going to have to find USD$800M, USD$850M to kind of get this thing going here. Have you guys considered starting smaller? Have you guys considered other strategies which don’t involve the need to go out and raise so much money for a USD$140M company?

Dan Wilton: Yes, listen; we faced this a lot on the concept of potential dilution; people talk about it. Listen, our strategy is advancing the value of this project, getting it through real value milestones and taking real risk out of it. And then in 2023, when we are having a discussion about is, a single asset company the right one to build an USD$800M project on their own? History has shown that to not be an entirely universally constructive exercise. So at that point then I think you have a bunch more options, but you should see the value of the project there. This is one of very few 5Moz projects that, you know, in good jurisdictions you get it permitted, you know, there aren’t that many projects in the world that can produce 400,000oz a year.

Matthew Gordon: Yes. But therein lies the problem; if you can get it permitted, it’s sitting under a Lake. Canada  is a very good jurisdiction mostly, but sometimes things take a little bit longer. And I do appreciate the size and scale of the Springpole project that you’re talking about, and there’s so much to like about it. But as I say, therein lies the problem of the single asset company, which you highlighted, which is if you have to wait around for that thing to be monetised in some way or you know, or give you the bump in the share price, then you could be waiting for an unquantifiable period of time. So what are you doing with the other asset, Goldlund for instance? Where’s that at?

Dan Wilton: Yes. So it’s one thing when you look at this portfolio, you can draw conclusions; this is not a single asset company. We’ve got a lot of really interesting projects and in some senses, honestly, probably a few too many for us to spend money.

Matthew Gordon: I’m glad you said it. I was getting there.

Dan Wilton: Exactly. And that’s been the other part of the recognition that, you know, as we’ve been setting capital budgets and priorities, getting our permits for Springpole, and in part of getting permits, it’s getting the permission to mine and the social license to mine, and that’s really important in us working with our indigenous communities. And we’re in early and active consultation there so that’s an important part of it. But you know, while that is going through a process, we have a lot, you know, a lot of other projects, five other projects that we need to help surface value from. And from our perspective, listen, the market is moving, the Gold industry is moving to a point where there is going to be a lot of capital needing to find homes to try and build productive capacity. People are going to need projects. We have some. So it’s about getting the projects to the position where they are able to attract other capital or attracting other capital now to get them ready for the time when the industry really needs them.

Matthew Gordon: Exactly. But you know, the money controls that conversation. So you do have to put as many things in place as possible. You’ve got your PEA, PFS later this year and hopefully EIA approvals in the first quarter of next year. I get it. So you’re moving that along like everyone’s got to do, right? It’s the usual path. It’s very clear. But what else are you going to be able to do? So you may have too many projects. I suspect you do. Are you looking to cash some of those in and off-load some of them? Are you bringing in strategic partners and how do you bring more cash into the company now? Over the course of this year, to allow you to do the things you’re going to need to do to be able to have meaningful conversations with materials or large caps who are looking at a 5Moz scale operation?

Dan Wilton: Yes, so I think we’re executing on that right now. So, we announced an earn-in deal on our Pickle Crow project in January, with an Australian company called Auteco, which a lot of people don’t appreciate if you haven’t actually done the read through, but it’s the same team that was behind Bellevue Gold, which if you look at what they have done with Bellevue, this is the Australian Explorers of the year, last year, you know, and they surfaced value in Bellevue by going into a past-producing, high-grade Gold camp and applying, you know, good state of the art geo science to delineate.

Matthew Gordon: It’s a great deal but what does that mean for you? What was the deal? Did you get cash out of it?

Dan Wilton: Yes, so the deal is, it’s not much cash up front. We’ll get a few shares up front and then they spend USD$10M over the next five years to earn an 80% interest. We’re carried through to a construction decision, which is pretty important in an underground mine where you know, that delineation of resource towards a mining decision is expensive. But what that project needed was a focus team and probably USD$10M to really outline the opportunity. The look through value on that for us, you know, if they have even a portion of the success that they had at Bellevue, which is now sitting in a USD$350M -odd market cap or something like that. You know, we still own 20% of the project. We have USD$4M of cash payments that would come in as part of the earn-in deal, and we he have 10% ish of the cases.

Matthew Gordon: Okay. So that’s a kind of medium to longer term play, and assuming they hit all the targets that they need to hit and they can continue to fund this thing, that could be something for the future. What else is happening with any of the other assets like Hope Brooke or Cameron for instance?

Dan Wilton: Yes, so you know, we spent, after we finished our financing in May of last year, we spent a little bit of time and a little bit of money trying to understand a proper game plan and look at a couple of the key risks on each of those projects. And so, as we looked at it, Cameron I think, is a real sleeper in this portfolio. The reality is, it was basically ready for production, or ready for feasibility; they did a Feasibility Study on it in the ‘80s, but there’s a 240m ramp down. It’s been developed into ore on three levels and there’s about a 30,000t bulk sample sitting on surface at the project right now. And it disappointed when they bulk sampled it on grade: so they thought they were going to get 5g/t, they got kind of 3.5g/t, and it has never been identified as big enough to support its own mill. But what’s happened from the 1980s to today is, someone’s built a 25,000tpd mill, 88kms away. So we’re thinking a little bit creatively about how that project could be moved forward. And at Hope Brook, you know, it is similar, there’s kind of one or two really interesting things that you need to understand about, you know, potentially could you be starting moving some waste rock and selling it as aggregate, for example, which some of the producers in Northern Newfoundland are doing. You’re right on tidewater, you’ve got a power line right on site that’s still energised. You’ve got, you know, ship, well, not ship-loading facilities, but you got a roll on roll off barge facility that’s still in great shape. You know, and there’s an almost a 1Moz resource there. So it’s kind of getting just enough information that you can understand what’s a right way to put it forward, whether it’s us or other people. But we haven’t had an environment where you can sell these projects for cash, right? That environment I think is coming. So in order to get them ready for that, it’s about finding partners who can help you move them to the position where they’re then in the right state that you can maximize the value.

Matthew Gordon: Okay. Well at least you’re answering my question; I do feel the whole way through this, you’re being quite straight with me. So you were talking and thinking about ways to monetise the non-core projects. You’ve got one which you’ve done a, what did you call it? A not a joint venture earning – an earn-in, and which may have some monetisation component to it at some point on-going. But today they’re not going to help you move the main story forward with, you know, Springpole or Goldlund. And I think that’s what shareholders, and certainly some of the viewers who have contacted us, are keen for you to start communicating to them; what are the points in this path forward that are going to allow them to, you know, they’re underwater, you know, get back to where they were. Stay around for the upside, hopefully, and stop the rot, as it were, because you’ve got all the right stuff, but you need to tell people how you’re putting it together. So what should they be focused on now? Now we’re very clear about the six non-core assets where you know, where they’re at, what are you doing on the Goldlund and Springpole to maximize that shareholder value?

Dan Wilton: Yes, as we talked about, at Goldlund, we’re drilling right now, and I think we’ve through our drill program last year identified at the Miller target, which is kind of 10 kms away from the Goldlund main zone. And we had some of the better open pit drill results in Canada last year. The challenge with Goldlund is that it sort of, like everything in our portfolio, gets overshadowed by Springpole. And so it’s difficult to get people to pay attention, when you get them to pay attention to, you know, 800,000oz at almost 2g/t of an indicated resource and another 870,000oz of inferred at 1.5g/t, that falls into an open pit with a sub 6:1 strip ratio, located just off the highway. We need to do a better job of highlighting the value of that. But it’s still wide open to continue to grow. But my concern to be honest, is we can put out great drivers; we put out 40m of 4g/t, and an open pit target 80m down last year and no one cared. Like you put out a 150m of 1.5g/t, that’s 10kms from our main deposit.

Matthew Gordon: Tell me what you’re going to do about that. That was the same for a lot of people. They put out stuff, they said this is a catalyst moment. The catalyst moment came and went. No one cared, right? So what do you do this year? You’re not a producer. Those are the people who are seeing the uplift and the benefit of the Gold price today. Gold’s gone up, your share price has gone down. What do you do?

Dan Wilton: So, listen, first of all, we are raising the capital to make sure that we’re funded to get there; we announced that we were raising USD$5M. We’re going to have a second close on that tomorrow, which will be larger than that. And what we’ve found is, you know, for all that we talk about, there are a number of shareholders who are disappointed, we have a number of great long-term committed shareholders. And I think when people look at how those shareholders have shown up to support us here, I mean, it’s been amazing for me and humbling that, you know, there is still a really great core group who are supporting us moving forward. And so that gives us a sense of, you know, we have the capital we need to move the project, particularly Springpole, through some of these catalysts. But you have to find other ways to do it, right? And part of that is our partnership with Asanko who are doing our Pre-Feasibility Study – all for shares, which is a pretty unique structure. But you know, we’re delighted to have that kind of partnership with what I think is the best engineering group we could be working with on this size and scale.

Matthew Gordon: Alright, So let’s come back to these raises; because you did one at the beginning of February, 14th February, and you said that you’re doing the second half of that now. Is that what you are saying?

Dan Wilton: This is, yes, it’s all been kind of been pulled together over the course of the last 5 weeks, yes.

Matthew Gordon: So that’s a total of 5+..?

Dan Wilton: It’ll end up being larger than that.

Matthew Gordon: A little bit more than that. Okay, great. So I guess what people want to hear is that that’s not for GNA and that’s not for director’s salaries. They want to hear what you’re going to do with that money which is going to generate, you know, dollar for dollar, more than that.

Dan Wilton: Yes. Well listen, this all comes down to what I think is pretty simple math. So as a corporate finance guy for 20-years, and a private equity guy for five years, if you look across the cycles, if you get a project permitted that’s of the size and scale that Springpole is, that project with permits should trade at somewhere around a 0.5 times its net asset value. So Springpole today, that’s USD$841M at a USD$1,300 Gold price, that’s USD$1.2Bn at a USD$1,500 Gold price. And you know, everyone used to kind of wring their hands when we’d talk about USD$1500 – does the project need USD$1,500? No it doesn’t. But in the environment we’re in, if we’re talking about a USD$1,500 Gold price and you know, C$0.75, this project is really, really robust.

And so to surface that value by getting the permit, gets you, I think a real opportunity at what is a multiple of our current share price rerating to get there. Now, it’s a lot of work and there’s still a lot of time to that. But getting this PFS done that takes, you know, I think a real demonstration of the technical risk out of it. Getting our environmental impact statements submitted, which we are aiming to do next year, that kicks off what in Ontario has been a pretty reliable two year process. So Ontario has permitted three big open pit mines in the last three years:  Red Lake, Hardrock and Magino: all of them, you know, tend to 35,000tpd open pit mines around a lot of water because there’s a lot of water everywhere in Ontario.

So when we get that permit and we get the project through that de-risking phase, and I don’t think it’s, you know you get no credit for it and then they hand you the permit and all of a sudden it goes up x4. You tend to, as you demonstrate that you are moving the project forward, you tend to see that value accrual.

Matthew Gordon: Talk to me about that because I’m fascinated by that because you know, there’s a line of logic here which says, don’t invest anything until there is certainty: and that’s when the permit has been submitted. There’s some level of certainty that you have got to a point where you think you can get it through, and then to when the other permit, or permits, are awarded. Okay. That’s some time away. But right now you’ve got, you know, you’re trading, but it’s trading down. Okay, so you’ve got 1M shares or so yes, that’s great, but it could be a whole bunch better. So what do you between now and then to say, look, we’re going through the process, putting the permit thing documentation together, but here’s what we can tell you between now and then to give people some comfort that you guys are going to be able to get this thing over the line. Because otherwise, people just sit back and wait, and that’s not good for you, especially when you’re raising money. That’s expensive money, right?

Dan Wilton: It is. And we are at the most difficult point of projects to raise money right now. This is unprecedented in my career; where you can find exploration stories with no resource and two drill holes that will attract x3 our market because everyone’s looking for something new, which is great, but it’s irrational. So what’s going to solve this over time? And it all comes back to, you know, what the titans of the industry are saying about peak Gold, and about how they don’t have any projects. When your senior Gold producers are trading at two times their net asset value, and they’re generating, you know, two to two and a half times the free cash flow that they were three quarters ago because the Gold price has gone up, you know; unprecedented free cash flow and high trading multiples. When they go to look for where those projects are, and it’s not us specifically, but developers generally are trading at 0.1 to 0.2 times your net asset value. So what closes that gap? You start seeing partnerships again. You start seeing investments buying intermediate and large-cap Gold producers and you start seeing M&A deals, and that’s what is going to compress that and get, you know, back to the rational metrics which are; these projects should trade at x0.5, up to x0.7 NAV and get acquired at 1 x NAV by producers trading at x1.5 to x2.

Matthew Gordon: No, I hear you but, and again you’re talking my language, I get it, but again, you’re towards the end, you’re talking towards 2021 – that sort of timeframe. I’m talking about now; for the rest of 2020 – what are you going to be talking to the market about? I know you can’t talk about conversations that you know, that you may be having with strategics, et cetera or M&A, or any of that kind of good stuff. You’re going to have to be like, here’s what we’re doing on a quarter by quarter basis, which is helping bring certainty to those conversations that we’re going to have with those strategics. What are you going to do?

Dan Wilton: So listen, there’s the challenge that you’ve exactly hit on, is that there’s only so much that you can talk about when you’re going through a Pre-Feasibility Study (PFS), right? So what are we doing? We’re doing an enormous amount of work in the next 6-months to understand and really pin down the development potential, economics and permit ability of this project. And so that’s exciting things like hydro-geology and hydrology and waste rock characterization and tailings and ongoing metallurgy. So I think we can talk about some of the milestones and test work of those things that are coming out. Not draw conclusions, because conclusions get drawn in a PFS at the end of the year, and in your environmental impact statement. But until then we can keep in dialogue with our indigenous communities, and in consultation, and we can do everything that we can do to move the project forward. And you know, that might be having discussions with partners. It might be finding a longer term source of financing it, you know, it might be giving people some degree of hope that the company is not just a perpetual ‘dilution machine’, which we hear a lot and is one of the concerns.

But we’re in that point where there is a natural wait and see tendency and you’ve absolutely hit the nail on the head. But one of the things with having all the other sort of opportunities and leverage in the value of these other projects in our pipeline is that we hope that there will be a bunch of other catalysts: whether it’s our partners at Auteco who are putting out new drill results at Pickle Crow, or who are putting out a new resource to Pickle Crow, demonstrating that there is value in these projects and we’re going to be able to surface meaningful value. Yes, it might not be in 2020, but I think with this financing getting closed, we’re going to have enough money and line of sight and runway to demonstrate. We can get to some of these real value.

Matthew Gordon: Okay. So the money you’re in the money of raising now is going to get you through to when? A few months, maybe?

Dan Wilton: The money we are raising now, and we’ll see what the final number is, but the goal is that it gets us through to the end of this year. And then again, we’re talking about if there is some other sources of financing, we can sort of put on top of that with a longer time horizon to see us through. Ultimately, listen, where I would like to get to, is to be able to say this company is funded to get Springpole from where we are today to our EIA approvals in hand, which is 2023 by our timeframes right now. So the challenge with this portfolio is that there are, you know, there are G&A costs and there are holding costs of 6 projects; some of which you can offset by doing asset deals like we have done at Pickle Crow. So that takes all of the costs and, and you know, we bring a partner in to help us to do that. So there’s lots of different ways that I think we can look at that. And it’s not all just dilution, right? So we’re actively in discussions with a bunch of other sources of capital that might look more at the project.

Matthew Gordon: I think that’s what people need to hear because like I say, you have got a lot of eight assets growing out of that: there’s a lot of costs, a lot of time, effort, distraction, et cetera. You know what your number one asset is, you know what your number two asset is. And I think people would want you to say, stop this ‘dilatory machine’, to use the phrase that you used a second ago, and give them a sense or an idea of how you’re going to stop that from happening. And you know, because once you’ve done a PFS, guess what happens next? We need an FS, we need a DFS. So, you know, it keeps going. And this question of, again, people want to know are you going to be financing that? Or is that the time to bring in strategic partners to help you with that? Those are the sorts of clues I think people are looking for.

Dan Wilton: I can tell you that the discussions we are having with potential strategic partners today are markedly different than the discussions we had a year ago. Right? And we have just come from a great forum to have a bunch of those discussions. And the world is changing and what a lot of people don’t appreciate, investors particularly, they don’t appreciate that the free cash flow to the Gold sector in the last 6-months has doubled. Right? You work on the assumption that all in sustaining costs in the sector is about USD$1,000 p/oz. We were trading at USD$1,250 and the Gold price was trading at USD$1,250, and the Gold price goes up to USD$1,500; that doubles the free cashflow to the sector. But we’ve only had that for two quarters. And in the first quarter, no one believes it. And in the second quarter, they’re still kind of setting their budgets for next year, but money is pouring into the coffers of producers right now. And at the same time, just watch the year-end results announcements from all of them; they’re talking about reserve reductions, they’re talking about not having been able to replace the reserves because of eight years of, you know, systemic and systematic underinvestment in productive capacity, or exploration or development or whatever. So yes.

Matthew Gordon: Again, I got it. I mean: well told story, well-trodden, you know, story. Again, it comes back to, because I see so much that is right with this, you know? And I do appreciate your honesty and forthrightness about what you’ve got and what you’re trying to do. So I do like that. What I’m not hearing yet and, but you’re telling me it’s coming, is how you’re going to explain how you get a seat at the table when these newly moneyed-up producers, because the Gold price has been, as you say, only for 2 quarters, let’s remember that producing cash where perhaps they were once struggling. And there’s a few of the big boys who have struggled until recently – let’s be clear, right? They need this to continue just to make right some of the wrongs of the past couple of years, quite frankly. But assuming some of them do come to the table, like some of these Australian guys who are cashed up, how do you get them to listen to you? We’ve heard some fantastic South American stories, you know, some other Canadian stories; it’s a very competitive environment. You know, you are sitting in a lot of ounces, but so are a lot of other people. So how do you get to the front of the queue?

Dan Wilton: Well, listen, much as I’d like to say it’s my charm and ability to tell a story, it’s not. It’s the fact that we have a great portfolio of projects, and when you look around the world, let alone in Canada, but look around the world and where you can scope out projects capable of producing in excess of 400,000oz a year, that is a very small list. And when you look at those projects, and then there is a calculation I would encourage you to look at and encourage investors to look at: what’s the percentage of the capital. So how many of those could you conceivably build for less than $1Bn? The answer is almost none. And in those other projects of this size and scale, what’s the infrastructure build requirement to get there? So everyone looks at Springpole because we don’t have a road up to the project today and says, ‘Oh it’s remote.’  We are 30kms from a class one logging road that I drove last week, and we’re 30kms from a power line. The actual infrastructure component of this is minimal relative to the size and scale the operation. But listen, it has its own challenges. And the challenges are that the deposit sits under the bay of the lake, but you know, that’s been known since they discovered it, it’s been known that it sits under the bay of a lake and there’s been an enormous amount of environmental baseline work done, like 8-years of environmental baseline work, and a 380 page report that their conclusion of which is there’s no species at risk and there’s no unique fish habitat here that can’t be compensated for.

So that, you know, I think in the end anyone who has not looked at this project in 8-years, which is most of the world, when they come back to see all of the work that has been done and the money that’s been spent to understand the key risks, they actually really get it. So that’s where I think we can have a different discussion around, jurisdictionally if you’re going to try and pick one or two projects that you’re going to back,  do you want a project that’s at 5,000m in the Andes that needs a diesel plant on the coast and a pipeline? Or do you want a project 100kms east of Red Lake, just off a logging road.

Matthew Gordon: Thanks very much. I’m just sort of running out of time here, but I do appreciate you running through that story with us. Like I say, there’s lots to like I want to hear more from you, definitely, because this sounds like some good things coming up this year. And you know, I wish you well for PDAC next week.

Dan Wilton: Thank you very much. It’s going to be a busy time, a really interesting time in the industry, so we’re all pretty excited.

Matthew Gordon: Yes, yes. Okay. Well thank you very much for your time and we’ll speak to you again soon.

Dan Wilton: Okay, great. Thanks very much.

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The First Mining Gold Logo

Canada Nickel – 11th Largest Nickel Sulphide Resource Globally! (Transcript)

The Canada Nickel Company logo
Canada Nickel
  • TSXv: CNC
  • Shares Outstanding: 57M
  • Share price C$0.47 (18.03.2020)
  • Market Cap: C$27M

Interview with Mark Selby, CEO of Nickel Exploration company, Canada Nickel (TSXv: CNC).

Selby tells us he already has the 11th largest nickel sulphide deposit from less than 20% of the structure that they are exploring. 260Mt with a higher-grade core running through the middle. And he claims they have an accelerated timeframe planned to get into production.

A PEA will be out in the next 3-4 months and then a Feasibility Study by the end of 2021. Canada Nickel Corp has hopes to time this nickel cycle right and therefore be able to fund the project into production off the back of the Feasibility Study.

Key take-outs are 1. This is a large project – elephant hunting territory – which is attractive to large Nickel Majors 2. The Nickel Resource has been added for only $1 per ton. Many projects cost spend $1,000 per ton to add to their Resource. 3. The PEA will be out in 3-4 months. Investor can understand the economics at this point. 4. The grade is relatively good and the company hopes to be able to mine a higher-grade core first to deliver a higher return in the earlier years. 5. It’s a Nickel Sulphide project which is preferred because of the significantly lower CAPEX compared to Hpal projects required for Nickel laterite.

CLICK HERE to watch the full interview.

We Discuss:

1:16 – Going Public: The Aftermath

1:46 – PDAC Conference: Low Attendance Rates

3:16 – Resource Numbers: What Do They Mean for Investors?

7:37 – Commercialisation: Possibilities and Timings

10:45 – Focusing on High Grade: How Will it Work?

12:22 – Coronavirus’ Impact on Market and Possible Outcomes

Matthew Gordon: Hi, Mark, how are you Sir?

Mark Selby: Good to see you again, Matthew.

Matthew Gordon: And we spoke last week; you went public. How did that go?

Mark Selby: It’s good. The transfer agent mechanics in the background took a little while to get people’s shares into account, but the nice thing is, we did trade a bit and the stock was up 250% on the first trading day, so that’s a great way to start. We’ll see what happens and we’ll see what happens today.

Matthew Gordon: Beautiful, beautiful, beautiful. Now you’re at PDAC; about to go through three days of marketing, shaking hands, meeting people, et cetera, et cetera. Tell me, what’s it like there? Because, I’ve heard various reports about attendance levels. What’s your sense of what’s going on there?

Mark Selby: Yes, I know what’s interesting, and again, there’s a lot less shaking hands and a lot more touching elbows!

Matthew Gordon: True, true, true!

Mark Selby: No, no, there really has been an impact. I know one of the guys who came in from out of town, you stay in a hotel in Toronto, he didn’t, he just asked them, he’s a consultant who wanted to just, just was curious. And so, yes, I think they basically had about a third of the people not show up, basically cancel the reservations from a few weeks ago. And I co-chair one of the larger introductory sessions at the conference. It’s held in the big room and I would say, yes, there’s probably 20-25% less people now than there have been in past years for that session. So yes, I noticed it. There’s definitely, definitely been an impact.

Matthew Gordon: So clearly coronavirus; people nervous about traveling at the moment. I think there’s a lot of news going around. Okay. So that’s having an impact.

Mark Selby: One of the speakers on the panel, she works for one of the big banks and yes, they were basically – she did it remotely because they have an only essential travel policy going right now.

Matthew Gordon: Right. Okay. Well I’m sure it’s going to impact some people’s ability to do business or a certain account chart with, whether it be strategic partners, funders, whatever. But I guess we’ll hear more of that as the week carries on. But let’s get down to business here: so we spoke to you last week, you went public – well done, 250% increase, but let’s see how that goes this week. You also released some numbers around your resource, so tell us about that.

Mark Selby: Yes, we were very happy. Again, we’ve been drilling since September. And so the resource results were the 12th largest Nickel Sulphide resource globally. The nice thing for that in terms of technically what’s there is, we’ve talked about this higher-grade core showing up in the drilling. And the nice thing is from a resource perspective, there’s a higher-grade core running right through the middle of it. So, again, Dumont is the closest comparison, and so this higher green core, we’ve got 260Mt out of 900Mt; that’s basically about 15% better than Dumont. And then we’ve got some additional grade shells. And we’ve got about 100M tons at 0.3, 0.4, so again, the key thing with that higher-grade core is that when you go to get this into production eventually, if you’re able to mine that material first, that means just a lot more cash flow right out of the gate, and that just helps the economics and helps you run the business.

Matthew Gordon: Well. Yes, for sure. So, yes, I guess you’re going to have to work out, are you going to be able to mine that first? And you’ll presumably be working on that over the next few weeks and months. And also some pretty big numbers out, right? So what does that actually mean? I mean, how should investors interpret that? I hear the numbers, but so what? What does it mean for me?

Mark Selby: Yes, no, the key thing again, because a lot of mining companies just add ounces or pounds for the sake of adding ounces or pounds. , the key thing here and that what I said the other day is that in the market today particularly is you see, companies that have elephant scale projects that can attract major mining companies or attract downstream partners to come into it. So a lot of companies in Columbia and Ecuador right now, with Copper and Copper Gold discoveries, being a Nickel Sulphide project of this scale, I believe right now in the market we’re in for EVs, and the majors wanting to get exposure to battery metals, that kind of a scale deposit should get BHP’s attention, should get Teck’s attention if they want to get meaningful exposure to battery metals: Nickel and Cobalt that we have.

Matthew Gordon: What do you mean? You talked about elephant hunting before, but where are you in the scale of things? Give me a sense of it. Is this like number one in the world or in the top 100?

Mark Selby: Yes, right now, we are basically around the 11th largest and we’ve only explored, that’s off less than 20% of the structure that we have at Crawford. So we think we’ve got potential to make it larger. And again, where we’re going to focus is on those areas where we’ve seen the higher grade. And so we’re going to take what we learned about where the high grade is at the one place we drove off and see if we can find some more of it. We’ve got some ideas in terms of where that may be sitting in the rest of the structure. And so, because again, the thing that I’m also quite proud of is our team added that resource for about a dollar a ton. You literally, because the scale of most Nickel Sulphide deposits is quite small, yes, they’re high grade, but you don’t find many tons for a lot of drilling and for a lot of companies, they are spending literally almost USD$1,000 per ton to add resource and reserve.

Matthew Gordon: Is that an extreme example or what was sort of average?

Mark Selby: No, no. I would say like I think in Western Australia you’re looking at $100 per tonne of exploration costs to define Resources. It’s okay because they’re trying to find little small Nickel lenses, that might be today quite deep. So you’re drilling again, you might be drilling 500m holes, 800m holes, hoping to hit 10m of massive Sulphide Nickel, where we get to drill a 500m hole, 450m of it have assets that end up in a Resource model.

Matthew Gordon: Right. Okay. So that’s going to give you, again, as investors, we’re all going to be interested in, at what point do you start being able to, and I know it’s early days, but at what point do you start being able to put some numbers or thoughts around the economics of this. So I’m hearing it’s large, you’re finding in terms of they contain Nickel Sulphide, 11th largest in the world. I mean that’s pretty good, straight out of the gate. It’s cheap. But at what point does that start converting into meaningful numbers for us as shareholders?

Mark Selby: Yes, so that’s the key. I mean, what we wanted was, again, we wanted to work this on an accelerated timeframe, given our understanding of this type of deposit. And so this Resource and the results we have are of the scale and are of the potential that we’re going to move that Resource right into PEA stage. I’m literally meeting today with one of the leading engineering firms to start scoping out to kick off that work. And we’d look to kick that off in April and have a PEA done for the fall for this coming year, which again, we’d roll right into a Feasibility Study from there. So again, from 6-months from drilling, we’re going to be able to start putting numbers around this which is very fast.

Matthew Gordon: Okay. And then how quickly, you mentioned the Feasibility Study as well, clearly, but what’s your timeframe on that? Because the more you do, the more notice people take. And when you say accelerated timeframe, I’m interested in, do you mean it? Or is this the usual long drawn out process and you guys are…

Mark Selby: …are we’re talking 6-years from now, hopefully not the project because it’s construction. Yes, no, we’re looking to have the Feasibility Study target would be the end of 2021. And so, and then a 2-year build from there. So that’s the timeframe we’re going to be working towards.

Matthew Gordon: Well, you’re suggesting there that you could get financed off the back of a Feasibility Study?

Mark Selby: Yes. Again, in a kind of market we’re in now, in the market we’re expecting for battery metals, when you’ve the head of BHP saying, ‘We need more future facing metals, we need more Nickel and more Cobalt’, I think when we get to that point we should be seeing the interest from the major mining companies and from the industry downstream players.

Matthew Gordon: Okay. That’s pretty big statement you’re saying. And in 2021, you could have a Feasibility Study ready. You will have been having, and would hope to conclude financing discussions around that point – is that what you’re telling me? Okay. And then there’s a 2-year build out, so when you say accelerated, you do mean accelerated, and you’re hoping to hit the cycle. There’s a lot of ifs and buts between now and then, obviously, right?

Mark Selby: Oh yes, yes. Nothing’s guaranteed in this space. But again, my view is we’re going to be hitting a Nickel super-cycle sometime in the mid-2020s. And so, we want to make sure that we’re as ready as possible to take advantage of that that super cycle.

Matthew Gordon: Okay. And when we talked previously, you talked about this kind of, and I think you mentioned at the beginning; this high-grade core, which you would look to focus on initially just in terms of the ability to positively affect the numbers out of the gate again. What do you know today about your ability to be able to do that?

Mark Selby: Within the release and the presentation, there is a slide with a series of grade shells to show how contiguous that material is. And again, it starts up at surface. So we won’t know exactly how much we’ll be able to pull in early, but based on the geometry of where it’s sitting, it looks quite promising on that basis. So and again, when you’ve got 98Mt of 0.34, that’s basically 8 to 10 years of ore for a large, the kind of scale mill that we’d be looking at for this type of deposit.

Matthew Gordon: Okay. Exciting times. Well, Mark, thanks for that update. I just wanted to catch up on it because I’m always interested in, well I mentioned battery metals at the moment, and obviously these are the newest stories in the marketplace and there’s been a lot of debate which you’ve helped stimulate actually with your education series, Insights series. I do appreciate that. Let us know, I might just call you at the end of this week to see how PDAC has turned out because obviously, those sorts of numbers of non-attendees is huge and quite meaningful. What do you think the wider impact is? Is it going to be short term in terms of the whole coronavirus? Because obviously, last week was a huge reset in the market. I mean huge reset. Do you think that was always coming or do you think that’s coronavirus linked?

Mark Selby: Well we needed a correction in the market place. I mean, so many stocks have just done this for a continuous period. And so we are overdue for a correction. I think the Corona virus has given people an excuse to take some profit. It is having an impact; the Chinese PMI came out over the weekend and they were in the 25 and 28 range; sort of the lowest ever recorded. So it is having a physical impact today and I think it will continue through this quarter as it kind of rolls around the globe. We’ll see that. But I think as long as we don’t get some highly, virulent evolution of that disease, so it starts killing lots of people, it’s basically a really bad flu right now. So I think we’ll have a quarter or two of impact. There’ll be a lot of government stimulus, particularly with China to help sort of restart the economy after that shock. So again, from a Nickel perspective I think it pushes out the recovery I was looking for the summer to fall, it will be pushed out another 3 to 6-months, so maybe by the end of the year, early next year we’d be able to sort of see new prices come back at that point.

Matthew Gordon: Right. And what do you think are the other…I’m just interested because you always have an opinion on these things, is around some of the smaller companies that are perhaps struggling for cash, to attract cash, who were struggling in terms of share price, et cetera; they’ve been hit pretty badly. Do you think there’s going to be some joint venture activity? There’s some takeovers and M&A, some mergers, farm-in, farm-out. What’s the impact of what’s been going on recently? Because in the Gold space, you’ve got producers producing cash, making money, losing a third or 25% of their market cap, like in a week. What’s going on?

Mark Selby: It would be a good time for companies to make some acquisitions. And again, you do have a whole group of companies, both the major mining companies are announcing, BHP had the second largest dividend in its history recently. So they have the cash to make some moves. Whether they’ll be aggressive enough to take advantage of the selloff in the market, again, those are the times when you should be buying, but a lot of companies just don’t have the to step in there when the market’s falling. So again, I would like to think that’s going to happen. I think we might get one or two deals done, but we won’t get, I don’t think there’ll be much activity. People will want to see the market bottom, see the market recover, and at that point in time, it’s time to start to step in and look at asset acquisitions at that time.

Matthew Gordon: It will be interesting. I’m very keen to see what happens over the next couple of weeks or month or so. Because there’s a few companies, I think who were on vapor before this happened, so we shall see. Always good to have a nice Spring clean. Right, Mark, thanks very much for your time today. I do appreciate that. Good luck with PDAC this week. Hope you don’t catch anything.

Mark Selby: Nope. Thank you, Sir.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

The Canada Nickel Company logo

Canada Nickel (TSXv: CNC) – Accelerate, c’mon babe, Pick up your speed (Transcript)

The Canada Nickel Company logo
Canada Nickel
  • TSXv: CNC
  • Shares Outstanding: 57M
  • Share price C$0.47 (18.03.2020)
  • Market Cap: C$27M

Interview with Mark Selby, CEO of Nickel Exploration company, Canada Nickel (TSXv: CNC).

Mark Selby has previously weighed in with his expertise on the nickel market. His general insights have been very informative for nickel investors, but now it is time to talk about Selby’s latest play in the nickel space. Canada Nickel Corp. is a relatively small nickel play in Canada. But it has a lot of the right parts that you would look for as an investor. It is Nickel sulphide. Potential for large scale resource and district-wide. Funded for next stage of operation. Looking to an accelerated delivery of a PFS. In a nickel bull market. Low share count.

After giving us the details on the recently concluded IPO, Selby gives us a look at what Canada Nickel Corp. has to offer for investors. On February 21, 2020, Canada Nickel completed a private placement and issued 3,074,333 Common Shares at a price of C$0.25 for aggregate gross proceeds of C$768,583. Canada Nickel Corp. has acquired 100% interest in the Crawford Nickel-Cobalt Project.

Selby has previously doubled down on Robert Friedland’s words: “nickel is the new gasoline.” Nickel demand is robust in the stainless steel industry, but a projected fresh surge of demand for batteries, courtesy of the EV revolution, has got investors across the board foaming at the mouth.

Selby indicates that the Crawford Ultramafic Complex (CUC) could have strong potential for developing a low-grade, large-tonnage nickel resource. In addition, the resource hosts nickel and/or cobalt bearing minerals and possesses promise for the extraction of these elements. In addition, Crawford has been assessed via magnetic, borehole geophysical, airborne helicopter magnetic and electromagnetic, and FALCON© Airborne Gravity Gradiometer surveys, and was investigated by its previous owners, Spruce Ridge, through diamond core drilling.

Now Canada Nickel has the available capital from its IPO, it will look to provide an accelerated investment opportunity for investors. Selby sees this as the start of a new nickel super-cycle and states there are only a handful of close-to-production projects than can help double nickel supply by 2030.

With the expertise of the management team, the existing infrastructure at Crawford, and the work Canada Nickel Corp has already done in the last 6 months or so, Selby is confident the company can surprise the market with the rate of returns and value growth, and he is likely to draw on much of the knowledge and experience acquired from RNC’s Dumont Nickel Project. Investors can expect confident, decisive, technical mining. However, they will be hoping Crawford can fulfill expectations.

The resource should be out soon. Will it “shock people” like Selby claims? When will Selby look to bring in financing from institutional investors, and is there a risk he could have to give a big portion of the company away? Selby is adamant he will make the right deal at the right time and will delay if necessary. He would rather wait for a better deal than rush into dilution for shareholders. How will this play out?

Are there any issues left to resolve? An MOU needs to be arranged with a local tribal council group, and then there needs to be six impact benefit statements/agreements before full construction of the nickel project. Selby is confident that once the PEA is signed, sealed and delivered, these shouldn’t be problematic to acquire. Investors need to decide if this nickel sulfide story excites them. If it does, it could be worth some serious consideration.

CLICK HERE to watch the full interview.

We Discuss:

1:42 – Listing on the TSX: The Process of Going Public
4:55, 8:36 – New Deal, New Opportunities: What Have They Got and What Will They Do?
6:33 – Nickel Cycle: Have They Got the Timing Right?
11:51 – Business Model and Game Plan: What are People to Expect?
15:53 – Strategic Partners: Any Danger of Giving the Company Away?
18:46 – Share Breakdown and Company Strengths
19:37 – Outstanding Issues to Resolve

Matthew Gordon: Hello, Mark Selby. How are you, sir?

Mark Selby: Good, sir. How are you? It’s been a while.

Matthew Gordon: You’ve had your head down, because we spoke to you a few weeks ago now, and you’re in the process of getting Canada Nickel Corporation through the TSX and making it public. You’re there now. Must be pleased.

Mark Selby: Yeah, very happy just to start trading today. It’s been several months to get through this process. But, again, it’s a regulatory process so, it does take time but we’re glad to finally be there and that we can actually start talking about the story again, because there’s been lots going on in the project.

Matthew Gordon: You’ve got to tell me about this, OK because we usually speak to people when they’re public and they’ve been trading a while, or they’ve got their own issues and stuff. But we’ve started talking to pre-IPO, there’s a real process to go through. Give me an idea, give the people at home the sorts of things that you’ve kind of got to get through to be able to go public. What are the topics that the exchange wants to know about?

Mark Selby: Yeah. So again, I think with the transactions that we had, and again, it was just the nature of where the asset was. There were several degrees of difficulty that we had to kind of jump through. So, again, if you think of the majority of IPO’s it’s a single asset that’s been acquired from one company to another. It’s either an IPO or then an RTO transaction and that goes on. We first had to deal with the fact that we were consolidating a joint venture of a joint venture between two other small companies and then some private companies that don’t actually file any documentation. So, working through that in a regulatory process that likes things that fit into boxes and having stuff that doesn’t fit in any of those boxes was some additional work that we had to get through. And again, it’s really about they just want to make sure that you’ve got the financial resources that you say you do, that you own the asset and that you’ve got the capability to move it forward and deploy the capital that you’re raising to take it forward. So, again, on those parts of the process, again, we didn’t have any issues with that. It was just more that sort of that inherent complicated structure that we started with that didn’t fit into one of those typical regulatory boxes that caused some additional time, but as I said we’re glad to be finally here through that finish line. And then, again we should have a pretty steady series of news flow from this point.

Matthew Gordon: Okay. It’s interesting because there were three different parties and you had to get them to agree to the deal. And then you’ve got three different sets of data which you’ve kind of got to share or get in these boxes for the TSX and were you managing that process or was that all of you adding to the confusion, as it were?

Mark Selby: Oh, no, that’s it. Basically, you’ve got three general counsels. You’ve got three sets of auditors. You’ve got three sets lawyers. So, no it’s not a straight forward process, but it’s more than worth it.

Matthew Gordon: OK, let’s move away from admin hell. That’s my idea of hell. We always have people to do that so kudos to you for getting through that. Let’s talk about what you’ve got. Let’s give people a one-minute summary of the deal that you’ve put together and what you’ve got and then again, we’ll kind of remind people about what you’re going to try to do.

Mark Selby: Sure. We now own 100% of the Crawford Nickel Cobalt Project. Since September, we’ve continued to advance the project. So, we’ve been doing the drilling work that we need. We’ve been starting to do the mineralogy work that we need to do. And again, I think people are going to be surprised in terms of how far we’ve advanced this project already while we’ve been waiting to go public. And so, there’s going to be a very steady series of news flow over the next few weeks, which I think will really demonstrate the potential that we believe was there with Crawford to be truly one of the great nickel cobalt sulphide discoveries of this time, this decade and potentially beyond this decade.

Matthew Gordon: Well, I think it’s very timely.  I look back to your RNC days with Dumont, it’s a great asset. But the timing wasn’t quite there, it’s 12 years in the making. It’d be one of those 12, 13-year over night successes. Your timing, nickel sulphide, obviously, is where you want to play. You’re going to, I assume, be able to tell us a little bit about what you think you’ve got now. But I’m interested in how you’re positioning this business in terms of getting the cycle right. Because we look at this, the wave of conversations we’ve had about market, it’s been phenomenal. The EV thematic, no one’s disputing that. It’s a question of timing that seems to be important. So, do you think you’ve timed it right?

Mark Selby: Oh, no. I think that the timing’s been perfect. As you said with RNC, with Dumont, I spent seven years promoting a project when nickel was out of favour. And again, we were setting up to deliver a nickel project for the next nickel cycle, which has now arrived. Our view is we need to double the supply of Nickel that we have right now by 20%/30%. And there’s only a handful of projects that are ready. So, to get something like Crawford ready for this next cycle, I think it’s perfectly timed. I think in terms of investors looking for sort of how far sentiment has shifted, you know, BHP Billiton for most of the prior decade was looking to sell their nickel business. Mike Henry in their annual report, basically said we need more future facing metals, we need more nickel and we need more copper. So, if the biggest mining company has done a 180, I can assure you that the management teams of every one of the other large mining companies is doing this, has a similar view and has a similar take now on getting exposure to battery metals. And so, again, having a large-scale potential asset like Crawford in a jurisdiction like Ontario, where in the Timmins camp, where the mines have been permitted on a relatively straightforward basis, I think the timing of this couldn’t be better. And again, there are some other nickel sulphide opportunities we’re looking at because, again, I think our team spent a lot of time looking at nickel sulphide when no one else did. So, we think we’ve got a leg up on the rest of the competition in identifying those assets that are going to be able to deliver the nickel the EV market needs by the end of this decade.

Matthew Gordon: Okay. Interesting. We spoke with Anthony Milewski last week and we put a piece out at the weekend. He was quite complimentary of what you’ve got, and people perhaps should take a look at the interview and get his take on what you’ve got. What do you know about what you’ve got today? And then what are you going to do with it? And how do you pay for that? Because, again, there’s so many exploration plays which just aren’t able to get the funding in place. I mean, you’ve just listed, you got some cash now. What are you going to do with that cash?

Mark Selby: Yeah. So, again, I think the key thing is here, because we’ve got that experience, we’re going to be able to accelerate the process and advance the process in a much more timely and cost effective manner than we were, because Crawford is basically a very similar asset to Dumont with its own unique set of strengths. So, with the money that we’ve raised, we’ll have a resource out here very, very shortly, which I think will shock people in terms of just the scale of the resource that we’ve been all ready to drill with a few million dollars that we’ve raised to date. And, again, I think as we take this forward, we’ll be able to highlight what I think this resource will show, what the potential of this property is. We’ve only drilled off 15% to 20% of what we have at Crawford. And so, I think the highlight of that scale potential will be there. I think the what we’ve been able to deliver for the cash that we’ve invested to date will make it easier for the next set of investors to bring that next round of money that we need. And again, given our experience with Dumont, we’ll be able to quickly advance Crawford into the resource we have now, into a PEA and then look to basically build out the other 85% of the property that we haven’t drilled yet.

Matthew Gordon: Right. But what’s the game plan here? You’re using great words. So, it accelerated in value and all of wonderful things, which lots of people do. But I need to understand what that actually means. So, you’re going to deliver a resource which you’re saying gives you the scale and you’ve told me before scale…

Mark Selby: We’re going to deliver a real resource that I think will surprise a lot of people when they see it next week. And that resource on its own will be large enough to help support moving and what we’ve seen to date will allow us to move right into a PEA on that resource itself. We still have 85% of the property that we haven’t explored yet. And so, again, now that we understand what the best part of what we’ve drilled off already, we know there are other pieces on the property that we’re going to be able to find. There’s a good chance we’re going to find similar good stuff in other parts of the property to make it even larger than what we have right now. And I think the key thing in this market and again, to point to investors in generally investing right now, the market is really bifurcated into two categories of assets. So, if you own a world scale asset that the majors want to buy and again, there’s companies in Colombia and Ecuador that have found a new range of copper, copper gold elephants, those stocks have traded well. And then there’s everybody else. And so, what we really want to show with this first resource is that we’re in elephant country and that we’re hopefully going to find a bunch of elephants on this property and have something that I think will be interesting to large mining companies, to large EV players and to large suppliers that this is exactly the kind of nickel, cobalt resource that we’re looking to help build their business.

Matthew Gordon: Ok. So, this is the bit that interests me is the model, I need to understand the model. So, you’ve got some money, you will deliver a resource next week. You hope that will have an impact on the share price and also get people to notice that you’re here because there are not too many of these around. I get that. I want you to help me understand what people are getting into. What will investors get into? Will it be just a long series of diluted raises to get you where you need to be? How do you assure people that they’re not in for a long, drawn out process? And how quickly are you going to deliver your plan when you do either hand it over to a big strategic who actually goes and puts the money in for this? Or you bring in the strategic partners who again, coming in at asset level and not diluting people in the public company?

Mark Selby: Again, we will be out to raise the next set of money for the PEA, that’s the next stage that we need to get through. And, we will be looking to bring a strategic in at that point in time, if the pricing makes sense. And again, we’ve already had some interest on that front. I think the key thing from here is we’re going to advance in towards that, get that PEA done, and then from there we’ll be able to move right into a feasibility study. The key thing from it from a managing a process perspective is that you need to have some, and communicate to the market, very clear milestones that you are able to move quickly, because if you can’t demonstrate to the market that you’re going to move quickly, then the large mining companies suffer from inertia issues. And so, they’ll never quite get around to making you that investment. But if it’s very clear that if they don’t step up today or they don’t step up in three months, or they don’t step up in six months, we’re going to be moving the ball, to use a sports analogy, moving the ball very quickly down the field, and they’re going to find themselves chasing a valuation, which is hopefully going to be improving materially as we move forward here.

Matthew Gordon: Okay. But let’s come back to what some of those deliverables are, because again a lot of companies use these phrases. And I want to separate the cliché from actual delivery. But what are the moments, what do they mean for you?

Mark Selby: Yeah. First resource out very soon, PEA out by the end of September. Worst case, end of October. Feasibility study out before the end of 2021. That’s about as fast as you can advance a project today. We’re already assembling the PEA team in place again with experience with Dumont, that we’re going to be able to bring that knowledge and experience to bear and be able to quickly advance the project going forward.

Matthew Gordon: Okay. And clearly, each of those deliverables, you hope there’s a bump in the price and you’re able to raise money more cheaply this time? So, there’s not a long-diluted process here and there’s not a lot of money to get to feasibility. Is that what you’re saying to me?

Mark Selby: Yes, very much so. So, again, I think when this resource comes out in the coming week, people will be surprised at just how many tons of nickel we’ve delivered for how few exploration dollars at this point. The benefit of these large-scale low-grade deposits is we’re not drilling lots of 500-meter holes to hit 10-meter gold veins. We’re drilling a 500-meter hole, of which 450-meters of that end up in assays that you can use in a model. Again, because the deposit doesn’t twist and turn and then get faulted in 50 different directions, you can use much wider drill spacing to define the resource that you’re using. So, both of those things help to be able to define a very large resource very quickly.

Matthew Gordon: Right. So, I’m going to ask a maybe difficult question which is you talk about getting a strategic in, around the PE stage and if I look back at Dumont, Waterton came in there, RNC gave away, what, 78% of the company and how although it is a fantastic asset and it’s worth a lot of money on the balance sheet, or could be worth a lot money on the balance sheet for RNC. If you bring in strategics too early, are you in danger of giving away the company or do you think you can negotiate a sensible, reasonable position?

Mark Selby: The key thing is and again, when we did the Waterton deal, it wasn’t really around any issue per say with Dumont. A key portion of that deal was to set up a joint venture fund to look to acquire other nickel sulphide assets in time in a market where no one else was buying them. So, unfortunately, Cobalt 27 and Mr. Milewski came along about two months after we announced the deal. So, people we had been talking with for several years who were getting to the point of capitulating, if somebody shows up with a cheque, you can have my nickel sulphide asset. I think, if Cobalt 27 hadn’t come along, we would have gotten a couple of those deals done. And I think that’s sort of logic of that transaction would have been much clearer to a lot of people at that time. So, that would have allowed us to have a whole portfolio, of nickel sulphide assets that the smaller, easier, cheaper restarts, complementing the much larger large-scale asset is key. And again, to your point as well, in terms of too early and giving away too much, this is a time in the market where, if BHP is already talking about more nickel, I can assure you that Rio Tinto and Anglo American and all the others are also talking about more nickel. And there’s really very few ways to play it. So, I have most of my net worth invested in this company. If you see, when I was at RNC, I was buying the stock all the way along through the ups and downs. And again, here, I’ve taken a bunch of that money and put it into this company. So, I will do the right deal at the right time. And again, if it means we have to wait a few months, I’m not going to build it for the sake of building it. I think some other mining companies have done sort of full financing package deals where there’s a massive amount of dilution. Yes, you’re going to get your project built but how will your equity holders actually ever going to make any money off this thing? Because you’ve basically diluted their ownership interest in the project, you’ve issued a huge amount of equity relative to your current base. So, it’s going to be challenging for people to actually get a return on their shareholder value. You as management are great because you now can build your projects, you’re going to get your pay checks for three or four years, but your equity holders really are going to make any money.

Matthew Gordon: Right. So, you’re cognizant of that point, that issue and that’s a consideration.

Mark Selby: Yes, very much so.

Matthew Gordon: OK. So, how much do the management team own of the company?

Mark Selby: I personally own 4%, my family own another 5%, and the management team as a whole has over 10% of the company. I think that’s one of the other strengths with this company, too, is, again, as a brand-new company, we’ve got 57M shares outstanding. There are no warrants. And there’s a core group of individuals who spotted this opportunity, initially drilled those four holes in 2018 and are committed to seeing this through until we basically deliver what we think will be a great nickel cobalt sulphide project for the world.

Matthew Gordon: Okay. So, I know you’re in a great part of the world, the infrastructures there. You’re good. I’m not going to get into that yet. Have you got any outstanding issues with regards to permitting or First Nations or any liabilities, obligations which you’re still trying to resolve as part of this three-way triumvirate negotiation?

Mark Selby: Yeah, the one thing that’s been a real strength of this area is that Noble Minerals, one of the first thing they did, they were the original property holder, they have they had an MOU in place with the local group of First Nations, Wabun Tribal Council, who’ve been great to deal with them since we’ve now moved into the relationship. And we’ll have an MOU with them shortly for the property. They have six impact benefit agreements in place, which is what you’re going to need to have when you go to build the project. And again, once we kick off the PEA, we’ll be looking to start to advance that impact benefits agreement in place to make sure that it doesn’t become a bottleneck on the timeline going forward.

Matthew Gordon: Okay. Mark, I just wanted to catch up. I know you’ve got a busy day. The bell has rung as it were. I hope people at least have a look at this. It’s certainly a very exciting area to be playing in. Nickel sulphide is very, very topical. We got a lot of questions. And thank you, you did that series for us as well, and Anthony Milewski’ s followed up last week and reinforced what you said with regards to winners and losers and red flags and things to look for. So good luck with it. When the resource number is ready, please call us or we’ll call you and let us know because you seem quite excited by this scale.

Mark Selby: Yes.

Matthew Gordon: Congratulations on your new company. We wish you well. Let us know how you get on.

Mark Selby: Thank you, Matthew. We’ll be in touch soon for sure.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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Excellon Resources (TSX: EXN) – What good’ll one more do? (Transcript)

Excellon Resources' company logo.
Excellon Resources Inc.
  • TSX: EXN
  • Shares Outstanding: 112M
  • Share price C$0.52 (17.03.2020)
  • Market Cap: C$61M

Interview with Brendan Cahill, President & CEO of Silver producer, Excellon Resources (TSX: EXN).

We’ve seen some great turnaround stories in recent times; RNC Minerals springs to mind. Excellon Resources is something of a more long-winded story, with the share price falling for much of the last 5yrs, albeit in erratic fashion. Well, they did choose to be Silver after all.

Excellon Resources looks to change things around with an aggressive M&A strategy. Cahill talks to us about creating wealth. Shareholders are in two minds though. On one hand, perhaps Excellon Resources should focus on and fix the assets that have. On the other hand, M&A is usually a sure fire way of changing the status quo. Cahill talks us through the logic and strategy for this change.

Excellon Resources is Mexico’s ‘highest-grade silver producer’ with one small producing mine and multiple exploration opportunities in Mexico. They have also option a Silver Exploration asset in Germany. So country diversification, but not commodity diversification. The commodity diversification comes on recent news, February 24, 2020, of the proposed acquisition of Otis Gold, a gold development project in the United States, to its portfolio. The acquisition is remarked as an ‘initial step in Excellon becoming a larger multi-asset precious metals producer.’ Cahill comments that we are currently at a gold:silver of 90:1, and the historical norm is 60:1.

There are also some issues surrounding production; the majority of silver companies are producing a concentrate, and the lead and zinc by-products have seen a large increase in treatment charges in recent years. The management team has a solid track record in terms of mineral exploration and M&A. To us, the M&A feels like Excellon Resources trying to diversify, and take less of the impetus off silver, given it has let the company down.

Diversity brings leverage to multiple commodities and a greater set of options; however, investors will know that focus is extremely important in the world of mining. Excellon Resources may have a “simple plan” on paper, but the reality seems more complex. A management team can only chase value through M&A for so long before they need to generate more substantive growth through profits. Spreading a team thinly across multiple jurisdictions with multiple commodities could be a concern for investors. Cahill states that evolving optimised economics at projects within Excellon Resource’s portfolio could be a game-changer, but will the market agree?

The company has not been generating cash flow for the last few quarters, but Cahill is confident these projects will operate much more efficiently in the future. Excellon Resources has c. C$5M left to play with because C$4M of Excellon Resources’ cash is committed to exploration in Mexico and a further $1M to Germany. What does that mean for the newly-acquired project, Otis Gold? Cahill says that cash flow will help, but this is not expected until the end of 2020. Listing on the NYSE could Excellon Resources gain more investors, but will Cahill be able to communicate this complicated turnaround story effectively to prospective investors? 2020 should be a very interesting year indeed. We will keep our eyes on this story as it develops.

CLICK HERE to watch the full interview.

We Discuss:

2:00 – Company Overview
2:46 – The Background: Plan and Issues Solved
6:49 – Share Price Volatility: What Was Happening?
8:54 – Team Experience
11:26 – The Future: How are They Raising Their Value? Is M&A the Way to go?
13:09 – Mexico: Happy With What They Have? How Much Will Need to be Spent to Bring it Back From Plateau?
19:27 – Germany: Jurisdiction, The Asset and Costs
30:55 – Acquiring Otis: Why Did They Do the Deal? What’s There & How Much Will it Cost to Monetise it?
43:21 – Big Shareholders and Their Positions
47:37 – How is the Market Expected to React to Otis’ Acquisition?
49:24 – Listing on NYSE: What Will it Do?

Company page: http://www.excellonresources.com/

Matthew Gordon: Hello Brendan. How are you, Sir?

Brendan Cahill: Very good. How are you?

Matthew Gordon: Not too bad. Not too bad. You’re getting ready for PDAC, are you?

Brendan Cahill: Yes, gearing up for it. Yes. Great weekend. Definitely need some mental preparation beforehand.

Matthew Gordon: Oh, I know. Did it for too many years. I am fortunate not to be going, but I wish you well. I wish you well. A lot of people there. Why don’t we kick off? Give us a one minute overview of the company for people new to this and we’ll pick it up from there.

Brendan Cahill: Okay, great. Excellon is Mexico’s highest grade Silver producer. We’ve been in production since 2005 and we’ve been in Mexico since 1996. Really interesting announcement out, where we’re proposing the acquisition of Otis Gold, which is a company that’s been active in Idaho for a number of years and they’ve got two very interesting Gold projects up there. The key one being the Kilgore project, which has a resource of just under 1Moz. It’s a heap leach operation or proposition, but with a huge exploration potential. So I’m very excited to talk about that today.

Matthew Gordon: And we will, but I want to start off a bit earlier than that because I need people to get to know you, get to know what you’re capable of. Okay. You’ve been there seven, eight years now. What was the plan when you came in? What did you see and what were you tasked with doing?

Brendan Cahill: Yes. So I joined it in the middle of 2012, and really when I started, the company was in a turnaround phase, and that’s what we were working on for a number of years. But really to go back to the beginning, because it’s really important to understand our roots. We got Platosa, so around 1995, 1996 and Peter McGaw, you know, one of the world’s great geologists, chief exploration officer at Mag Silver, he brought us the project. He was going through the town of Bermejillo, in the state of Durango in Mexico, and he saw all these gypsum crystals in the shops. And you can see behind me, this is actually a big gypsum crystal there which comes from the Platosa mine. Now, knowing that these crystals are really associated with carbon replacement deposits, he staked the ground, rolled it into Excellon and we made the discovery a couple of years later.

So that became the highest grade Silver deposit in Mexico. The first resource of 2,700g/t Silver put out in 2003 or so. But nobody cared about Silver back then because it was, you know, after reacts and the market was just getting turned around and it was really at the dawn of a new precious metals bull market back then. But Excellon, you know, got the money together, put it into production in 2005 and started being a producer. The trick was that you know, starting a very small mine on a small resource, only 60,000t at the time. Not everything was done perfectly, right?  It’s kind of a story in the mining industry, you know, trying to have the capital and the time, balancing that against your investor’s interests of getting things moving, making it to cashflow. So, hydrogeological testing wasn’t perfected. Community engagement wasn’t perfected. Labour engagement wasn’t perfected. So when I joined, there was a series of these issues that were really coming home to roost. You know, there was some social issues at the time, which we resolved some labour issues, which we resolved. Too much water coming into the mine. We resolved that issue in 2017 and went from there to very dry mining conditions, a great little operating mine and that’s kind of where we are today.

Matthew Gordon: Okay. So you used the phrase there which was; it’s been a turnaround story up until about a year ago, okay. And yes, we’ve seen this scenario before where companies need to kind of shortcut the process because of investor pressure on them, share price pressure on them. And are you saying to me that you were kind of fixing a few problems caused by short-cutting in the process or just natural mining? The difficulty of mining; because mining is tough, right?

Brendan Cahill: Definitely. Yes, it can be interesting, challenging at times, but yes, I mean, it was really just, you know, dealing with the rock when you get down there. Dealing with changes in the jurisdiction that you’re in, so you have to really take the time to understand the chronology of why things are where they are. And then, you know, putting in the changes to make things better. And the most important part of course, which I didn’t mention was that, you know, of all the turnarounds we did, it was bringing in a really exceptional group of people, you know, upgrading our board, upgrading our management; top to bottom. And that’s what really allowed us to address these challenges that we saw. And certainly, you know, the management before me were dealing with a whole other set of challenges. Everybody in mining is always dealing with a turnaround story, right? Whether it’s an exploration project; where is the discovery? Or whether it’s running efficiently, or whether you’re in production, and then it’s just a whole host of you know, day to day opportunities for improvement.

Matthew Gordon: Yes. So this is the bit I find interesting. It’s like sometimes, even when things are going well, you’re in the middle of a turnaround process because markets change. No market better demonstrates that than the Silver market, which is typically, and you know, most notably quite erratic. And if I look at your share price last year, fairly erratic: you’ve had big highs, big lows, but you kind of ended up sort of where you started off. Was that caused by some of these legacy issues that you’re talking about or these ongoing mining issues, or the new team coming together? I mean, what was the cause of that?

Brendan Cahill: I think that actually the Silver market right now is quite interesting; particularly over the last 18 months or so. When you look at our peer group, you know, as you said, it started at A, bounce around, and then ended at A And you can look at many of even the big companies in the peer group and they haven’t kind of seen that almost stratospheric increases in share prices that many of the Gold companies have seen. And when you look at Silver over the course of time that it is kind of the way things go. Right now we’re at a Gold -Silver ratio of 89, almost 90:1. And the historical norm is between 55 and 65:1. So we’re in a very challenging place for Silver right now. The other aspect of Silver that has been tricky over the past little while is most of us are producing a concentrate, you know, so we’re not producing doré, some of us are, but a significant portion aren’t. We’re producing Lead and Zinc along with the Silver, and treatment charges for that Lead and Zinc, particularly on the Zinc side, have increased significantly over the past couple of years. So that’s added another economic challenge to the business, and something that’s affecting the entire peer group area.

Matthew Gordon: Right. So this brings us nicely on to the business plan. Okay. So; Silver company, you’ve got assets in Mexico, one which kind of three me – Germany. And obviously now you are, and we will talk about Otis in second, we will talk about Otis in a second, which is obviously Gold and so you’re looking at different ways to mitigate the ongoing risks involved in mining and Silver mining in particular, obviously. So, you made a point in mentioning this team that you’re building up, I mean, can you give me a sort of sense of the track record of the people involved? I do want to talk about some of the shareholders in a minute, but what have your people, what have you done, which has created value for shareholders in the past?

Brendan Cahill: That’s a question that my wife has asked me at times as well. So you know, I came from Davies Ward in Toronto, which was one of the eminent M&A firms in Canada, and then I went into mining around 2008, or explorations specifically. And actually I started at a company called PlanGeo Mines, which acquired the Detroit Lake deposit back in the late nineties. Ingrid Hibbard was CEO, she has just joined the board of our Kirkland Lake actually, and I won’t go through the whole details, but an amazing transaction at the bottom of the market for $1.5M acquiring the Detroit Lake deposit.

So we spun that into Detour Gold around 2007, and through a series of transactions ended up merging part of PlanGeo back in with Detour. And the returns that we saw from that, you know, I bought PlanGeo stock when I was a student; I think paid off my student loans and at 10 cents, right. And by 2000, and that was probably around 2002 and by 2011 it had returned 11,000%. So that’s kind of where I came from.

We went from there, that transaction to doing a series of acquisitions in Ghana, West Africa, making a number of discoveries and seeing our return to shareholders increase further from there as well.

On the rest of board and management, Ben Pullinger, our senior VP geology was at Roxgold. He was with me at Plan Geo as well, so we saw those returns and then went over to Roxgold; high-grade success story in West Africa, bringing you know, exceptional asset, Yaramoko from an inferred resource through to production from 2012 to 2016. Great success story there Anna Ladd-Kruger, our CFO was at Kinross and then was at Trevali from the very early days, USD$50M market cap all the way through to the billion dollar deal with Glencore. So saw huge returns for shareholders there.

Matthew Gordon: Beautiful. That’s great.

Brendan Cahill: I could go on.

Matthew Gordon: No, I guess that sounds like you could, so let me stop you. I think that that gives us a flavour. So there’s a real mixture there of finding value in the rocks, the geology. I like the rocks story particularly. I think that’s a great business model as well. I’m a big fan of John. You’ve also been doing it through M&A, which is what you’re doing here. So is that the plan going forward? Do you know, is the plan to gain or get shareholder value gains through acquisitions? Is that the plan or are you also going to be looking at the rocks?

Brendan Cahill: We have a really simple vision; it’s almost embarrassingly simple. It’s just to create wealth, right? That’s it. Great wealth. I mean, anybody in business should be looking to do that.

Matthew Gordon:  Tell me how, tell me how?

Brendan Cahill: So you know what we’ve got in this industry in particular, right? You really have to be involved in the entire growth pipeline because markets change, commodities change, investor sentiment changes, access to capital changes. So we have production now with the acquisition of Otis Gold, we have development; Gold development in particular. And we have a significant exploration portfolio. And, you know, the way this portfolio, our entire portfolio or growth pipeline is organised, we have immediate leverage to metal prices: Silver Lead and Zinc. Silver being better than Lead and Zinc right now. We have a Gold development project which has a significantly higher potential value than our producing assets; you want to be able to grow into that yet better asset. And then we have a number of exploration properties. And you need a portfolio of exploration properties because exploration is risky, right? And trying to make a discovery on one property is, you know it’s like playing high card.

Matthew Gordon: No, I get it. We talked to companies like that all the time, but if I may, let’s come to the producing components, do you think that they are doing enough? Are you happy with what’s happening in Mexico? Are you happy with what’s happening in Germany?

Brendan Cahill: I’m never happy. I always want more, right? That’s the business.

Matthew Gordon: So what are you doing about it? What’s happening?

Brendan Cahill: So in Mexico, as I mentioned before, we had a very wet mine, too much water flow, inflow coming into the mine. So we put in an interesting engineering solution to solve that problem. Drawing the water table down in an underground mine. Kind of like treating it like an open pit, creating a cone of depression around the mineralisation, drawing out the mine entirely. And that was really sending in the storm troopers, right? Fix this. It would take every means to fix this. And then we needed to make a change. And right now, over the past six months or nine months or so, we’ve got the optimizers in there, you know, the plastic surgeons. So they’re really working on, you know, optimizing the mine, the normal course mining stuff. It wasn’t possible before, but this yields millions of dollars of cashflow when you push it and make sure that you put to it entirely. We won’t talk about Otis and Kilgore in terms of immediacy, but on the exploration front, we’re making great strides.

Matthew Gordon: Let’s stay with Mexico. Let’s stay with Mexico. Right? So when do these storm troopers report back to you? What are they going to be able to do in terms of the numbers? The economics around this, what’s going to change?

Brendan Cahill: So the storm troopers have left the building now. So yes, I mean, but what they did was they took a mine that we were effectively mining underwater, you know; intensive grouting at the face, a very slow inefficient mining process, and they’ve allowed normal dry mining conditions to continue going forward. So, and that job was done very effectively and it’s just part of our ordinary course of operations now.

Matthew Gordon: So what’s changed? What’s changed?

Brendan Cahill: Now we have to deal with like the ordinary thing of getting guys to the face faster and for longer parts of their shift, you know; more efficient use and safe use of ground support to make sure that we can operate efficiently. Two of the challenges that we face at Platosa are high electricity costs, you know, we pay about 12 cents a kilowatt hour. But under Mexican energy reforms we can go into the private market and get a lot less than that; about 25% less than that. So that’s an optimization that we’re in the process of doing over the next couple of months. Our electricity costs are very high because we’re pumping a lot of water. So that’s going to result in an immediate significant savings to opex.

Matthew Gordon: Okay. Give us some idea of the numbers that you think you’re going to be able to get to, because people are interested in that. People want to know, are you going to reduce your overheads? Are you going to be more profitable? I mean, tell us what can you do?

Brendan Cahill: Yes, so certainly for the past few quarters we’ve not been generating profits, not being generating cashflow. But with these optimizations, you know, we’re targeting and All in Sustaining Cost of something below USD$15. That’s really the target we want to get to.

Matthew Gordon: When?

Brendan Cahill: Towards the end of the year, in the second half of the year, that’s basically where we’re looking at right now.

Matthew Gordon: That’s still quite high, isn’t it?

Brendan Cahill: You know, Silver at USD$18. If you look at our peer group, if you have an All in Sustaining Cost under USD$15, you’re kind of in that top five, 20% or so.

Matthew Gordon: Wow. That high? That’s amazing. Okay. So you think towards the end of the year, you’re going to be able to say; we think we’ve got Mexico Platosa under control now; it’s as good as it’s going to get. Is that the message?

Brendan Cahill: Well, there’s, I mean, Platosa the reality is it’s a, you know, we want to mine 250t, up to 300t per day from the Platosa; so it’s a small mine. It’s the highest grade mine in Mexico. It’s one of the highest grade Silver mines in the world. Production grades are over 1Kg per ton Silver equivalent. So there’s very few things like that out there. But it’s small, so we need to find more, we need to grow more. And that’s both at Platosa and then at Evolution, which is where our mill is; about 200kms to the south, but big exploration package around that. We’ve made a new discovery there as well called the Lechuza zone. So that’s something we’re going to move towards resource over the course of the year. I need a bit more work to kind of set it on that path, but you know, it’s organic growth from that perspective, like identifying new deposits and put them into production.

Matthew Gordon: So how much money, how much money are you going to put to that to spend?  I mean, are you going to spend time, effort, money, and if so, how much?

Brendan Cahill: Yes, so our exploration budget is generally around USD$4M to USD$5M per year within our existing assets. And that doesn’t sound like a lot, but it’s very effectively spent money. You know, what we’re trying to do is find new things, right? So you don’t want to grid drill a green-fields project in the hopes that something might be there. We use a very scientific approach, and the way that we look at an exploration is really, it’s research and development, right? And it’s one of the things that’s been lacking in the industry for a while. But, you know, for us, it’s spend the money wisely, identify the target and then bring your rigs on and start drilling something off.

So down at Evolution, we’ve actually done quite a bit of that over the past year and we’re ready to move that now towards, to find a resource over the course of 2020.

Matthew Gordon: Right. And I don’t know how much cash, I mean, how much cash are you sitting on at the moment?

Brendan Cahill: So as of this transaction, we’ll have about USD$10M in cash so we’re in a pretty good position, and with Platosa starting to turn around over the next few months, we should be generating that sustainable cash flow for the exploration that we want to do within our Mexican portfolio.

Matthew Gordon: Right. So Platosa will be break-even; is that what you’re telling me?

Brendan Cahill: Sustainable operation, yes.

Matthew Gordon: Sustainable, I guess. Sustainable. Okay, cool. And towards the end of the year, moving towards more of a profitability?

Brendan Cahill: Yes, exactly.

Matthew Gordon: Okay. So let’s move away from that. Germany; what’s happening in Germany – that well-known mining district?

Brendan Cahill: Actually, you’d be surprised.

Matthew Gordon: Tell me.

Brendan Cahill: There’s over 50 underground mining operations in Germany, right? There’s a huge amount of coal production in Germany, you know, and we’re actually in the state of Saxony, which is in East Germany. It’s kind of in the crook between Czech Republic and Poland, and it is a very, very long mining history. So the project that we have; it’s called a Silver City, or the Bronze Door exploration license. It’s about just Northwest of the city of Freiburg. And this area was mined for 800 years; from the 11th Century, all the way through to just after the Franco-Prussian war. And Germany won the Franco-Prussian war and got a 200 million pound Gold settlement from the French. And really, you know, they dropped the Silver standard, went to the Gold standard and history progressed from there.

And this was one of the interesting things when I kind of was presented with this project back in late 2018, I was dismissive at first as well. You know, who goes to Germany, right? But I didn’t know, but I did the research and I thought about it and then he pitched to Ben and he said, geologically, like, we have to be here, we have to check this out. And when you understand that history, and then you’ve got the switch to the Gold standard and you’ve got World War I, you’ve got the Weimar Republic, the Great Depression you have World War II, and then you have this becoming part of USSR effectively, or the Soviet empire, right? Which was not focused on the capitalist metals of Silver, it was focused on Lead and Zinc and Tin and Coal. So that was really what was explored for here and Silver was forgotten about.

Matthew Gordon: I get the history, I understand the history of Germany and Europe around that time. Today, Coal is not in favour in Germany. It’s a very green, liberal country these days. So, you know, how is mining in Germany for you? I mean, do you come across problems, protests, any issues with regulation, law?

Brendon Cahill: Well, we’ve only been there on the project since the fall of 2018 sorry, 2019. So really, we signed an option agreement on this asset back in September. But the integration with the community, and with the institutions there, and with the regulators there has been quite impressive. And you know, one of the things is, the impression of mining in Germany and exploration in Germany, Brussels and Germany, Berlin actually founded an Institute called the Helmholtz Institute there in 2011. And this was, if we go back to 2011, I’m obsessed with history and the chronology of why things are, right? That’s why, sorry for going through the whole history of the 20th century, but it is, there you go. Right? So it is so critical that you understand the history or you miss opportunities, right? And you think, well, somebody else would’ve done this. How was this opportunity mine, somebody else would have done this. And then you reel back the history and you’re like, there is a huge opportunity here.

So Germany 2011, if we go back to 2011; Silver’s at USD$50, Gold’s at USD$1900. You’ve got rare earth metals absolutely ripping. You’re coming off, you know, Nickel highs, Copper highs, so Germany recognised that they needed to start controlling strategic metals, which is a very topical aspect now. Rares are still an issue in Canada. The mining association of Canada is looking at strategic metals review. Germany recognised this in 2011; created this Helmholtz Institute to further exploration, development, production, with high technologies in Germany. The great thing is Ben Pullinger, our Senior VP Geology, his former professor is actually the head of this Helmholtz Institute. There’s this weird serendipity or synchronicity that kind of happening with us going to this project. That Institute is in Freiburg because Freiburg also has one of the oldest mining and metallurgical universities in the world: the University of Freiburg.

So if you go around the world, you come across geologists all the time. I didn’t exchange there, I went to school there, I’ve been underground there, you know, in the old workings under the town. So that’s the kind of thing that we’re drawing on. We’ve got a high technology Institute with, from drones to core scan technology to a Met-Lab that they’re developing right now. Loads of PhD students who have been crawling over this ground, looking at the opportunity for years now writing their dissertations on it. We get the benefit of all that research and yet there’s been no modern day exploration. There’s never been a drill hole for precious metals on this project.

Matthew Gordon: So tell me what you’ve got; so thank you for that, that was actually an education, I’ve learned something. That’s good. But tell me what you’ve got. What do you know about what you’ve got in Germany?

Brandon Cahill: So the concession that we have, or the exploration license, we have; we call it Silver City, the Silver City property. And people are like, why Silver City? That’s not a German name, but you know, Freiburg, the nickname for Freiburg is ‘Silberne Stadt’, which, forgive my pronunciation, but; Silver city. So it was a pretty easy branding exercise when I saw a Silver and Stadt, and I’m like, well, there we go. We’re good. So there is that long history of mining, certainly. Well what we have is 164kms2 with 35kms of strike, and a number of veins running through that property along this strike and loads of historical underground workings. So our concession was mine for, you know, on and off well, continuously for almost 800-years. We have all the records of that mining as well, or most of them anyway, right?

So we know where the workings were. We know how deep they went and what they were mining. And some of the grades that they were seeing there, you know, up to 3,500g/t Silver, excluding other metals. And it was definitely Lead, Zinc and Gold as well, and up to 10 metres width. So we know where they stopped. And it’s a really simple, as far as geology and exploration are ever simple, to know where they stopped, understand where the system is, using all this information that’s being generated by one of the top mining universities in the world, and set the rigs down and start drilling the deeper part of this.

Matthew Gordon: Okay, let’s talk numbers, so I’m going to assume that you wanted to mitigate country risk from Mexico into another jurisdiction and you came across something which you thought might fit that bill, okay? I’m going to assume it.

Brendan Cahill: No.

Matthew Gordon: No? You thought this was headed out of the park?

Brendan Cahill: I mean, I had the same impression as you, right? Like Germany; that’s kind of an asymmetrical assessment of improved country risk, right? So it was really, we were looking around the world for high-grade exploration opportunities that could deliver results very, very quickly, as far as you can ever have that expectation. And this really fit the bill. It wasn’t until we got over there, and did our work and diligence long before signing the option agreement, that we realised this was actually a special opportunity, you know, a regulator that was very much in support of bringing exploration back to Saxony, with a huge amount of wealth and talent to support that kind of reinvigoration of this region. But even to say reinvigoration; it is a little bit of a misnomer because we’re not the first guys there. We’re not the only guys there. There’s loads of exploration down in the South on the Erzgebirge, again, forgive my pronunciation, but the ore mountains, which were mined for hundreds of years in the middle ages. Up to the Northwest, there’s the ‘Kupferschiefer’, which I never pronounce properly, one of the world’s great Copper mines and the big coal mines along the North part of Saxony.

Matthew Gordon: So I get the bit why you think this is unique in its own right. It sounds like you’d be proud to have this in your own right, but that is surely the definition of risk mitigation. You’ve got Mexico, you’ve got another jurisdiction, you’ve got two assets instead of one. Is that part of the thing? I’m just trying to work out what’s going on up here. Why, why are you doing this? Why Otis? What was the problem you’re trying to solve, Brendan?

Brendan Cahill: So I mean, I guess when you’re looking at business, right? You know, risk mitigation people are like; ‘Oh, you’re in a different jurisdiction. That’s cool. That’s good’. Right? And it’s a good jurisdiction; excellent rule of law. And it’s actually a very clear permitting process. You know, if you follow the rules, do the right work, you know, it’s one step, two step, and things will happen as you expect. So that’s good. But this is about opportunity. You know, this is, you’ve got risk and you’ve got opportunity. This is far more on the opportunity side, understanding that the risks are relatively minimal. Because when we look at the project, you know, 35kms of strike, that would almost cover the entire Fresnillo belt from Fresnillo down to Zacatecas. That’s about 50kms to 35kms. If you put that in there and turn the clocks back 150-years, you know, just after the Spaniards were wrapping up, you’ve got one of the richest chunks of the Fresnillo Silver belt, you know, it’s absolutely a special opportunity, and there’s been no exploration since the 1870s for precious metals.

Matthew Gordon: Okay, so let’s talk about some of the numbers then, okay? Because how much did you pay?

Brendan Cahill: So it’s an option agreement over three years.

Matthew Gordon: What’s that cost you?

Brendan Cahill: CAD$500,000 in three payments over the three years, and CAD$1.6M in shares of Excellon. So CAD$2.1M total consideration; a very reasonable deal for sure.

Matthew Gordon: And what are your obligations in terms of…what are your other obligations, financial?

Brendan Cahill: At the end of the exercise of the option, there’s a 3% Royalty on precious metals and a 2.5% Royalty on base metals, each of which are, we can buy them down collectively for a payment of USD$1M, so we’d go down to 1%, 2% precious and 1.5% base. And then there’s an exploration bonus, but relatively or sorry, a discovery bonus and a resource bonus of relatively small amounts. In terms of work commitments, there’s no work commitments under the option agreement. We do negotiate work commitments under the exploration license with the regulator. For this year there are around CAD$500,000. next year around CAD$500,000, and CAD$1M in the third year. So very manageable, and certainly with success, we’re going to be spending a lot more than that this year and around a million dollars on the project.

Matthew Gordon: Right. Okay. Well; over and above, in terms of your allocation of people’s time on it or collectively?

Brendan Cahill: So CAD$4 million in Mexico and CAD$1M in Germany.

Matthew Gordon: Got it. Understood. Sorry, I wasn’t clear.

Brendan Cahill: They’ve got tons of talent there. So, you know Ben; he has people in Mexico, Jorge Artega, our exploration manager down there, really managing the country effectively. And we’re developing a team in Saxony as well.

Matthew Gordon: Okay, well I’ll be interested to see how that develops this year. Okay. Now the bit you want to talk about – Otis – you’ve done it yesterday. You made the announcement, I’ve got the press release here. Why’d you do it? It’s not Silver, it’s Gold. Do you know anything? What do you know?

Brendan Cahill: You strip it back. It’s our job to create wealth, right? So when you do that, you’re not like tied into to ideologies effectively, right? It’s really about generating returns for shareholders and the community and our employees and the whole kind of continuum of the business. So, and it’s really founded on if we were at, you know, if we were in 2013 and Gold had tumbled from USD$1,900 down to USD$1,600 in April 2013, going down to USD$1,300 or USD$1400, this wouldn’t be the time to do, to kind of, you know, you weren’t in the right part of the market. So we’re very much market focused and market trend driven. And I think that’s the important part of the industry. There’s times to buy, there’s times to sell, there’s times to hold, there’s times to explore, there’s times to build, right? And we didn’t put that in the right order, but you know, there is different aspects that need to be done at different parts of the market cycle.

Right now, we firmly believe we’re back in a precious metals bull market that wasn’t like, you know, over the past couple of weeks, with the horrors that are happening with the coronavirus and everything. This is from May last year when Gold moved through USD$1,375 through USD$1,400, and it was game on, right? Silver is trailing of course, but Gold, it’s game on.

So that’s why we bought this now. But what it does is, it increases our precious metals or our total resource base by 450%. That’s just on M&I. It’s more when you include inferred; the inferred goes up by 6,000%. And importantly, it switches our mix of base metals, sorry, our mix of metals. So right now we’re 50% Silver and 50% base metals. After this transaction we’re over 90% precious metals. So that’s a very important switch as well. You know, continuing on it, it completes our growth pipeline. We have production, we had exploration, have exploration; a big portfolio there. Now we’ve got an excellent development project in the middle.

Matthew Gordon: Fantastic.

Brendan Cahill:  -that improvement as well as having the torque that you have from exploration.

Matthew Gordon: Got it. If I may interrupt, okay. You’ve got the blend of production, development and exploration. You’ve changed the mix from 50/50 on base versus precious to, you know, 90/10. It’s great. So you’re making all the right moves. I think the interesting thing that you said there was the fact that when you started the conversation about Gold, it was before Gold started moving. So it suggests some foresight there. So this wealth that you’re going to create with Otis, what’s the cost of the wealth that you’re going to create? So what’s it cost you? How much are you going to have to spend, and how much focus are you going to give it?

Brendan Cahill: Yes. So with Otis as well, we’re adding their VP exploration to the team. He lives  in that part of the world. Great guy; Alan Roberts, trained at RandGold, so experienced all of the world. Very you know, obsessed with this project. It’s a great project, right? So, you know, the goal is; keep the focus on stabilizing Platosa, start generating cash flow from there. You know, with Kilgore, again, the oldest asset, right now it’s about doing the studies in support of another PEA, or an updated PEA over the next while. Doing the exploration to grow the resource. Right now the PEA provides for a USD$81M of capital for five years of mine life at 110,000 ounces Gold a year at an All in Sustaining Cost of around USD$830.

It’s a very nice project at USD$1,500 Gold; so 53% IRR and USD$185M NPV at 5%. So a very quality project, but we’re not building that quite yet. It’s still in the study stage so it’s not going to cost a ton of money. But we do want to do there though is look at the bigger opportunity, and that fits into our exploration and discovery portfolio.

What we look at Kilgore, it’s like a round mountain. So a round mountain is a mine that Kinross has been operating for years. It’s been in production since 1977, has produced 14Moz over that period. So an exceptional deposit down in Nevada. This is a very similar kind of geology. Now around the mountain at surface you’ve got, you know, 0.5g/t oxide, but as you get to depth a much, much higher grades.

And here, there’s a series of drill holes which really haven’t been followed up on. A number of them actually ended in mineralization. We’re talking like 95m at 4.2g/t. 30m at 5g/t, you know, a series of these holes. So it’s really chasing that round mountain opportunity. That fits into our bigger exploration play perfectly, you know, and that’s from Platosa looking for a big CRD to Silver city, looking for a new epithermal district to Evolution, you know, on the continuation of the Fresnillo Silver trend. And now this is part of the game as well.

But again, on that kind of stuff, it’s intelligent exploration, doing your science from the start. Drilling is the last thing you do to prove the theory and then define the asset, right? But we take every single aspect of geophysics, of geology. And I’m getting too far down the geological wormhole here. I’m a ‘geologisht’, not a geologist. But it is like kind of really painting the whole picture of what the opportunity is before you spend the significant capital on drilling and then, you know, grid drilling to the final –

Matthew Gordon: Okay. So let’s go back to my question; which was, how much money are you going to need to spend? Because I think you’ve got USD$5M left: USD$4M going to Mexico, USD$1M in Germany. You told me you’ve got USD$5M left. Is all that going into Otis or are you going to raise additional money to develop it, develop this wealth that you’re talking about?

Brendan Cahill: Right. So the first is that, you know, as we turn the Platosa around, that will start generating cash flow, which will take a lot of the burden off and cover kind of –

Matthew Gordon: But that’s towards the end of the year, isn’t it? That’s what you said. How do you allocate money now?

Brendan Cahill: So, I mean, I think one of the things is, and the reason we’re doing these things now is that it’s a different market, right? In this market, people are paying for exploration. You know, if you really look at the money rates since January 2019: USD$1.1Bn, something like 70% or 75% of it went into exploration. And why? Because that’s where the greatest returns are. Like, we’re finally back, and it happened I think in 2018; you could see discoveries and stocks would just fly and go up 10 times, 20 times. Right? And in this market, when you look at say, a Silver Crest or a Great Bear Resources, you know, incredible returns on the market for incredible assets that have been funded from the market. So if you have the right thesis and the right focus, that money is there and that’s the difference of the market we’re in versus the market we were in you know, even last year and certainly two or three years ago.

Matthew Gordon: I think that’s the case if you’re able to articulate your model, like if I say, Great Bear, great example, and there are other business models that we’ve looked at and explored and CEO’s who have been able to articulate it. But you know, I say 50%, 60% of CEOs go, we’re just going to drill holes. So that’s their thesis, right? Which is maybe the right thing to do, but it’s hard for investors to then differentiate between companies necessarily, which ones they should target. So I’ve enjoyed listening to your thesis, as it were, today. But like I say, so on Otis, your idea is to just sit back and evaluate what you’ve got. You’ve got a PEA, which is, you know, it’s the start of a process. So what are you going to be doing this year in terms of, you know, is a PFS on the card this year?

Brendan Cahill: So I think the first thing is, is improving our studies and understanding of the project, and those studies are going to move towards an advanced or an improved PEA, or PFS ultimately. And we haven’t closed the acquisition yet, so we’re not talking about timeframes yet. Give us a month or a few months on that until we put more time frames, or a timeframe for the timeframe. But you know, the ultimate goal here is from what we have right now: a very solid base, great PEA, great NPV and IRR, but really growing a resource that supports a 10 year mine life at a hundred 100,000oz a year. You know, that’s something that’s very assessable by the market, by analysts and something that you want to build. As well, at the same time, looking for that bigger opportunity. You know, the multimillion ounce deposit and that’s why if Nico is a shareholder, I’m sure we’ll talk about shareholders as well, that is a big opportunity that has to be part of the focus as well.

Matthew Gordon: Okay, that’s a good point you raised, so you haven’t yet closed it. What’s the timing on that?

Brendan Cahill: So we announced the transaction yesterday on February 24th. We will be mailing materials in mid-March, mid to late March at the latest, and aiming to close in mid to late April.

Matthew Gordon: Okay. You didn’t get much of a market reaction when you made the announcement? I’m just trying to re-read around chat rooms and forums; people don’t seem to understand why you’re doing it.

Brendan Cahill: People don’t like change, you know. And certainly, we’ve been Mexico’s highest grade Silver producer for a long time, but you know, our stated vision –

Matthew Gordon: But you got to make money though, haven’t you? It’s all well and good having high grades, if you’re not making money, it’s no good to anyone, is it?

Brendan Cahill: Yes. I mean, I think one of the key things is looking at the Silver space right now, Silver has been trailing Gold significantly over the past, long time now you know, at an 89:1 Silver to Gold ratio. What we’re doing here is buying. It goes back again to that, you know, multiplying our asset base and moving into precious metals. Lead and Zinc; certainly in the global economy and everything right now, are not the place to be making money, especially when you’ve got treatment charges increasing year over year now. We had incredibly low treatment charges for a period:  three to five, five years ago, and now they’re kind of back to the historical norm, but metal prices are coming down. So you just have that margin getting crushed. So this is an asset that we’re buying with, you know, producing paper, right? To buy an acid in the ground that we think has great value in it.

And one of the things that, when we look at the market now, the junior developers that aren’t financed, right? They’ve just very much underperformed the market. The finance developers have flown: they’re up 63% in 2020. The senior producers have skyrocketed. They are up 30%, 40%; for these big companies, that’s a big move. And that’s what you would expect to see at this point in the market. When you compare this market to 2002 to 2011, 570% returns over that period. For us, since 2016 to now, it’s around a 48% return. So we’re really in the early days of that market, but we’re seeing exactly what we would expect to see in the early days of a new bull market, right? The money first starting to go into seniors, the generalist money going into seniors. What we’ve seen which I really like, is the money going into explorers for discoveries, mostly it’s post discovery. But if you don’t have the development money, it’s a little bit tricky to get right now. So this combination increases our size, makes us more financeable from a development and exploration perspective, and really kind of completes the story and sets us up to really ride this new bull market.

Matthew Gordon: So those treatment guys make money?

Brendan Cahill: It’s a good gig.

Matthew Gordon: Just an idea, just an idea; you can have that.

Brendan Cahill: You’ve got to build a smelter though.

Matthew Gordon: Just buy one.

Brendan Cahill: When you’re the man in the middle, that is always good too.

Matthew Gordon: I know a guy, I know a guy. Okay, let’s talk about some of these shareholders. You’ve got some big names in there. Okay. So Eric Sprott, Agnico; how involved are they? I know they are shareholders. Okay, let’s start with the easy one. So Agnico, did they own one of these assets before? Why are they in here? Have they put hard cold cash in?

Brendan Cahill: Yes. So Agnico, I invested USD$5M in Otis in 2017, and they did it because they see this opportunity in Kilgore.

Matthew Gordon: So it is option money, right?

Brendan Cahill: Not option money. This is money to go into the ground to define a 3Moz to 5Moz deposit.

Matthew Gordon: It’s option money for them. It’s like, it’s nothing. So why aren’t they doing this themselves?

Brendan Cahill: Because if you look at the way that Agnico operates, and again, this is second-hand knowledge because I’m coming in and you know, we have to develop that relationship with Agnico as a shareholder, and hopefully a significant backer. But they look at projects that do have that potential. So they do a lot of diligence before they put in money. You know, this is not high card money. It’s not throwing chips on the table. This is extensively researched. We know this asset and we want to put money in. The interesting thing is, the guy who did that for Agnico, or led the initiative at the time, Mike Timmons, who was their VP Corporate Development, he’s actually joining the board of the combined company. So when he learned that we were acquiring Otis for Kilgore, he said, ‘Oh, I’ve got to be involved in this. This is something I want to, you know, further this idea on that Agnico started a couple of years ago.’

Matthew Gordon: Okay, so I sort of jest there, but when I say it’s option money, it’s like you’re one of 20, 30 companies that sell USD$3M to USD$5M out, okay? So if one of them comes off big,  they make their money back. So in that sense, it’s option money. At what point did they work out what you’ve got and whether they come in for the next round of cash, or however the relationship works?

Brendan Cahill: I think like the option money, it’s not really about making their money back. It’s really about finding things that they can acquire. Right? They’re looking for new mines, whether it’s in Mexico, whether it’s in North America, it’s not just a trade. Right? It’s really, it’s research and development and the furtherance of a new invention, which they can, you know, buy and put into production.

Matthew Gordon: Yes. But you appreciate that we talk to companies all the time who’ve got money in from the big players, who’ve spread the cash, spread the love, as I say in the hope of finding the next global big scale projects.

So, okay. I understand about Agnico. Let’s come to the interesting bit for me, which is Eric Sprott. When his name is associated with a project, it usually means the project is going to work. Whether the project’s any good or not is another matter. So when did he come in and what’s he going to do for you?

Brendan Cahill: I really feel like the trade is going to work, right? His market sense and his ability to see opportunities –

Matthew Gordon: Absolutely.

Brendan Cahill: So he came in, he’s been a long-term supporter of Excellon since long before I joined the company. And that was originally through Sprott Asset Management, right? Which is, Sprott Asset Management is still a shareholder. Eric’s retired. It’s run separately, but he started putting money in personally in April 2016. And so he put money in at 45 cents, then at USD$3M, USD$$3M in a private placement. Then we put another USD$7M or so, in a public offering in July of 2016. And then invested again in 2017 and 2019. So he’s been a long-term supporter and you know, he’s timed the market well in terms of wanting to put money in as well.

Matthew Gordon: So what’s his involvement? I mean, do you get that phone call once a month going, ‘What’s going on, Brendan?’

Brendan Cahill: No, he’s like the best shareholder you can ever have. He really is like, he was very, very supportive of pretty much every company that he’s in. And you know, for us on presenting this Otis deal, he was happy to sign a support agreement which was obviously a huge, huge benefit of the transaction.

Matthew Gordon: Okay. Okay. Well, great story. I like the model. You’re going to be bouncing around PDAC next week; better you than me. What’s your sense of the market reaction when you put the Otis press release out? Were you getting  inbound phone calls? From what, what were they saying?

Brendan Cahill: Yes, it was a busy day. We’ve got you know, I think it’s a little bit of a difference; some of our shareholders were like, why are you doing this? But when we presented it to the market and kind of the funds that are invested in the company and they’re like, this is a great move. This is the kind of jurisdictional diversification that it actually is good. We’re, you know, going into Idaho, we’ve got Integrity Resources there, Midas Gold, Liberty Gold, Revival Gold, right? We’re kind of getting into that really re-emerging Gold district. So it is a great jurisdiction to get into. And so the institutional money is now much more interested in Excellon than it was last Friday, right? Because there is a much better asset base. There’s a complete growth pipeline. You can see Platosa moving into Gold production over the next three to five years. So it is a much more integrated story from that big money perspective.

Matthew Gordon: So what are you hoping the share price does? Because it’s, I say it’s been fairly erratic for the last 18-months; mainly because it’s Silver focused. With this Gold acquisition, would you hope to see a slightly more steady state or do you think you’ll kind of get that appreciation from the marketplace?

Brendan Cahill: I think we are for sure. And one of the important parts of this transaction is, it’s a really, you know, there’s a market strategy to it as well. At the closing of the transaction, we’re going to do a share consolidation and we’re going to apply to list on the New York Stock Exchange, we’ll start in the NYSE American.

Matthew Gordon: Yes. Sorry, I meant to ask you, so what do you think that’s going to do for you? Apart from, I guess open up a new investor base, but how do you think the guys back on the TSX are going to feel?

Brendan Cahill: I’m more concerned about how my shareholders feel than the stock exchange, but a different conversation I think. But I mean I think the important – or you mean the shareholders?

Matthew Gordon I do mean the shareholders on the TSX.

Brendan Cahill: We’re going to get a lot more money coming into the stock, a lot more liquidity on the stock as well. I think if you look at any of our peer group, and that’s from say Avino, which is in Mexico, and has been a long time on the NYSE. America Silver, American Gold & Silver now. I’m moving there back in 2017 or so. Most recently, Metalla Royalties and Equinox Gold, so both of them did this exact strategy. You know, they did a 5:1 or 6:1 consolidation, got that USD$2 share price, but really over USD$5. That proved very effective as well. And saw within a month to three months, 20% to 40% returns. And I mean, the reaction was immediate: on announcement of the application, these companies started moving and you can just see the liquidity pickup significant. So again, it’s prepping for this precious metals bull market. We’re at the early days now, but as more generalist interest starts filtering down to the less senior companies, being on that exchange is just going to open up a lot more investor base, a lot more liquidity and that’s for the benefit of all our shareholders, whether it’s retail or the biggest funds.

Matthew Gordon: Okay. Brendan, thanks very much for telling us that story. Like I said, I like the business model. You’ve got a bit of work to do in Mexico, and you know, come back to market and tell them how things are going there. Take care of what’s happening at home. And then with the exploration development and Otis, obviously sounds exciting times in terms of that diversified portfolio approach. Thanks very much. Do stay in touch, let us know how you’re getting on. Okay?

Brendan Cahill: Sure. Sounds good. Thank you for having me.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

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Excellon Resources' company logo.

China Gold Int (TSX: CGG) – Oh, now look at me and this opportunity (Transcript)

The China Gold International Resources Corp. company logo.
China Gold Int Resources
  • TSX: CGG
  • Shares Outstanding: 396M
  • Share price C$0.65 (17.03.2020)
  • Market Cap: C$274M

Interview with Jerry Xie, Executive Vice President and Corporate Secretary of China Gold International Resources Corp. (TSX: CGG, HKSE: 2099).

China Gold is a big gold producer, with a secondary focus on copper. The company orients itself around organic growth of its two large main gold and copper assets. It does have however very deep pockets if required for M&A. What we found particularly interesting was the companies approach to value. They can buy large-scale projects, but will not overpay. Now, given the relatively cheap cost of the money available to them, paying a premium would not be out of the question, which could give them a competitive advantage.

Founded in 2000, China Gold International has 2 main assets. Its main project is the CSH gold mine, one of China’s largest open-pit gold mines. And the extremely large Development play, Jiama Copper Mine. CSH is located in Inner Mongolia, China, the principal product is gold doré bars with silver as a by-product. In terms of measured and indicated (M&I) Resources, we’re looking at 262Mt, averaging 0.60g/t gold totaling 5Moz of gold at 0.28g/t cutoff gold grade, based on the most recent 2012 Feasibility Study. If fully-optimised, investors are looking at 60,000t per day of ore. The life of mine stands at 11-years (as of 2012), with an estimated LOM CAPEX of US$213M, and an impressive AISC of US$713/oz of gold.

Over at Jiama Copper Gold Polymetallic Mine, in Central Tibet, China, Phase II expansion started commercial production on July 1, 2018. Jiama Mine’s Phase II consists of two series. Each series has a mineral processing capacity of 22,000t per day. The full design capacity of ore processing at Jiama Mine will increase to 50,000t per day. Total copper production in 2019 is expected to reach c. 132lbs, and the expected life of mine is 35-years, with gold and silver credits. According to China Gold’s feasibility study, production is expected to grow to 176Mlbs of copper per year at full processing capacity.

While many gold producers share prices were buoyed by rising gold prices during 2H/19, China Gold International saw a slow and steady fall, now standing at CAD$1.06. The market cap is a sizeable CA$420, with 396.41M shares outstanding. Xie claims the share price issue has been mainly related to marketing issues. A potential easy and cheap fix? He claims marketing on the TSX vs the HKEX is very different, and retail gold investors have either not been told the story effectively, or haven’t been told it at all. So now what? Time for the company to step up its efforts.

Big changes for investors to look out for in 2020 will be cost-cutting and significant development of Jiama, maybe into optimised copper-gold production? Communicating effectively with the North American market will be important too. The management team appears very competent. The assets are large, it is producing and sitting on a lot of cash, but the business strategy and marketing needs to be better understood by the market.

China Gold needs to clearly communicate its strategy and focus to potential investors, and it needs to get the word out. This has the potential to be an exciting story: let’s see how this develops, but this one story we are going to follow with great interest.

CLICK HERE to watch.

We Discuss:

1:52 – Company Overview
3:32 – From Start to Finish: What Did They Set Out to Do? Why Do They Choose to Stay Public?
10:21 – Organic Growth and Restrictions to it: Project Overview
14:36 – M&A and Their Criteria: Can They Afford to be Aggressive?
23:13 – Share Price Dropped When Everyone Else’s Rose: What Happened?
27:38 – 2020 Goals: Building Value and Regaining Control
31:26 – Possible Road Blocks and Concerns Company page:

Company Website: http://www.chinagoldintl.com

Matthew Gordon: Hello and how are you, sir?

Jerry Xie: Well, I’m very good. Thank you very much. Well, thank you.

Matthew Gordon: Thanks for joining us. You’re you’re in Vancouver at the moment. And you’re gonna tell us all about China Gold International today, because it’s a good story. It’s a big successful company. But we want to hear about how you’re going to grow it. But before we do, can you give me one minute summary for people new to the story, so they can understand a little bit about this before we start talking.

Jerry Xie: All right. Thank you. I would love to. This company is named China Gold International. The former name was Jinshan. So many long-term investors still remember that name. Actually we changed the name from 2010 from Jinshan Gold Mine to China Gold International. So, for your information, this company’s founder was Robert Friedland. He set up this small company early 2000s and went to China for the gold opportunities and he found one named CSH. And in 2008, our parent company, which is the largest Gold producer, China National Gold Group. Bought it. He owned 42% of the company became the largest shareholder that basically was the 2008. Two years later, we changed the name to the China Gold International. It had already been listed on the TSX. And in 2010, we duel listed on Hong Kong stock Exchange. So right now, this company has two stock exchange listing. And I think 2010 we inject a one polymetallic mine from our parent company. Right now has the two listings, and 2 producing assets.

Matthew Gordon: Perfect. That’s a good start to this. Okay. So, can I just talk about what it was that you… I understand the history there, but what was it that you guys were selling act to build? Obviously, you are a gold producer. Great, but you’ve listed in Hong Kong. You’ve listed on the TSX. Why did you take this thing public first of all?

Jerry Xie: They original strategy. Actually, the market can take China Gold international and the China National Gold Group as one. We share the same strategy, we sit under the same under the same umbrella. So originally back to the year 2008, the China Gold Group was going out of China. They’re looking for the opportunity to grow, grow the group. So after a screening of would be target, they picked up Jinshan Gold Mine, as the first step. The reason behind that.. they set up the strategy, the criteria. Ideally the company should be a public company. Listed on the TSX or like Australia, somewhere like a very mature, stable jurisdiction. TSX is really the ideal place, public company and also ideally the asset, liquidity in China is easier to access, easier to manage, as a first step. That’s why they picked up this company after that…. We still want to keep that platform because obviously the reality is the Western…the North Americans investors… they want… it’s not really about the Chinese factor. Every time when we were in China people just got confused. So keep this platform. I mean, the listing position will ensure we’re not black sheep. And just  following exactly the rules, the public rules, to keep the transparency. Follow the rules. So that’s the purpose. So easier to access the partner to look.. to find us a real good opportunity.

Matthew Gordon: I mean, that’s a really interesting thing. You say that because I think when people talk about Chinese companies, there’s a mystery to it, in the sense that it doesn’t feel as open and transparent. But as a public company, you must be. You must follow and comply with the rules of both sets of Exchanges. So when you started off that the needs were very different from today. You have successfully, economically, commercially been producing gold. Okay. You have got a lot of cash that you have created, a lot of cash flow that you’ve created since you started. Do you still feel the need to remain public? Because you don’t need to be. You’ve got you’ve got the cash, you’ve got partners who will give you cash facilities. You are in a very lucky position compared to most. So you’re saying you’re keeping the public persona, because it gives you an air of transparency. Is that the driver today?

Jerry Xie: Yes. So that’s really good question. And also, the challenge as well. The reason I’m saying so is because some, like I said, from the beginning from the long-term investors still remember Robert Friedland’s name. A few remember Jinshan Gold Mine. Even though we changed our name from Jin Chang to China Gold International, since 2010. But people still take us as the ‘new company’, When, people sometimes people introduce that say, ‘hey guys, let me introduce a new company to you’. ‘Hey, come on, we’re not new’. We been here with a new name already for 10-years. So you’re right. And we should be talking to the market. Some people are asking, why do you guys still need us? You don’t need money. You are financing with no problem. You can see that our…We do have access, to very low-cost of financing. I could say we’re sitting on the $500M bond that global issuing, very low-coupon. The last one was 3.25%. So this this year, it’s this 3-year term ending year. So we will need to renew that, maybe not $500M. It depends on our needs, but a CapEx, is not as much as during the construction period. Maybe lower. It really depends if any acquisitions happen in the near future, but still not really a strong need compared to our peers. It’s not really for financing on the equity side. But two reasons. 1. is like we said, keep it transparent. When we approach people, if you know, I mean, like Canadian owners, the peers. 70% global gold owners are Canadian companies? No matter where. Africa, South of America. So we have to approach them here. So when they see China Gold International that are listed in TSX and Hong Kong, so that we can build up more confidence and they feel more comfortable to talk with us. 2. Another thing is if we can run this public… the company better. I mean, the better the stock price, if it performance is better, so we can use our stock, to buy the targets. Not like always with cash. So that way you see a higher multiple, if our share price performs better, the higher multiple to buy a lower multiple, that could be very good deal. It’s not always just in cash. So again, combined, it’s a more flexible.

Matthew Gordon: I hear you and I want to stick with this for now, because the thing that… I’ve looked at your company, we’ve done some analysis of your company, you’re in a very good position. But I want to understand the money side of things a little bit more, if I may? So if I look at some of your peers, you’re talking about your Canadian peers here, who perhaps don’t have readily, or not as readily, don’t find cash as readily accessible, and certainly not the types of rates that you’re managing to pick up. So you’re at a slight advantage to them. But so what is it that you’re trying to build? Because it seems to me you could go and buy a lot more ounces in the ground. You can do that. You are already producing gold with good margin today. So but you’re only a $400M company today. What’s the goal here? Surely with the amount of cash you’re throwing off, the cash that you’ve got access to. There are companies struggling who would like some of your cash. What’s the plan?

Jerry Xie: So that’s really depends on what kind of strategy, how to grow this company. That is the question basically you are asking.

Matthew Gordon: Yeah. Tell me that.

Jerry Xie: So basically all the mining companies are similar. The strategy is how to grow their mining company, it’s both like organic and external M&A. So organically, we have the two producing assets. One is purely gold, which in is Inner Mongolia. Naturally one province in China. It’s not a Mongolia country, just adjacent to the border. That is a pure gold. Open-pit, heap-leaching, really conventional like process. Another one is a polymetallic, mainly Copper, but a lots of Gold. You can see that every year we are sitting are 200,000oz. Part of this ounces comes from the by-product of the Polymetallic mine, named the Jiama in Tibet region. So two assets, have two different natures. So for the pure gold, to the CSS Gold Mine. Right now the peak of the production already passed. Well, we look at, we still have like 2P Reserve is about 2Moz. But every company needs pipeline. So if the gold price sitting on its level or looking even higher. So we can look at the deeper Resource or how to utilize that. The grid could be a challenge. Right now it’s open pit. If we could convert that terms on the ground. Maybe the grade cannot support the economics. So maybe they use some block caving. We really need to look at that. The different scenarios. But it’s still a question mark. So that’s like a 6-7-years to go. The other one is a much, much bigger. The Jiama Mine Polymetallic is a huge deposit. It’s only 9% of the area we own. So right now it’s 6Mt of Copper, plus some like a 100Mt, 100% of the Gold is there. Not mentioning the Silver, Molybdenum and small portion of the Lead and Zinc, mainly Copper and Gold. Now gives us a huge potential. Mine life is like a 30-years. Right now is after expansion, ramping up to the design capacity level, which is 176Mlbs per a year. Right now we’re aiming at 145Mlbs. We’re close, but still on the way to ramping up. But the thing is, we need a pipeline. So even though that’s a huge potential there. Copper is good, even though right now it’s not that strong, but still like Copper is Copper. The need is there. The demand is still there. But we are China Gold. We’re still looking for the bigger, multiple commodity, which is gold. So we keep looking for Gold assets, so which turn the topic to what should be the strategy of how to grow this company is by external acquisition.

Matthew Gordon: So you’ve explained the organic component, the organic growth. The restrictions and the opportunities. I get that. So come to the M&A bit. But because again, we’ve been talking to lots of people… we talked about Equinox Gold before this call started. They have gone through a process of acquiring ounces in the ground. They’ve made some good acquisitions. They’re a bulk gold play, low-grade bulk play. But it’s very clear to me what their strategy is. And I would like you to share with me, and the viewers here. Do you see M&A as a big part of the growth going forward? And how aggressive are you going to be? Do you feel you’ve got the finances in place to be aggressive?

Jerry Xie: For the external acquisitions? That’s another topic, right? But organic gave us very strong capability like we have $200M cash on hand. And we’re like $3Bn asset value and about $1.4Bn book value there. We can see that we’re a medium-tier, a second-tier of players. So when we’re going out, we can, like I said, we share the same strategy and same umbrella with our parent company. So every time we’re talking about China Gold International, keep in mind we were strongly supported and backed up by our parent company. So you can see, if people only look at this China Gold International, maybe the cash capability, even though we can access the bond, let’s say we can easily go for another $500M. We can reach more by leveraging the capability of the parent company. Thick line to short, money won’t be an issue. But the thing is, we funded… here is the thing. Every time, every day almost, so many sellers approach us, but not too many really met our criteria. We have our own metric? Where to go, and what kind of commodity, what time of play?

Matthew Gordon: Well, tell us.

Jerry Xie: Let’s come to thematics. Well, we basically.. the principle is project driven. So good quality. Good quality means. We’re looking for the producing mine with some potential. We’re not really focusing on the green or too early stage. We’re not patient enough to wait for that, and the higher-risk. So producing mines with some potential. And also commodity-wise, we mainly focus on Gold and Copper, or silver if it’s good enough, but nothing too much. Jurisdiction-wise, we prefer stable jurisdictions that everyone prefers too. So like Canada or Australia. We know that Australia is more expensive right now than Canada. And if we can see the trend is there is more and more consolidation there. So that real trend is there. We’re open to some countries in South America, and some countries in Africa. But some where we’re not going to like DRC. Don’t get me wrong, I don’t put any a judgment onto these country, but that’s our own judgment, our own strategy. That is our main metrics.

Matthew Gordon: The hard bit here is, as you say, if you set your targets quite high, there’s a lot of competition looking for the same stuff, you know? Do you think you’re going to be able to… you can compete financially, but you don’t want to overpay, necessarily. But you may decide something is worth more to you than it is to someone else. And you know, you’re paying a little premium is okay for you. But how many of these conversations have you got going on, and how close are you to doing something? Because M&A acquisitions excite the market. You’re buying more ounces, because you’re buying production, you’re buying more potential in terms of Reserve / Resource as well. Where are you today? What can you tell us?

Jerry Xie: So that’s turned into a little sensitive topic right now.

Matthew Gordon: But you can tell us, it’s fine.

Jerry Xie: Let’s continue my words. That’s say there’s so many people approaching us. But, I noticed the trend there is a people approach us, not only us, but it’s the approach the larger scale Chinese mining players,  because they know Chinese mining players have lots of cash. That’s why they approach us. People like cash rather than the paper. So that part of the reason, but for us, even though we can access the low-cost financing. We still want to use some paper. If our paper performs good enough. So that way we can avoid too much premium. Reason premium, reasonable, it’s acceptable to us. We can look at the average level  what the premium will be, and we can talk about actual re-valuation thing. But the thing is, we emphasize that producing mine plus the potential, that potential, can make-up that the premium. If we just paid premium, there is no money we can make. All the revenue side is a premium, so we’re not going to do that. So that’s why they can explain why China Gold moves so slow. We’ve been talking about this topic been almost 10-years. Since we listed in Hong Kong Stock Exchange, so many, Cornerstone investors keep chasing us, ‘hey, you guys promised us you’re going to buy this, buy that, but you still don’t take any real action’. But our team, we keep doing that, screening the things. Talk to people quite often. So some deal is really close to… I can’t say too much about it, so that I say it was sensitive, almost to the way joint deal process. And we’re close to writing the cheque. Really, really close to it. Open the dataroom, doing the due Diligence, been to site, did the site visit, valuations there. Ready to Ok, you know, external consultants, IBank, lawyers, we spend a lot of money on this. But eventually people were saying that it’s good… when we figured it out. It’s not that good. It does not meet our strategy metric. Or too expensive or the quality is not that good or our competitors, they offer higher than us. So, for a few reasons to make China Gold look not that nicely in this regard. So they really want to give you a example. I can talk to you about something already happened with people I already know. Many years ago before Lundin’s Gold group went to Ecuador ICN Project, China Gold joined the first three rounds of bidding process. And we were in the first rank. But due to some reason the bad communication, we lost the chance. That time was even better deal. So  I cannot talk about so many things ongoing. Or is it that people don’t want us to talk too much? I have already done that last year in Africa last year, I talked to the media, but it’s not nice to be very careful.

Matthew Gordon: That’s fine. And I understand that. Well, I guess what I’m trying to get a sense of from you is, I think historically Chinese companies have been branded as cavalier with their cash. They just want to get the asset and therefore they overpay, which makes it difficult to make money. What I’m hearing from you is, you’re cautious with your money. You’re sensible with your money. And you’re not going to… you’ll pay a premium if it’s worth it to you, as the sum of the parts of all of your portfolio. But you’re not going to be foolish. Which is good. Which is good. But that leads me to the share price. You’ve seen the share price come away. It was the last half. Basically, when all producing gold company share prices’ were going up. Yours has been trickling down. Do you know why?

Jerry Xie: Yes. That’s a good good question. That’s actually happened to us last September. And our price was not that nice, but it’s not that bad. We were just stable. But it’s not that really exciting, but not very bad. But when we were in the Denver Gold Show last year, September, we keep talking to our institutional investors. Van Eck, something and we talk very good talk, very quick just in that week and we came back to our Vancouver office and we found our share price had dropped a lot. We were shocked to see that, nothing really happen. And we talked to the… because retailer is one thing, but retailer just the follower normally. But I now this space interactions, but to the institution will be taking a leading role. So one more thing I need to add. We duel list this company. It’s really different to market in Hong Kong market and TSX market. TSX side. The Canadian side. The investors really understand mining investment is a long-term thing. But in Hong Kong side people only look like a short-term. They act more speculative, more than the TSX side, but some investor from mainland China they understand mining, but they go through some channels so called the connection between Hong Kong and the mainland development stock Exchange connection. We tried accessing that, but eventually but sat on that for one year because there’s some criteria. Your trading volume, your market… the market value needs be at some level. But China channel was shut down. We’re back to Hong Kong Exchange. So after 2010, we thought Hong Kong investor was understanding the China factor. They fully understanding what Central Asia know you mean. That’s a really positive factor than Hong Kong. So we pay more attention to Hong Kong than to the TSX. So that’s my fault. So we could be talking to the Hong Kong, and Hong Kong most of them are retail. They’re just following. More speculative. So when last year this kind of thing happened, because our institutional investor ‘oh, awesome it’s North American.’ But we found. ‘Oh, wait a minute. We should pay more attention back to the North American side’. That’s why since last October, we’re starting doing more to make communication with North Americans. There market let people the new story. So that’s why it a shock to me. Surprise people say your a new company, and they both say, ‘look at your solid deposit… Resource base, look at your solid management team and your performance. They said you’re a good company compared with some peers. But why are you undervalued that much’. People say, is there anything bad that we don’t know? ‘No, nothing I can tell you… everything has to keep there on chance. It’s the same. We’re still ramping up. But the stock price dropped down. That’s really our challenge. More people knowing about story.

Matthew Gordon: Well, I buy some of that. I do buy some of that. But, once you’ve kind of got the downward movements, very hard to move. Go back up. So going out and telling a story to retail is, I think, a big part of what you need to do for sure. But can you succinctly, very quickly, say what are the things that you’re going to do.. more than just telling the story… What are you going to do with the company to allow people to believe that you’re going to deliver it? You’ve talked about organic growth. You’ve talk about potential acquisitions, but it’s quite hard to make those acquisitions. But those are the big meaningful numbers that you can you can deliver. But what else can you do?

Jerry Xie: You know what? It’s basically right now we’re emphasising ourselves. First on the organic side for now, it’s because the asset that on the purity gold mine are operating very smoothly. Well, like I said, if the gold price is sitting at this level, even though we you know, we don’t do something deeper, utilise a deeper resource. Keep current operation level, it’s still like 160,000oz per year. So that money, if they went to the channel it to improving our recovery rate in the heap and to the profit the drop down this cut to make a bigger room for our profit. So that’s on the gold mine. But not mentioning if the gold price got higher, we can look at a deeper one, as the next step. So for the Jiama, it’s more that complicated. That’s a huge mine. So we would send that in the past few years we’ve done the expansion. We call that Phase 2. That is a big jump. From 6,000t per day processing capacity to 50, 50,000t processing capacity. Given that elevation, the mill is sitting on 4,400m high. So right now they need more time to ramp up, right now on the waste, ramping up. So we are focusing on reaching that design capacity as quick as possible because the Jiama, we say that it’s complicated. It is because the three type of deposit on the surface, 30s XXXXXX it lowers the grade. On the ground, it’s a skarn type. It’s around 0.8% to 1% at highest. The deep is the Porphyry. We haven’t touched it at all. Not touched it. So right now we’ll only work on the surface and the skarn type. So the challenge is the 50,000t per day. 33,000t comes from the surface. 17,000t comes from underground. So we right now are focus on how to increase in the higher-grades ores comes from underground to increase to 17,000t to like a 25,000t, 26,000t. That could make a huge difference to the current situation. But that’s our effort to put in.

Matthew Gordon: And that’s what you want to focus on this year, because you can control that. You’re in control of that, right? With M&A, you’re not in control, I think is what you’re saying to me. You’re on the lookout, but it makes a big impact, a big noise in the market. But you’re not in control. So the Copper Porphyry seems like a very big target for 2020. So what are you actually going to do in 2020 versus 2021? What are the big moments that you’re going to come back to market, say? We have done this. What what are you going to be able to say this year?

Jerry Xie: Like I said, yes. There we are focused on cutting costs in general. In the Jiama most likely this year and that next year, it’s focused on the ground higher-grade zone, increase that. So that’s what we are focused on.

Matthew Gordon: Are you’re nervous about anything. I mean if you got issues around water, permitting, license, infrastructure, all the usual stuff. Meanwhile, is anything that we know?

Jerry Xie: No. Because everyone thinks Mining in Asia really have that risk thing… everywhere is the same. It does mean… in any country it’s the same, even though.. our parent company, we relied on them because there are a operating genius. We relied on them because they have very strong influence in China. They’re Central ISOE. So they have very strong operation team, that has very good in relation to the local governments and the local community. Some people have a different imagination in China, I can tell you mining is exactly the same in Canada or to … mining is mining? You’ll have to try your best to make relations to the local community. If you don’t, your done. So we’re trying so hard to build up there’s a good relationship between local governments and their community, to acquire their support. So nothing else. Right now the environmental protection in China getting more strict, but they have to be kept at a reasonable level. So right now, the people already saying that the government already tolerates that direct to pay more attention to the environmental protection. But meanwhile keep at a reasonable level. So there’s no concern about the license of some challenge like this. The only thing we cannot control is the market. The metal price. Let’s say right now the Corona Virus. That’s really out of hand. You’re out of control you have no idea by that. You can see that. After all our trying to communicate this to the American market, our stock price is coming back a little bit last December to the beginning of January. Look at now. With that virus attack.. Another thing about our strategy is the China Gold Group has owned this company before, they have very strong support to this company. All can being with us, selling Doré to their smelters. They have few smelters, large-scale smelters. Every smelter with refinery. We sell to them at very favorable price. Because China Gold is vertically highly-integrated. If you have been to China. Terminal 3 International Airport. You can see that very big store, physical jewelry store named China Gold. They over 2,000 physical stores. Very influential. If it, you know, take the whole thing of China Gold. It doesn’t matter if it is China International oo China Gold Group, we share the same strategy, the same strength.

Matthew Gordon: Thank you so much for telling that story. It’s new to us. I really appreciate you talking us through that. I’d love you to come back on the show another time. And let’s get into some of these numbers and how you’re progressing things. But these seem to have a lot of very good options available to you. I think you need to help the market be clearer on what your focus is, and how you’re gonna deliver that. I don’t worry about your access to money. I don’t know. And you’re saying a lot of the right things. So I do appreciate the time you’ve taken today to do that. Let’s stay in touch and speak very soon, please.

Jerry Xie: Thank you all very much. And also welcome to hear the feedback from their market and what people really want know. We are fully open. There is really a high transparency, and we are open to all the questions.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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5 Things You Need to Know about Class 1 & 2 and Intermediate Nickel (Transcript)

Nickel ore

Interview with Industry Commentator Mark Selby, CEO of Canada Nickel Company.

We catch up again with Mark Selby to get his take on investing in the Nickel market view our previous interview here. Fans of investing in the Electric Vehicle Revolution thesis will find this interesting. Some battery metals are on the up and others are not, why is that?

We discuss the Class 1 and Class 2 Nickel debate as well as the intermediate Nickel, and the amount of Nickel units required in the market. Investors new to Nickel may find the discussion around how to identify good investment vs. a lesser investment fascinating.

Do you know the difference between Laterite Nickel and Sulphide Nickel and why some investors won’t touch Laterite Nickel? And what HPAL plants actually cost and why some companies pushing that agenda may be about to fall off a cliff? As an investor you need to know what that entails.

Interview highlights:

  • 2:06 – Class 1 & Class 2 Nickel: Differences and Investor Concerns
  • 8:56 – HPAL Plants: Why Can’t They Be Built for Less Than $1B?
  • 12:39 – Red Flags and Differences in Grades: What to Look for When Investing in Nickel
  • 17:39 – Nickel Sulphate: What Should You Know?

Click here to watch the interview.


Matthew Gordon: I just wanted to say thank you very much for the piece you did last year, end of last year. We’ve had amazing feedback on that because it has helped clarify and expand people’s understanding of the Nickel markets and thanks for that, and you are probably seeing lots of different pieces of that now going out to the market too. I appreciate that. One thing we didn’t cover though was this Class 1, Class 2 debate. We said we would talk about it a little bit further. You kindly said yes to speak today. Why don’t we kick off – what is Class 1 and Class 2?

Mark Selby: Yes, so Class 1 and Class 2 refers to the type of Nickel product that gets produced. So, a Class 1 Nickel tends to be LME deliverable and meet a purity standard of 99.8%, or better. It gets used, you need it in applications like alloys, alloy steels, plating products, and then increasingly, that purity of Nickel will be required for Nickel sulphate into cars. Again, the key is the product, it doesn’t necessarily have anything to do with where it comes from, and I think that is one of the places where people get trapped up.

Class 2 is basically a Nickel-containing product that is less than 99%. That can still be used by a consumer and it doesn’t have a terminal market so the issue with that is, with an LME-deliverable product, if you can’t sell it to a customer, you can always drop it off at the LME and get the ‘LME  price’ that day for your product. Class 2 has to go to a consumer and so those products tend to have much more volatile premiums because there is not that terminal market like you have.

Matthew Gordon: So what do you mean by consumer? Because again, terminology in the industry is different.

Mark Selby: Sure, generally, Class 2 gets used in stainless steel and alloy steel applications where those processes have a robust refining step in the process so they can take materials that are less pure, or they are quite happy to have the iron that comes along with Ferronickel because they need iron to make stainless steel or make an alloy steel, anyways.

Matthew Gordon: Got it. So now we understand what they are, there’s a lot of conversation online and I think you alluded to the fact that perhaps people shouldn’t be expending as much energy worrying about whether it is Class 1 or Class 2, why do you think people are concerned first of all?

“The frustrating part for me is that there has just been so much air time on this Class 1 versus Class 2, and there are some really bad, to me, pieces of thinking that happen and get people distracted. What I think is the real issue is we need to make sure we have enough Nickel units, period, to meet the growth for stainless steel and to meet the growth for electric vehicles, going forward”

Mark Selby: Yes, I think where it has come down to is; yes, we will need lots of new Nickel to make Nickel-Sulphate batteries. And the Nickel that needs to go into those Nickel Sulphate, or the Nickel sulphate that comes with it, needs to have a very high Nickel purity to it.  That is true, but where people get tied up is that they then project that all the way back to that, okay, these types of deposits are only good for this type of application. At the end of the day, there’s basically three types of Nickel sources: there’s limonite ore, there’s saprolite ore, and then there is Nickel Sulphide ore. Limonite is what goes into the HPAL stream typically, Saprolite is used to make ferronickel and NPI, and then most sulphite ores, they make a Nickel concentrate and that then gets smelted and refined. The key piece of it is that each of those steps makes an intermediate product which can be smelted or refined into a whole range – it happens today and will happen even more so in the future because we are going to need a lot more Nickel Sulphate, so the Chinese are going to build way more capacity than the market needs, just like they do for every other product, and so there will be all this capacity to take an HPAL Intermediate, to take a Pyro-ferronickel Intermediate mat, or take Sulphide concentrate and turn it into 99.9% metal. Turn it into high-purity Nickel Sulphate. Turn it into Ferronickel if they need to, you know, again, you need to completely decouple the ore source discussion from the end product discussion.

Matthew Gordon: Right. Okay, so when I’m reading about people having discussions, debates, sometimes heated, online, about well; ‘I won’t invest in Laterites, I’ll only invest in Sulphites’, what you’re saying is that it doesn’t matter.

Mark Selby: Yes. It does not matter. There are today, more natural homes, and today, Nickel Sulphide processing has actually been a bit of an oligopoly between the very small number of Nickel smelters that exist, but the Chinese will build lots of capacity. Again, I’ve talked about, again, real world examples; in the Cobalt space, in 2003, China was 3% of finished Cobalt production. In 3 years, they were 30% of production, and in 5 years, they were 50% of production and that was basically taking bags of Intermediates and dirt, sometimes dug by children in the Congo, and turning it into a usable Cobalt product. It was a various range of Cobalt salts. And again, people get all excited about this Nickel salt premium, well, in a Cobalt market, because there is so much capacity to make salts in China, salts tend to trade at a discount to the metal, not a premium.

Matthew Gordon: That’s fantastic. That’s helped me understand it, certainly. There have been in the past, discussions about premiums on one versus the other, but you are saying, the way the market is setting itself up means that that is going to take that issue away as a concern.

Mark Selby: Yes, yes. And part of the reason that got some traction was because about 18 months ago, 2 years ago, yes, Nickel Sulphate prices at that time were trading at a about a USD$2,000 tonne premium to metal in China because, again, you had this surge in demand that started and the supply just hadn’t had chance to get going, you know?  Today, Nickel Sulphate premiums are recently, I haven’t looked this week, but Nickel Sulphate premiums in China were 0.  And that’s where I encourage investors again, don’t get caught up; if something is trading at a short-term very high premium or a short-term big discount, don’t extrapolate 3 months or 6 months and say that’s the long-term sustainable value for that premium discount.

Matthew Gordon: Well, hence, talking to people like you; you have been through a couple of cycles and understand the machinations of the sector, I appreciate that. Can we talk about HPAL? We’ve had so many people come back about your comment around HPAL, okay? Because some companies set themselves up and say we are HPAL ready – to use that term. You made a comment to us that the cheapest, well, the only and therefore the cheapest builder of an HPAL plant – it has cost them over USD$1Bn. So anyone who is telling you that it has cost them less to build than that, they need to have a pretty good reason as to how they justify that going forward, right? So that has obviously been what some companies, a handful of companies are saying about the market. It’s quite a big statement from you, and people have asked; where’s your certainty coming from? Why are you so confident that going forward, people aren’t going to be able to deliver a HPAL project cheaper than, say, USD$1Bn? 

Mark Selby: Sure. Okay. So where this comes to is, if you think about it, this is about USD$40,000 per tonne of installed capacity. So that is…the only company that has successfully done two HPAL plants is Sumitomo Metal Mining, and their costs to build those plants were between USD$30,000 and USD$40,000 per tonne of capacity, just to make an intermediate product that they shipped to their existing factory in Japan. So they are not going all the way to a pure Nickel Sulphate or a pure metal or a pure briquette, which is just additional costs that have to be built into it.

So this is the best case performer – number 1.  Number 2 -they are building these in the Philippines which is about, you know, lots of companies build modules in the Philippines because the construction work there is the highest productivity, lowest cost place in the world to build those things. So again, relative to Australia, relative to Europe, relative to Canada, the Philippines is a very low-cost place to build these types of operations. Unless the operation has higher grade than the operations that Sumitomo Metal Mining have built which is, you know, in the 1.3 to 1.4% range. And the reasons they built those ones were because the grade was pretty good. Two – unless it’s in a place that’s cheaper to build stuff than the Philippines, then, or that they have way more infrastructure, that may be one thing that may exist in those places relative to Sumitomo Metal Mining built their operations. But, that’s what you need to ask yourself to say, okay, do I believe this company’s capital cost number or not?

Matthew Gordon: Okay. That’s fair enough. What you have said to me and what I have heard there is that; don’t worry about Class 1 or Class 2, there’s an intermediate solution which is going to be coming into the market, it’s coming thick and fast. You are saying, worry about Nickel Units: there’s not going to be enough Nickel to cope with the demand for Nickel. So that’s a selling message. I want to help retail investors understand what are their red flags: so there’s a lot of…come on – mining is mining – people go around: there’s promoters and brokers and intermediaries, and they all go and loudly trumpet their story around the marketplace and it’s not always true and it doesn’t always come to be. So, what are the red flags around Nickel? What do companies need to have, or need not to have in place, because not all Nickel stories will work out. They are not all going to be economic. So, what do you look out for as an investor?

Mark Selby: So yes, as an investor, I think you know, one of the key things is scale and grade; you need, ideally, if you have got both those are fantastic.

Matthew Gordon: So what does scale mean? What do you mean by scale?

Mark Selby: That you can produce a sizeable amount of Nickel for a reasonable period of time, say, 20,000 to 30,000 tonnes minimum for at least 10 to 20 years. You know, that very quickly gets rid of a bunch of potential opportunities. You need to have, because again, there is the rare project that is at an extremely low capital cost, but at the end of the day, there is a chunkier enough amount of capital that is required to get into these operations. Now, if the grade is high enough, you can get away with smaller operations; so that’s the thing you need to look at. If you have both, so things like Nova-Bollinger, that was why it got acquired for USD$1.5Bn.

Matthew Gordon: Right.

Mark Selby: That’s why Voisey’s Bay was acquired for USD$5Bn. Because it was a big deposit that had a very high grade.

Matthew Gordon: So let’s talk about grade; you talked in the previous discussion about what is grade. What is low grade, what’s okay and what is high?

Mark Selby: Yes, so again, you would have to split that between underground and open pit. For underground, you know, 2 to 3% plus would be high grade and anything less than that would be low grade. For open-pit, high grade would be anywhere from 0.7 to 1%. Again, it depends on the strip ratio, anything lower than that would be lower grade.

Matthew Gordon: But lower grade can work if there’s enough scale to it?

“That’s what you need to ask yourself to say, okay, do I believe this company’s capital cost number or not?”

Mark Selby: Enough scale to make it work; which is what Dumont and then what we have at Crawford, that’s the key there, that there are just very large deposits in places with lots of infrastructure.

Matthew Gordon: So what else makes you nervous? You’ve got scale, you’ve got grade, what else is there?

Mark Selby: Yes, so the nature of the deposits – one. The other in terms of part 2 – the location of the project, so you know, again, political risk and infrastructure, right? Again, it is much easier and faster to build the mine if all the infrastructure you need to build it is actually already in place. So,   there are a lot of locations that are very remote that you have to spend money and time building the infrastructure before you can start building the mine. So that’s where you look at big Copper projects in the Andes, they cost USD$3Bn to USD$4Bn because you have to spend USD$1 to 2Bn to out in all the infrastructure and then you spend another USD$1 to 2BN just to build the plant, in places where there is infrastructure in place. So the benefit in a place like Dumont, or what we have at Crawford is that all the infrastructure is in place so you can just build the plant and the mill.

Matthew Gordon: Right. Without promoting your own company too much, just more generally, what do you think investors, when they are looking at the Nickel market, when they are hearing this EV story, what else should they be looking to avoid or what should they look for?

Mark Selby: Again, I think the market today is still tough for exploration and development stories. You really do – like where you are getting the premium valuations, if you look at some of the companies in Copper and Gold, in Columbia and Ecuador, is that they have this scale that will attract, that the Majors are willing to bid for, right? So they are really breaking out as a value category so again, as I think that investors are looking for opportunities as you want to look at, is it of a scale that is going to attract the bug guys that are going to write the big cheques that are going to make you, as an investor, a lot of money, right? That, I think, is key as you are looking for opportunities. If someone has been around for 30 to 40 years, unless there’s a really new take on it, again, the Majors probably looked at 10 years and then 20 years ago, 30 years ago, and they didn’t but it then.  So unless there is a really compelling reason as to why they should buy it now, they are really, probably not going to get there.

So that would be number one and then number 2, again, I think there is low capital, low, very quick kind of restarts, kind of Brownfield things, that you know, again, there was a track record of prior action, you don’t have to worry about, will the mine work? It’s worked a bunch of times before. And again, with the right team that has the experience to actually deliver it and has delivered it in the past, because they can generally get to free cashflow and use that to build the business as well. Those, to me, those are the two real paths to have a look at.

Matthew Gordon:  That’s really interesting. We have spoken to a few Gold companies, a few Silver companies, even a few Uranium companies who are employing that model. So you have got to have been there and done that before, as is the case in all of these individuals, but they are looking to get into production early.

Mark Selby: One of the things that again, in terms of this Class 1 and Class 2 and really around Nickel Sulphate, I think what investors need to be careful about is, you know, there is a lot of this talk about, ‘Oh, we’re just going to make Nickel Sulphate.’ I think there are a couple of important characteristics of Nickel Sulphate that people really need to be conscious of: so, Nickel Sulphate, you take a product, even that’s only 22% Nickel, so a lot of producers are taking a pure product and then making Sulphate which is a 22% product, or even most Nickel intermediates have a Nickel content that’s higher than 22%. So, you are downgrading the Nickel content and what you are shipping is a bunch of Sulphate molecules and some water. So, do you really want to do that 4,000 miles away from your nearest customer, right? Because all you are doing is you are adding a whole pile of costs to transport that material to the battery consumer.

Matthew Gordon: Okay. So you are saying –

Mark Selby: It’s better to ship the Intermediate closer to the market, and then process it close to where it is going.

Matthew Gordon: Got it. So it is Sulphates that are not necessarily as cost efficient, people may say. You need that all-in cost, as it were?

Mark Selby: Yes. Exactly. And so, and the other part of it too is that when you make Nickel Sulphate, one of the biggest cost components is to take the Sulphate molecules that are in solution and dry out the solution so that you crystallise it. So that requires a lot of energy, and again, in a lot of locations, energy is not cheap. Particularly because the first step, when you send it to the person that is going to upgrade it and turn it into a usable battery product, the dissolve it again. So, in terms of the overall value chain, it is a pretty stupid process to crystallise it, ship it and then re-dissolve it again. I mean, that’s what Nickel Iron integrated Stainless Steel was all about; they used to make Ferronickel, they would cool it, ship it, and the first thing the stainless-steel plant would do it melt it again, right? So the Chinese said, oh, that’s stupid. And I think you are going to see the same thing happen in the EV space; a lot of the downstream players are going to find a way and I know because we had discussions with them when I was at  RNC, they are going to look for ways to build onto their front-end plant so they can take a Nickel Intermediary directly into their plant, dissolve it once and make a final product that goes to the battery maker, car consumer who or however far down integrated they are.

The only time it really makes sense to make Sulphate is if you are already getting it in to solutions. So in an HPAL project, if you have leeched it, you haven’t built your plant yet to make it a high-grade product, in that case, maybe, if you are close enough to somebody, that might make sense to make Sulphate rather than a pure product. The other piece that all of these companies are going to deal with is that the purity restrictions on Nickel Sulphate are going to get stricter and stricter because all the car companies want to use more Nickel, because that’s what gives it the energy density. That’s what gives it the range.

Matthew Gordon: Right.

Mark Selby: The problem is that the Nickel is also the thing that makes the battery, in combination with a couple of other things, catch fire.

Matthew Gordon: Combustible, yes.

Mark Selby: So they are pretty concerned about catching fire. And so they have a bunch of systems that doesn’t happen. If you have random iron atoms or cobalt atoms, or other elements that are in the product, that complicates things. So, as we go from 33% Nickel to 50%, 60%, 80%, 90%, 95% Nickel, they want stuff that is as pure as possible into the process. So do you as a mining company want to continue to invest to meet the increasing quality standards that are going to exist going forward, and I think the answer to that is no. So there is Terrafame in Finland, they leach Sulphide ore and make a profit, and they were shipping an intermediate, for them to make a Nickel Sulphate plan to supply battery manufacturers in Europe – excellent idea, right? They have already got a very complicated chemical planet, making a chemical product out of the complicated chemical plant, that is okay because you need that expertise. For that scenario that made sense, but there are literally tens of other things I have heard of that just make zero sense to me. And again, to underscore with real world, not just Mark Selby’s opinion on stuff. Glencore runs Murrin pressure leach plant, you know, it’s an option for them and Glencore hasn’t talked to them about making Nickel Sulphate directly. They are quite happy to ship 99.8% briquettes to the end consumer who pays the premium for the briquette and then they don’t have to worry about the rest of the downstream process.

Matthew Gordon: I’m going to pick you up at a later date to talk about when you see things or companies that will worry you. I won’t get you to name names but I want to understand more about those. But, Mark, thank you very much for going through that with us. We have been reading with interest, people’s responses to your last piece. Thanks for that and thank you for today. Stay in touch. We should catch up soon about Canada Nickel because that is…when is that actually going to hit the market?

Mark Selby: Yes, we are in the final stages of the regulatory approvals.

Matthew Gordon: That’s always fun.

Mark Selby: We should be – oh yeah – we should be, we’re looking at hopefully the end of next week.

Matthew Gordon: Okay. Soon?

Mark Selby: We’ll be in a position to do that. We are in the final stretches there so next week or the week after, and again, we still need the very final from the regulators, but we are making good progress on that front. So hopefully, sooner than later.

Matthew Gordon: Well, we will look out for it; I’m sure there will be a press release on it and people will be able to start trading Canada Nickel in the next couple of weeks by the sounds of it.

Mark Selby: Yes. It will be a very exciting point in time.

Matthew Gordon: Well, come and give us an update. Sounds like a great project. I’d love to hear more. And thanks very much for your insight. Beautiful.

Mark Selby: Thank you, Matthew, glad to talk about Nickel.


If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Nickel ore

Energy Fuels (NYSE: UUUU) – Front Foot Planted, We Don’t Move Backwards (Transcript)

Interview with Mark Chalmers, President & CEO of Uranium producer, Energy Fuels (NYSE: UUUU).

Energy Fuels made an announcement last week about a $16.6M Bought Deal, which closed on Thursday, some shareholders do not seem pleased. We ask Chalmers why he did it and why on those terms.

What does Chalmers know that we don’t about the DOE announcement? What are his use of proceeds? And what is his strategy? Is there M&A planned, yes or no? And how does he plan to monetise the White Mesa Mill? Insider buying in the market for UUUU has been heavy in the last couple of days.

Interview highlights:

  • 1:31 – News Release: Why Did They Do it?
  • 4:05 – DOE Announcement: Does Energy Fuels Know Something the Rest of Us Don’t?
  • 6:33 – Financial Position at Present and Valuations of Stock
  • 7:31 – Possibilities to Sell Vanadium
  • 9:04 – Use of Proceeds: M&A and Project Focus
  • 13:17 – White Mesa Mill: Are There Talks of Other Companies Using the Mill?
  • 15:02 – $150M for the Creation of Uranium Reserves: Conversations with Miners on Price

Click here to watch the interview.


Matthew Gordon: Hi Mark. How has your week been?

Mark Chalmers: Oh, it’s been busy, with closing the financing. It’s been a very busy week for us.

Matthew Gordon: Ok so I guess I’m going to ask you the same question you’ve been asked a lot since you put out the news release about a week ago, which is Why did you do it, and why those terms?

Mark Chalmers: Well Matt, you know, it was expensive money, but as I’ve said to you and multiple times, as I’ve said to shareholders, we want to be on the front foot rather than the  back foot. We’re very encouraged that the government has announced planning to buy Uranium again, it’s the first time they’ve been planning to buy it since 1983. So we want to be as ready as we can for that because we think we’re best position to capitalise on that. But the other thing that probably a number of people didn’t understand or realise is that we had a convertible debenture that matures at the end of 2020, and it became a current liability at the beginning of this year. So we wanted to be in the position that we can show that we had enough funds to cover that on our own terms and abilities; without having the convertible drive us, we wanted to be in a position to drive the convertible.

Matthew Gordon: Ok but did that convertible contribute towards Cantor Fitzgerald being able to negotiate quite tough terms now? I get the point that if you didn’t, your negotiation stance towards the end of the year was going to be pretty difficult, you know, I’ve been there myself. But were they pushing you hard now because they could?

Mark Chalmers: Well you know, it was our decision, we weren’t being pushed, we discussed it certainly at board level quite extensively, and we just decided that it was going to be better to go now and get the funds and be ready for the future. But you know, no one wants to go and get into financing that… and I want to say that it was a bought deal, it was straight common shares, no warrants, but no one wants to be in a financing that pushes the share price down like it did for us. But again, we believe that we’re in the strongest position of anyone else, and we think there’s other people who are going to go to market probably quite soon and we wanted to be there sooner than they were. And as I said, this announcement by the government to buy Uranium, no one is in a better position to capitalise on that than Energy Fuels.

Matthew Gordon: Lots of questions. And I’m going to throw these at you in no particular order. You keep saying the word ‘front foot’, what do you mean by that? Are you talking about being able to capitalise on the DOE announcement? In which case, what do you know that we don’t?

Mark Chalmers: I think the demand…You know, we haven’t heard the whole story yet out of the working group on terms of the whole three steps of Nuclear fuel cycle, so we’re still hopeful that there’s more to come here. But we want to be in a position that right now the government’s announced that this USD$150M for this strategic reserve, we want to be in a position to get the majority or at least a large share of that ahead of… there is going to be lots of competition for it. But no one has the history, the proven history in the facilities like we do. Ur-Energy are in a pretty good spot too because they are a proven producer, but we are in the best position to deliver into that initiative.

Matthew Gordon: Ok so you’re making a bet, you don’t know anything that the market doesn’t know? Just so I am clear.

Mark Chalmers: Correct. We have released everything we know about where we are in this process and where the government is in this process. But there have been statements through Secretary Brouillette, and others, that there should be additional information forthcoming on the Working Group’s findings in the next few weeks or so. But we’ve also been waiting a couple of years for information flow, and it’s been delay, delay, delay.

Matthew Gordon: Ok, so are you expecting more money to be mentioned in these future announcements? Or more confirmation on the USD$150M?

Mark Chalmers: Well you know, we think that Nuclear Fuel Working Group, and I’m speculating a bit here…agrees that they need to do something to re-establish the Nuclear fuel cycle, the front 3 steps through enrichment. So we believe that they’ve come up with findings, but I don’t know exactly what those findings are Matt. But we, as I’ve said, what we do know is what they have released and we want to be in the best position to capitalise on that than anyone else.

Matthew Gordon: Okay, and I want to talk about use of proceeds in a second but if you don’t mind, what is your position now? Because when we’ve talked in the past you’ve had about USD$40M between cash and inventory, you’ve topped it up with another USD$16.6M..what position are you in with regards to your cash today…I know you’ve got the convert coming through, but what does it look like today?

Mark Chalmers: You know, we’re going to announce our financials in March. But yeah, in the order of magnitudes that you’re talking about…in the USD$40’s, plus this capital raise, you’ve got the convert at the end of the year. We’ve got around USD$20M of that is inventory, about half in value is Uranium that we value at around USD$25lbs, and about half is Vanadium which we’re valuing at around USD$5lbs which incidentally is coming up a little bit…last I saw it was in the USD$7s, so we’re hoping to get another kick there.

Matthew Gordon: So you are not tempted to sell the Vanadium today? Because it has been as low as USD$3 and as high as USD$30…so what do you do?

Mark Chalmers: Well exactly. I’ve said to you that we’re trying to do the Carbide plan which is to have inventories that we can deploy when we want to deploy quickly. And a big part of our plan, our strategy is to have inventories available packaged, ready to go. And that’s another reason for financing, because if you had in the order of USD$40M of cash working capital, the convert becomes a current liability, then you’re down in the mid USD$20s or so, of which USD$20M was inventory. So we believe we’re going to get a bigger bounce out of that inventory at the right time. I understand that the average person who is a shareholder may not fully understand our motives, but we wanted to keep that inventory, because whatever the government purchases, assuming they purchase inventories, you could get a 2X or maybe even more than that in flexing up on the value.

Matthew Gordon: Ok so thanks for sharing your motives with us. I appreciate that and it makes sense. Can I talk about use of proceeds? There are two strands here; one I need to deal with. Are you going to use any of your current cash available to you, you closed yesterday, to do any M&A work? Are you going to buy any of your peers?

Mark Chalmers: You know, it’s always a possibility and I’m never going to say ‘no’ because that’s an absolute. It puts us in a stronger position to do the M&A, so I’m never going to say no but I’m not going to say yes either. How’s that?

Matthew Gordon: That is very politic of you. Let me ask you another way. Today are there any plans to do any acquisitions?

Mark Chalmers: Not at this point in time

Matthew Gordon: Got it. Second strand; you talk in your press release about use of proceeds, obviously focus on the ISR project, I assume because that could go into production soonest? Is that right? What’s the order of play because you talk about all four assets but ISR was number one.

Mark Chalmers: We’ve got quite a diversified set of assets, but there’s some work at Nichols Ranch, we’ve got some work in increasing the flow capacity at Nichols Ranch, we’ve got some drilling that needs to be done at Alta Mesa, you know, we’ve got other work that we’re still doing, design work on the Canyon mine, we’ve got the shafts sunk there but we’ve still got to put in some facilities around the shafts, so. I can tell you this much, we’re not going to spend all that money until we get a little more clarity on the outcome from the purchase program, but there are things with a longer lead time that we will put some money in so we are better ready than we are now, even though we’re as ready as anybody out there.

Matthew Gordon: Yes you said you were best placed within US companies to take advantage of that announcement, but you’re not ready to go today without spending some money to get everything up to speed? So what does that mean, how much money are we talking about?

Mark Chalmers: No look, we’re ready to go today on some of our assets, they are ready to go today. But there are a lot of different variables here that we don’t know in this government purchasing programme. For example, are they going to buy inventory? And I think they absolutely should, because otherwise we’re going from a colder start, not a cold start but a colder start to build up production. And the clarity on who’s going to be able to best capitalise on that, that all will drive how much investment is required at which site or sites. So there is some uncertainty about how that will be distributed, the government did say that they thought his purchasing program would basically go to 2 mines, or maybe a little more, but its not designed to go to 5 or 6 mines. It’s not. Now, there could be few more mines potentially around our White Mesa Mill. But it’s really our focus in my opinion on…and when they talk mine’s I believe they are talking production centres where you can actually make the yellowcake, so like White Mesa would be a mine in their terms and perhaps 1 or 2 other ISR facilities. So there is absolutely no need to build new facilities with this current demand as we know it today, it should be focused on existing proven facilities that have a history of delivery that are already constructed ready to go.

Matthew Gordon: Ok. White Mesa, it’s a huge facility and you were saying its been a long time since it got near, or was processing at full capacity. Long time.

Mark Chalmers: Its actually never produced at full capacity. It has a licensed capacity of about 8Mlbs, and the best it’s done is around 4 to 4.5Mlbs.

Matthew Gordon: You’re never going to be able to fill that. Are you having conversations…there was one other CEO who mentioned at a presentation he was doing, I don’t know whether it was a slip of the tongue or has been misinterpreted, but they talked about using your mill to process on their behalf? Have you had conversations with other Uranium companies on this topic?

Mark Chalmers: Not recently no. No one but us has the right to use White Mesa Mill right now. Does that change in time? Perhaps. But no one has line of sight to use White Mesa Mill. We do have some clean-up of an idled Uranium mine that is currently going into White Mesa through an agreement there. Once that material shows up at the site we’re stockpiling it, we have the right to process that at our own schedule and desires. But we have full ownership of the Uranium from that material. So yeah, no one has line of sight. A lot’s going to depend on how the implementation process goes with this initial purchasing, we’ll see where we go from there.

Matthew Gordon: Ok. On this USD$150M, because again, there’s been a lot of numbers floating around. We don’t know the price at which the government is going to have conversations with miners, do you know?

Mark Chalmers: Well noI don’t, other than the quantum of the USD$150M. But there is a fair amount of banter around, ‘oh its USD$50 or USD$45’. Well USD$45 or USD$50 is not enough, that is not a high enough price. That is not a sustainable price. And when people say they can make comfortable margins with USD$50 in the United States, they’re full of something but I don’t want to say to you…

Matthew Gordon: Smoke?

Mark Chalmers: …Exactly what they are full of. But we need prices that are well north of USD$50. I mean sure, if we get USD$50, we are in a position at least Energy Fuels is, where we have 500,000lbs or more of Uranium that could be monetized, and that’s certainly going to be a help, and we can run projects like Canyon. This doesn’t mean we can’t run some of our projects. But USD$50 isn’t a fair price, it should be north of USD$60 is a sustainable price. It annoys me when people say ‘all we need is USD$40 or USD$50’, and they are full of it. Like I said, we have projects we can mine before that but that is at the site, it does not include the full loadings of a public company to deliver any kind of sustainability. And I think the key thing is that this USD$150M is over 10 years, so we need a sustainable solution and outcome here, not to have a flash in the pan and have people not being able to make it because the prices are too low.

Matthew Gordon: Ok so having had those discussions, and I can hear its been a source of frustration with people speculating around the price, but let’s even say it was USD$75 just for the sake of argument, that’s 2Mlbs we’re talking about, its not a lot, and they still have to go out and…

Mark Chalmers: No, and again there’s a lot of moving parts here Matt that we don’t know exactly what they are right now. And as I said, we don’t know what follows, or if anything follows with the Working Group when they get into more details. But I’m speculating here a bit, I believe that this first announcement is not big enough for somebody like say Cameco to come back in and restart their operations. And if that’s the case, and I don’t know for a fact that it is, that makes more room for ourselves and people like Ur-Energy. I think I’ve told you this, that since 2004, 2 companies have mined 85% and produced 85% of Uranium produced in the United States, and it was Cameco and Energy Fuels. So the 2 of us have the longest history of production over anyone else. Now, there are a couple of projects like the Uranium One and Ur-Energy that didn’t produce back in 2004, they started in mid-way say 2008 or 2009, or 2011 or 2012 that also contributed a material amount of Uranium. But if you include those 4 companies, 97% of the Uranium produced since 2004 were 4 companies. So there aren’t a lot of us with any kind of track record of producing a material amount of new Uranium, and we are very confident that we have that track record. And because at the moment we know the demand is small-ish, there’s no question, it should only go to those who can prove that they can do it, and have those facilities ready to go without major major capital investment.

Matthew Gordon: Ok, you sound confident. If you hear anything from up on the Hill, Whitehouse or DOE please give us a call. I’d love to hear your thoughts on how this thing’s going to progress.

Mark Chalmers: You’ve got my number Matt, you know where I’m at, and I’m always happy to have a chat with you.


If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Nickel Class 1 & Class 2 – Why Does It Matter For Investors?

Nickel is a commodity that has got investors raising their eyebrows. Diverse properties like a high-melting point (1453°C), resistance to corrosion and oxidisation, ductility, usability in alloys and an increasing significance to the EV market have turned nickel into one of the most fashionable investment opportunities. Investors in the nickel space likely already know about the two classifications nickel can find itself falling into, especially given the massive amount of coverage it has had from investment news outlets and individual strategists. However, for those who haven’t had access to the right information yet, here’s a quick breakdown.

Class 1

Nickel products that fall into Class 1 comprise of electrolytic nickel, powders and briquettes, as well as carbonyl nickel. These products are typically LME deliverable and have a nickel purity of a minimum of 99.8% Roughly 55% of total nickel mining output relates to Class 1 products.

Class 2

Nickel Class 2 is a group that comprises of less ‘pure’ nickel products. Examples of these are nickel pig iron (NPI), a version of nickel created using low-grade laterite ores and blast/electric furnaces, ferronickel, nickel oxide, utility nickel, Toniment, mixed hydroxide  and other <99.8% products. Both have a reduced nickel content and are often utilised in stainless steel and alloy steel production, where a high content of iron becomes beneficial. Class 2 products contribute the remaining 45% of total nickel mining output.   These products are not LME deliverable and must be sold to an end customer

So, what’s the history?

SOURCE: Trading Economics

After looking at the behaviour of nickel’s spot price, it is not hard to see why it has been branded as a boom/bust metal that moves in giant super-cycles.

The reasons behind this were touched upon in a recent article by a Crux contributor, stating that a primary factor behind nickel’s ascension to a high of $54,000/t in May 2007 was the rapid expansion of Chinese demand in the 2000s. However, this soaring price, driven by the need to ration available supply to meet demand, resulted in nickel becoming a victim of its own success. As prices rose, China began seeking more affordable options, thus turning to 200-series stainless steel (1-2% nickel) rather than 300-series stainless steel (8%) nickel.  As well, it began to pursue alternative sources of supply leading to the widespread production of nickel pig iron (NPI) in China using ore imported from Indonesia and the Philippines.  With this compression of demand and new source of supply, spot prices fell through a trap door.

Class 2 nickel rose to prominence at a time nickel was performing well in the market, but the consequential oversupply generated by tonnes and tonnes of NPI flooding the market created a supply/demand imbalance, crippling the spot price for many years. Nickel ore export bans from Indonesia, and proposed bans from the Philippines, didn’t help in the price discovery department.

Nickel’s most recent low was in February 2006 (do you mean 2016 ?); (NTD: there was one in last 5 years that got pretty close to the price of US$8000/t left 80& of the industry in a negative cash flow.

There has been a reduction in supply of over 200,000tpa (primarily Chinese NPI) in the last 3 years, and an increase in worldwide demand, driven by the EV narrative, has aided the nickel market in its recovery.

What does all this mean for you NOW?

If you have already settled on nickel as a potential investment opportunity, you likely have a bounty of good reasons, be that a projected 782,000t per annum increase in total nickel demand by 2030, or LME forecasts placing nickel’s spot price at US$17,000/lb (in constant terms) by 2024.

I think it’s very important for investors to not get caught up in that [Class 1 Vs Class 2] particular discussion.

The truth of the matter is that Class 1 and Class 2 nickel, as concepts, are mere distractions for investors, because laws of supply and demand and the Chinese ability to quickly respond to any market arbitrage opportunities,  will render the chemical differences fairly irrelevant in an investment context. Instead, total tonnage of nickel should be what investors are looking at today. The division of Class 1 and Class 2 simply doesn’t matter that much to investors anymore.

It’s important for investors to understand why and how Class 1 and Class 2 nickel have found themselves conglomerating into a singular quantity of nickel supply. In a recent interview with Crux Investor, nickel market commentator, Mark Selby, weighed in.

Class 1 & Class 2 Debate. Should It Matter To Investors?

Mining

There are two primary types of nickel deposits:

Nickel Sulphide

Expensive to mine, cheap to process.

Historically, mining nickel sulphide required underground mining in increasingly deep (and more expensive) mining operations . Nowadays, even deeper underground mines are utilised, with only a handful of open pit operations , but these are typically expensive to construct and operate. In 2018, 2 new projects were commissioned – Glencore began construction on their Onaping Deep operation which will cost $US[800] million and won’t fully ramp up until 2023

However, producers then make a concentrate from the sulphide ore,  upgrading the material from anywhere from 0.3-3% nickel to 10-15+% nickel for relatively little additional cost. This process is relatively uncomplicated and inexpensive; it needs to be smelted, refined, and then the process is complete.

Nickel Laterite

Cheap to mine, expensive to process.

Laterite projects are much easier to mine because the material itself is rock that has been converted to dirt over time, and as part of the process nickel and cobalt becomes concentrated in the soil. All mining companies have to do is dig up dirt and ship it off; this is a ubiquitous practice in Indonesia, amongst other regions.

However, this is where the simplicity ends. The processing of a material with complicated mineralogy requires significantly more time, technology and money. Costs include the large amount of electricity to melt the laterite to create NPI, or energy in the form of acid to break bonds, liberate the nickel/cobalt and create a US$1Bn+ HPAL process.

Reality

Individual nickel classes aren’t the main thing investors should be focussed on.

  • Companies can take intermediates of nickel sulphide and create a wide range of products, such as NPI and ferronickel (exemplified by the roasting process at RNC Minerals’ Dumont asset).
  • Nickel sulphide can also create finished nickel products via a smelter and refinery
  • EXACTLY the same can be said of nickel laterite. While the majority of it is currently used for NPI, there is no reason the material can’t be processed, refined and used for a wide range of alternative purposes. Specifically, laterite can be converted into finished nickel and cobalt products that can be used for the battery sector. Several companies are doing this right now, and as the industry evolves, we only expect to see this cycle grow.

Therefore, it is crucial for investors to avoid allocating too much focus to this debate. Chinese companies will likely build many facilities to process intermediates, while junior mining companies may also go down the same route, by having their own processing facilities on location to process products.

As we continue down the road of the EV revolution and the quantity of nickel in batteries increases, the specification for the sulphate will continue to become stricter. Therefore, building a processing plant to create sulphates appears to make little sense, because it would require continual improvements in order to keep up with progressively restrictive customer requirements.

Instead, it is likely companies will focus primarily on making high-quality intermediates, because the market will exist in the future for such materials as the nickel processing infrastructure continues to develop. This is further evidenced by the value of nickel sulphate premiums falling from c.US$2,000 two years ago to zero today. There are always lots of moving parts to different investment classes and commodities, but the message from industry insiders appears to be clear. Investors need to keep their eyes on the prize and view the market holistically the majority of the time. Reviewing things in microscopic detail may sometimes become more obstructive to gaining an overall view of a situation.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

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