I <3 geology, I <3 Ecuador

A photo of some colourful wooly hats.

In June 1991 I was unlocking my bicycle after my last first-year exam in geology at the University of Manchester when a bubbling surge of happiness stopped me in my tracks and made me look up and smile and just take it all in. I couldn’t believe that I had gone through my life until then without knowing what I had been taught in my first year of geology. It had opened my mind to new concepts of time and space, fascinating processes of rock and mineral formation, and also of how geology had influenced human activity through millennia. It had been a revelation, hard work, and a lot of fun. For me, the study of the science of the earth had shone a light onto politics, economics, the environment, climate change and of course the role of mineral deposits in the development of man. As I stood there, bicycle lock in hand, I thought how amazing the world was, and how much I loved this subject that I had come across by chance when I had mistakenly started an engineering degree.

Twenty-nine years later I am happy to say that my love of geology is still there. While the digital age thunders on, with apps and memes, full of ideas on a high-tech future, full of concerns about sustainability and climate change, geology is as relevant as ever and it still captures my imagination. As it was in my revelatory moment back in Manchester, so it seems to me that many of the key issues of the age are met in the exploration and development of mineral deposits. Is this too gushing¸ a case of hyperbole?  I argue that it is not an exaggeration, and that a look at the extraordinary events in Ecuador will help you share my appreciation.

The Ecuador national flag

Ecuador has it all. All of the issues, all of the challenges, all of the opportunities and all of the natural resources it might need to make a transformation. And I see this on a daily basis as I am a director of Salazar Resources, a proudly Ecuadorian Gold-Copper exploration and development company.

Ecuador is a traditionally socialist country that until recently had economic policies that deterred foreign direct investment in the mining sector. In 2007 the country trumpeted its eco-tourism and promoted a green economy, which was all well and good, apart from the fact that the country soon ran out of money. And in a dollarized economy (since 2000), printing is not an option which just leaves borrowing, inward investment or foreign export earning as potential sources of US dollars. In 2008, Ecuador borrowed $6.5 billion from China, with repayments partially based in Ecuadorian oil and terms negotiated at times of historic high oil prices.  While the oil price was strong, everything seemed fine, but commodity prices are cyclical and the cycle turns as inexorably as the arrival of taxes and death. Oil prices to 2014 had covered up the multiple sins of an inefficient public sector, large macroeconomic imbalances, and limited private investment, but eventually the oil price fell. As the new oil price reality bit, and growth opportunities in Ecuador (oil, agriculture, tourism) were remarkable by their absence, the government reassessed its attitude towards mining.

Maybe the 2008 moratorium on all mining was overkill? Maybe a subsequent imposition of a 70% windfall tax and mechanisms for 50% national ownership were deterrents on investment? Maybe the rampant illegal mining sector that paid no taxes and was completely unregulated in areas of environmental monitoring safety or any degree of social governance, should be brought under control? Maybe it would be better to have foreign direct investment to build a regulated, responsible mining industry that employs thousands, grows domestic economic capacity, pays royalties and taxes and earns hard currency? Maybe the mining sector in Ecuador should be nurtured not shunned? Maybe the remarkable geological endowment should be used to help build a better nation for the people?

An ineluctable truth emerged. Ecuador needed a modern mining industry to pay for its social and infrastructure agenda.  There were no other options, no other cards to play. And so reform was embraced.  Consultants helped create a plan for the Ecuadorian mining industry that led to bidding rounds by metal and by region, and critically the development of a new mining code.  The government introduced similar conditions to other countries, including incentives such as a fiscal stability agreement, VAT reimbursements and investment recovery before taxes kicked in. The results were astonishing.

A photo of copper-gold ore.
Copper-gold ore

Geology is apolitical, and copper-gold mineralisation doesn’t necessarily stop at a political border. Ecuador straddles some of the most prolific copper-gold geology on the planet and since the dawn of modern mineral prospecting it has experienced negligible systematic exploration. Almost uniquely for a peaceful country there are still walk-up large-scale high-grade deposits sitting at surface. When the government signalled it was serious about developing a modern mining industry, the world’s resources companies responded.

Almost overnight, Ecuador became a global mining investment destination. Foreign direct investment (“FDI”) surged to more than $250 million per year in 2017, with a projected $1 billion per year for the next four years. Over 200 new mining concessions were granted in 2017, accompanied by investment commitments of nearly $500 million of exploration expenditure in the first four. Since 2018, twenty-eight internationally renowned mining companies have established entities in Ecuador to pursue investment opportunities. Not only that but in 2019 two billion-dollar investments were completed, and the country now has two well-regulated, carefully monitored mines, employing thousands of local people, and generating vital foreign exchange earnings by producing copper at Mirador, and gold at Fruta del Norte.

Unsurprisingly there has been a backlash to this level of activity. A prominent anti-mining activist Carlos Perez has changed his name to Yaku Perez (Yaku is the Quechua word for water) and is vehemently opposed to foreign investment in the Ecuadorian mining industry, even though he turns a blind eye to the devastatingly destructive illegal mining in the country. Yaku regularly calls for referenda on the future of mining projects in Ecuador and he will continue to delay and obstruct the industry where he can as he persists in his argument that Ecuador should be pro-water and anti-mining. Incidentally, most professionals in the mining industry are supporters of clean water, responsible employment, wealth creation, the sustainable supply of vital raw materials and are not supporters of water pollution, environmental degradation, dangerous working conditions, tax evasion and all of the problems associated with illegal mining.

Another factor is that the population of Ecuador is split between those wanting jobs and those experiencing a very human resistance to change. What does a large mine entail? Will dastardly miners raze mountains, and bury villages under toxic waste? Some fear the rapid introduction of a new industry; others have the luxury of working closely with some of the many in-country professionals and learning first-hand about the industry. Suddenly the Chamber of Mines in Ecuador went from a clubby outfit to needing to assist the government and a population learn about the role and importance of a well-regulated mining industry in society.

Predictably, some of the mining companies gamed the system. Companies bid to spend $250 million on a single exploration licence (a ludicrously large amount) over four years, only to load the vast majority of the spend into Year 4 and then make it conditional on material success in the under-funded years 1-3. Companies committed to investing multiples of their market capitalisation in early-stage exploration within a 4-year period. Stuff and nonsense perhaps, but given that it seems easier to find a near-surface deposit in Ecuador then other parts of the world, many companies were enable by the vagueness of the new mining code to put placeholders on title in the rush.

Stunned by the whirlwind of real and promised FDI, protest referenda, the arrival of most of the major mining companies, and by the general pace of events, the government closed the Mining Cadastre in 2018. The commitment to a modern mining industry is as strong as it has ever been, supported by public pronouncements, progressive changes to process and structure within the mining ministry, and of course, the stark reality of ongoing national budget deficits. But it was a case of too much too quickly. The cadastre is still closed as the government is redesigning the mineral title permitting process to make the exploration expenditure more accountable, transparent and digital. No new licences have been issued for eighteen months and although in that time wrinkles in environmental permitting and water use permitting have been ironed out, there has been a knock-on delay in exploration activity. It does mean, however, that those companies that already have a licence portfolio are at an advantage over new entrants looking to build a presence in-country.

Which brings me full circle, to that moment when I was standing outside the exam hall in Manchester so long ago. The study of the science of the earth continues to shine a light onto politics, economics, the environment, climate change and of course the role of mineral deposits in the development of man. I am just as excited and fascinated by the interdisciplinary nature of my subject as I was as an undergraduate, and each of those competing and complimentary aspects are manifest in the gloriously complex reality of the mining industry today in Ecuador.

Companies, such as Salazar Resources, that already have mineral title to explore have a wonderful opportunity to continue the discovery journey (discovery of an economic resource is always much more of a process than a single moment in time). Community relations and environmental stewardship are critically important, and those enterprises that can bring its local and regional population along the discovery journey with them will succeed where companies that fail to engage, encourage, and educate its neighbours will face protest and delay. The government understands the vital developmental and economic role that a responsible mining industry offers and it is working as fast as it can to create the framework for that industry to grow, and yet it is weighed down by the responsibility of having to make decisions now that will have long-lasting effects. It is no exaggeration to say that the fate of the nation depends on it. The officers and directors of companies that I know are genuinely excited about the positive transformation that a single well run mine can make to individuals, families, a community, a region, and the contribution that it makes to nation-building in a relatively small economy. And within it all there are the pure geologists among us, thrilled at the prospect of being part of a team that will make the next big discovery and bring vital commodities for our future needs to market.

Company Website: www.salazarresources.com

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

A photo of some colourful wooly hats.

Global Atomic Right Of Reply

On the 21st November 2019, Mikko Leivo posted an article analysing Global Atomic as investment case to the Crux Investor Opinion platform. After seven or eight densely argued pages, the article eventually concluded that Global Atomic, in Mikko’s opinion, was a good investment proposition. But not before he had given the executive suite a thorough roasting on the way through. The excoriating prose left us as a management team reeling and wondering how to respond, despite the article being an overall endorsement of Global Atomic.

I don’t want to get into a he-said, she-said back and forth with Mikko but I would like to share some personal views about my involvement with the company and with the team.

I first met Stephen Roman in October 1997 when I was a neophyte mining analyst at HSBC, after a stint as an exploration geologist for Rio Tinto and mint-fresh graduated with an MSc in Mineral Deposit Evaluation from Imperial College. He doesn’t remember that particular meeting, but fourteen years later when Global Atomic Fuels Corporation walked into the offices of Blakeney Management in 2011 where I was the Africa and the Middle East resources portfolio manager, I was able to place him. And with Stephen Roman was George Flach. George and Stephen had, at this point already been working together in Niger for five years – Stephen as overall boss running the financing of the private uranium exploration company and George as the geological brains trust finding pounds in the ground. The list of deposit discoveries was impressive, Tin Negouran, Dajy, Isakanan, and of course the flagship asset, Dasa. Convincing as Stephen and George were, as good as the geology was, I didn’t recommend to the investment committee at Blakeney Management that we should invest in Global Atomic. 

On a regular basis over the following five years I saw George and Stephen. I tracked how they were managing in a post-Fukushima uranium environment, I saw them lay their bodies on the line as they both got serious bouts of malaria in-country, and I noted how they went for extended periods, years, taking equity not cash for salary. Although I didn’t invest at any stage during that period I was impressed by their dedication, their resilience and courage, and their general comportment. Here were genuine men in an industry that is notorious for its flaky fakers. And like many companies in lean times overhead costs were shared with other companies operating from one stable.

There were, however, three key reasons why Global Atomic Fuels Corporation did not elicit an investment recommendation from me in the period from 2011 to 2015.

Firstly, the high grade portion of the deposit was deep in the graben* which rendered the start-up economics challenging. Secondly, the uranium market was in over-supply and I couldn’t predict the turning point with confidence. Thirdly, Global Atomic was a private exploration company without cash-flow and anyone who has been part of the mining sector since 2011 knows how hard it was to finance any project, especially private exploration projects.

When I next looked at Global Atomic in 2018 I was gobsmacked by the transformation that Stephen and George had achieved in the company. The three key reasons for not investing had been addressed, and in spectacular fashion to boot.

Stephen had recognised the importance of a financing lifeline for Global Atomic and had recommended to the shareholders of both Global Atomic and TSX-V quoted Silvermet that a merger should take place. Remember that there was a considerable common shareholder base as Stephen had a loyal following after the success of Gold Eagle, and those investors had invested in both Silvermet and into Global Atomic. With the merger Global Atomic has fledged into a publicly listed development company with cash-flow. The vision and the gumption to complete this transaction is of immense value to the shareholders of Global Atomic and it was delivered by Stephen and George.

The previously moribund uranium market was finally showing signs of life with genuine demand growth and a genuine supply response to the low prices, pushing the market towards an ongoing deficit position. Ok this may be a purely external factor and nothing to do with management, but keeping a project alive during a painfully slow turnaround in metal prices separates dedicatees from dilettantes. 

A further key point was that the first dividend cheque from the Turkish recycling business was C$7M, and with that windfall capital George led the discovery of the Flank Zone. The Flank Zone is a body of mineralisation linking the high grade resource in the graben with the shallow low grade surface resources, in a spectacular discrete mineral occurrence containing about forty million pounds of uranium at a grade of around half a percent U3O8. This discovery absolutely transformed the economics of the Dasa deposit and is a play-opener to the strategic large-scale resources at depth in the graben. The Flank Zone discovery is of immense value to all shareholders of Global Atomic and it was delivered by Stephen and George.

Icing on the cake was provided in the form of the 2017 MOU with Orano (ex-Areva) which took Stephen and George four years to negotiate. The MOU is a wide-ranging arrangement that covers technical and logistical cooperation in-country as well as providing the option for Global Atomic to truck ore to Orano operations at Arlit. A genuine development option that may save the capital of having to build a stand-alone plant is of immense value to all shareholders of Global Atomic and it was delivered by Stephen and George.

What I hope this narrative shows is that the current strengths and assets of the Company are the result of years of work and dedication by good people. Part of my pitch to Stephen and George back in 2018 was that I recognised the transformation in the Company that they had achieved and that I wanted to be a part of the ongoing growth and evolution of Global Atomic, and I wanted to be part of the management team. Stephen and George and the rest of the team in Toronto have positioned Global Atomic to be a leading player in the anticipated uranium equities upturn. As a team we would be proud to provide the fuel for a low-carbon energy source to assist our beleaguered planet, and as a team we are very proud that the Company is in such good shape to make good on that aim.

If, on reading this article, you have any questions about our plans or our people, I would be glad to talk to you, so please get in contact with me at +44 20 7389 5023.

Merlin Marr-Johnson
Exec Vice President

 *Graben – an elongated block of rock lying between two faults and displaced downwards relative to the blocks on either side, as in a rift valley