Gold and the ESG Revolution

John Mulligan, Director, Member & Market Relations, World Gold Council

We are witnessing a seismic shift in the world of investing which is redefining how investors perceive and approach assets, companies and sectors. A clear and pervasive reality has emerged where investment decisions are increasingly driven by environmental, social and governance (ESG) factors. The ESG Revolution may, in fact, have been more of an Evolution, and some would argue has been a long time coming, but it is now definitely mainstream. And a substantial body of regulation is just around the corner that will catalyse further change, redirecting very substantial sums of capital towards sustainable investments.

This is not to say that practical financial and investment principles have been abandoned in favour of purely political, philanthropic or altruistic motivations. Rather, investors (and policy makers) are seeking to drive positive societal and environmental outcomes via investments underpinned by robust business cases. We may face a daunting range of challenges in moving towards a more sustainable global economy but, concurrently, very significant opportunities are also unfurling before us.

 … there are many common misperceptions regarding the nature of modern gold production.

Green bonds, for example, may still be a miniscule part of the overall global bond market, but funds are flowing into them at an accelerating rate; the year-on-year value of green bonds issued in the first half of 2019 rose by 48%.[1]

So why might this be of such significance for the mining sector, and gold mining in particular? Because I believe that the opportunities for positive action are such that, if grasped, they might hold the key to transforming societal perceptions of – and wider investor interest in – the industry.

For those not involved in gold mining, or those only aware of its past reputation or the negative social environmental impacts associated with the worst aspects of artisanal gold mining, there are many common misperceptions regarding the nature of modern gold production.

As investors have moved to embed a greater understanding of ESG-related risks into their thinking, similar considerations have been shaping the evolution of the gold supply chain. To ensure that gold is produced sustainably and responsibly, key market participants across the industry have evolved a range of initiatives and standards to give stakeholders, consumers and investors greater confidence in the provenance of gold as a responsibly sourced product or asset. And, of course, this all starts at the mine.

To guide and support this progress, World Gold Council recently launched the Responsible Gold Mining Principles (RGMPs)[2], a comprehensive framework through which gold mining companies can set out their position on a wide range of material ESG factors. The Principles acknowledge and consolidate several guidelines and standards that already exist to address specific aspects of responsible gold production[3], but integrate them into a single coherent and detailed definition of what responsible gold mining should look like.

World Gold Council’s Responsible Gold Mining Principles

Independent validation of company conformance to the RGMPs should provide further confidence to investors and stakeholders that the gold production process adheres to high ESG standards, reinforced by external assurance on performance, which should help minimise the risk of “greenwashing”.

The World Gold Council’s Member companies[4], which together represent over half of all annual corporate gold production, have committed to adhering to these principles and, over the next few years, we hope the wider industry will join them in embracing the opportunity to demonstrate its ESG credentials.

There is also often a common misunderstanding regarding the nature of the gold value chain and, specifically, of mining’s role in creating and distributing value in host countries and communities.

Gold mining companies are often a major source of income and economic growth and can play an important role in stimulating and supporting local socio-economic development. Contrary to the assumptions of many, the vast majority of gold company expenditure typically remains in the country in which an operation resides, with 70% of that money paid to suppliers, contractors and employees. Typically, in most regions, over 90% of the employees at gold mining operations are from the host country. The economic value from employment and gold company payments to local suppliers, with associated tax revenues for local governments, create far more value for gold producing countries than they obtain from direct royalties on land use and minerals extraction[5].

Deriving societal benefit from the revenues created by gold mining will, of course, also depend upon responsible host governments and, for the development potential of the gold mining industry to be realised, all stakeholders need to work together in partnership. But arriving at a shared understanding of the potential value of a vibrant, responsible and sustainable gold industry might help us move from the transactional type of relationship that often exists between many industry, government and community stakeholders, towards more collaborative partnerships.

… gold mining in particular, might be in a constructive position to … make a positive contribution to achieving net zero carbon targets.

As investors seek to focus on longer-term socio-economic development outcomes, they often orientate their objectives around the United Nations’ Sustainable Development Goals (SDGs); 17 goals focusing on key social challenges that range from ending world hunger to increasing access to clean and renewable energy. Importantly, in defining these goals and the possible paths to their achievement, the UN explicitly acknowledged the major role to be played by private companies. Financial firms are therefore increasingly looking to identify or develop investment opportunities in the private sector that might address global needs and meet the goals outlined by the SDGs while also attracting investors of scale.

Mining has a very significant role to play in addressing many of the SDGs and, while this potential has been much discussed by academics, policy advisors and civil society, it might also be to the advantage of the global mining community to consider in more detail the practical and investment implications of the goals.

Perhaps the most obvious example of how the mining sector might contribute to a specific development goals is its current and possible future role in facilitating the transition to clean energy and a low carbon economy.

Last year, the World Bank launched its Climate-Smart Mining[6] initiative, drawing attention to the strategic role metals and minerals will play in the manufacture of cleaner energy technologies. The move to these technologies is likely to significantly raise the levels of demand for many metals, requiring both more mining and more minerals recycling. While gold was not identified in the World Bank report as a ‘climate-smart’ mineral, there are some promising signs that gold as an industrial product or input may play a useful role in technological advancements needed to help mitigate climate change.

And broader recognition of climate-related risks and potential impacts has undoubtedly been the galvanising force and key driver behind the widespread escalation of ESG factors in investment decision-making and the regulatory landscape.

There is no more pressing challenge facing humanity than that of climate change. The concentration of carbon dioxide (CO2) in the atmosphere caused by human activity is already wreaking havoc with environmental systems and weather patterns.  

The science is irrefutable and alarming. Atmospheric CO2 reached a high of over 415 parts per million in May of this year, a level not seen for 3 million years. According to the World Meteorological Organisation, the past 4 years have been the hottest on record (the 20 hottest years have occurred in the past 22 years).  Wildfires have raged across Siberia, Alaska, California and Australia and these fires appear to be getting larger and more intense. (The intensity and scale of destruction of the recent Australian bushfires has pushed the country to what has been described as an “absolutely seminal moment” in its history[7].)

Sadly, these fires also further exacerbate climate change – all that carbon literally goes up in smoke!

Last August, we also witnessed Hurricane Dorian, the most powerful storm ever observed in the North Atlantic. And over the last three years, the US has suffered three floods previously classified as once-in-500-year events. The global rise in floods is directly correlated with rising global temperatures.

Climate-related impacts threaten ecosystems, accelerate extinction trends and soil erosion, and contribute to greater food and water insecurity.  They are also a very major threat to public health, increasingly the likelihood of famine, and infectious and non-communicable diseases.

If we are to reduce these physical risks and stabilise the climate we need to act immediately and commit to actions that might curb global warming to a limit of no more than 1.5C above the pre-industrial average – we are already 1.1C degrees above that average! – by the end of the century.  This will require us to achieve net zero carbon emissions by around 2050 and, to do so, will require radical changes across all corners of the economy and society, including the restructuring of energy, land use, transport and buildings, with unwavering support from governments, businesses and individuals. These changes represent very substantial transition risks and some sectors will undoubtedly struggle to adapt.

In the World Gold Council’s recent report, ‘Gold and climate change: current and future impacts’[8],  we presented evidence that the gold supply chain, and gold mining in particular, might be in a constructive position to embrace these changes and make a positive contribution to achieving net zero carbon targets.  Overall, gold’s carbon footprint is relatively small, estimated at under 0.3% of annual global greenhouse gas (GHG) emissions. The vast majority of these emissions are generated by the mining and milling of gold and, more specifically, from the electricity and fuels used in powering these processes.

Fortunately, there are already a range of options, increasingly accessible and cost effective, to allow gold miners to move away from fossil fuels and decarbonise both their electricity and transportation. Many gold mining companies are already moving in this direction and our research indicates how, over the next few decades, renewable energy sources, such as wind, solar and hydro power, and complementary technologies might prove more cost effective for miners than the existing carbon-intensive options.

Illustrative potential emissions reduction and transition pathway for gold mining

As I have described, these are no longer peripheral issues for investors, bracketed with philanthropic CSR programmes and narrow sustainability specialisms, as was often the case in the past. At the risk of repetition, I think it important that the gold mining sector embrace the fact that consideration of climate-related risks is now a mainstream issue, core to business interests and increasingly at the heart of basic asset evaluation and selection processes.  Acknowledging this new reality, gold miners might now grasp the opportunity to demonstrate sectoral leadership in taking concerted action to further reduce their emissions and impacts, in line with science-based targets, to help curb the current climate trajectory and its potentially destructive consequences.

However, in addition to the question of how a company or sector might impact climate change, a key issue for potential gold investors – and, indeed, investors of all asset classes – is how possible climate-related risks and future scenarios are likely to impact the value of their investments and the overall performance of their portfolios.

Mercer, the world’s largest world’s largest institutional investment advisory firm, have been proposing that investment strategists integrate climate change risks into their asset allocation models for a decade or so[9]. More recently, the Task Force on Climate-related Financial Disclosures (TCFD) has been prompting organisations to implement effective climate-related financial reporting, emphasising the importance of transparency in evaluating climate-related risks to support efficient capital-allocation decisions. Only two years after its launch, nearly 800 organizations, including global financial firms responsible for assets of over US$118 trillion, have declared their support for the TCFD and its objectives.

Our findings suggest a relatively robust outlook for gold in the face of a wide range of climate-related risks.

This trend is mirrored by increased regulatory scrutiny and rising pressure from activist shareholders wishing to influence the environmental and climate policies of public companies. A very notable example of this trend is the investor group, Climate Action 100+, consisting of over 300 institutional investors who collectively manage more than $34 trillion in assets. The organisation’s stated aim is to “engage companies on improving governance, curbing emissions and strengthening climate-related financial disclosures.” They have already negotiated strategy changes from some very major GHG emitters.

With this context in mind, the World Gold Council’s research on climate change seeks to not only outline a credible path for the gold mining sector to move towards carbon neutrality, but to also offer insights regarding how gold’s value as an asset might be impacted by climate risks.

Collaborating with global sustainability consultancy Anthesis, we adopted a methodology broadly aligned with established analytical frameworks for institutional investors and focused on assessing the robustness or vulnerability of asset returns in the context of specific climate-related risks and scenarios. We considered how gold and a range of mainstream assets, representing a substantial proportion of current institutional portfolio holdings, might perform in relation to four different climate temperature scenarios: 1.5C, 2C, 3C; and 4C (above the pre-industrial average), and the potential impact on asset returns to year 2030, 2050, and 2100 (in comparison to our current, i.e. 2019, expectations).

In general, lower temperature scenarios (1.5C and 2C) will require rapid transition and therefore impacts will be more prominent in earlier timeframes. Physical risks, however, are more prominently borne out in the later higher temperature (3C and 4C) scenarios where direct tangible impacts overshadow transition aspects.

Our findings suggest a relatively robust outlook for gold in the face of a wide range of climate-related risks. Gold may face some initial headwinds in a rapid transition scenario due, in part, to the urgent diversion of investment to either build net zero carbon infrastructure or from a severe erosion of consumer confidence which would hit discretionary spending. However, many of these risks are perceived as a lower probability, and of less magnitude or duration, when applied to gold; compared with their likely impact on other assets.

Looking at possible outcomes for other key asset classes, transition risks may soon start to impact US equity valuations as the US economy appears to be less prepared for decarbonisation than, for example, the European markets. At the other extreme, inaction on climate change and consequent higher temperature scenarios will be very challenging in the longer-term for agriculture, food and soft commodities. Energy and utilities will also struggle as physical impacts become more frequent and destructive.

Gold’s relative resilience is broadly compatible with the World Gold Council’s wider research on gold’s role in contributing to optimal portfolio performance. We have repeatedly demonstrated gold’s potency as a diversification asset and its relative outperformance of many mainstream assets when specific risk factors impact their valuations. The wide-ranging nature of climate-related risks suggests heightened volatility and potentially destructive disruption across a range of markets and these conditions will likely bolster gold’s utility as a safe, stabilising asset and as market insurance. This suggests gold may increasingly come to be recognised by investors as having a positive role to play in balancing and moderating climate-related impacts on their portfolios.

The technicalities of institutional investment portfolio construction in the face of climate change may, admittedly, seem somewhat far removed from the perspective of an investor looking at a particular gold mining asset or company. But these factors are highly relevant if gold is going to continue expanding its role as a financial asset, and if gold mining is to reassert its credentials as a credible and attractive sector for a wider set of investors.

And there is cause for optimism; the whole gold supply chain, from mine to market, is now in a strong position to demonstrate high ESG standards and contribute to climate change mitigation. If the industry seizes these opportunities, then all its participants, investors and stakeholders should be able to face the future with greater confidence. Whether it’s a Revolution or an Evolution, now is the time to commit and act!

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.


[1] Source: Climate Bonds Initiative

[2] https://www.gold.org/about-gold/gold-supply/responsible-gold/responsible-gold-mining-principles

[3] United Nations Guiding Principles on Business and Human Rights; the OECD Due Diligence Guidance for Responsible Business Conduct; the Extractive Industries Transparency Initiative; Guidelines for Multinational Enterprises and the International Council on Mining and Metals’ (ICMM) Performance Expectations

[4] https://www.gold.org/who-we-are/our-members

[5] The socio-economic impacts of gold mining, World Gold Council, 2015

[6] https://www.worldbank.org/en/topic/extractiveindustries/brief/climate-smart-mining-minerals-for-climate-action

[7] Sydney Morning Herald, January 10, 2020

[8] https://www.gold.org/goldhub/research/gold-and-climate-change-current-and-future-impacts

[9] See, for example, Investing in a Time of Climate Change; The Sequel (2019), Mercer.

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.

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.

Naked Banking – Exposed

“You should not be naked”, laughed the General. His men looked over, their AK47’s slung over their shoulders, and smirked. I smiled. It had been a long day that began 23 hrs earlier in London, and despite the 40-degree heat and my sweat-stained shirt, I had no intention of being naked. But without resolving my predicament relatively soon that was a distinct possibility.

We had been contacted by a French consultant, the French Fixer, as we referred to him in the office. He wanted to know if we could structure a sovereign-backed bond for an African country utilising its oil and minerals as collateral. Not something that a London boutique merchant bank was asked for every day of the week. After some research, I was sent off to investigate. I was to meet the relevant Ministers and then the President to get an idea of what exactly he had in mind.

It is impossible to fly there directly from London, so I had an 8-hour stop-over in Kenya. The flight left late afternoon, which I prefer with long haul, as I can get a couple of hours sleep. I arrived at 5am at Jomo Kenyatta International Airport, as it is now called. It’s a small and primitive airport; long corridors of food stalls and local craft stores. They were closed, as was the business lounge. Not a coffee to be had and just the cleaning crew and I occasionally nodding in acknowledgment of each other. Time passes slowly at first as I pace the softly lit mud-red walled corridors, but gradually the bustle of staff opening the shops and queuing travellers bring the warmth and breathes life into the milieu.

As I trying to squeeze my carry-on bag in to the narrow over-head compartment of the Being 737-700, I can’t help but note that I am surrounded by busy chattering monks wearing bright yellow and maroon robes trying to do the same thing. And there nestled serenely amongst them, the Dalai Lama. He sees me observing this bizarre scene and smiles at me. I settle in to my chair behind him oddly content.

When we land the monks and his Holiness are ushered off the plane and cram into a sparkling mini-bus, by-passing the airport security and disappearing from view. Does the Dalai Lama have a passport? As I start to disembark a microwave like heat hits me and a skin-peeling sun blinds me. My choice of chinos and a white long-sleeve shirt with linen jacket would have been perfect in June for the South of France. Here it was less so. I started to sweat before I got to the bottom of the mobile stairs. I patted my pockets in the vain hope that I had remembered my sunglasses and am guided towards what looks like a shed, but turns out to be the main hall of the airport. I note a concrete husk of a building in the distance, which a Chinese contractor had started to build, but had not finished. More of that later.

My friend, we need to get you some ‘clothes’es’, as he pronounced it, You should not be naked.

In the shed, we are greeting by U-shaped barricade of office desks flanked by armed military personnel. The room is no bigger than an average Starbucks. My co-passengers stare at each other hoping someone will take the lead. No-one says anything. Liberated by my encounter with his Holiness, I step forward and ask a tall lithe soldier, the friendliest looking, where we should go. He points to a crooked hole in the wall. We stare. A tractor, pulling a trailer with our luggage mounted, pulls up, and bags are lopped through the hole. We can’t reach them. Now the system becomes clear. The military personnel pick up a bag each and throw them on the desks, open the bags and search the contents. The owners rush forward, slightly alarmed, but necessarily respectful of the AK47s. When cleared, your suitcase was marked with a large white-chalk cross and you are allowed to leave through a narrow crack in the office-desk defence system. The hall started to empty rapidly until I was the last one left. No luggage! My irritation aside, this was deemed suspicious. ‘Why was I travelling without luggage?’ I wasn’t before I got here. ‘But you have no luggage.’ I know. I was requested to present a specific type of visa (which to my knowledge does not exist, nor therefore could it be required) and the relevant insurance papers or pay ‘a fine’. It is a way to supplement their poor pay. A bit mafia like and understandable, until the fine becomes unreasonable. I had danced this particular dance many times across Africa and in The Stans (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) and India. If you look like you have money, and would pay to remove an inconvenience, there are many scenarios which I have been forced to experience to extract my cash. And I don’t mind offering some travel advice. If the dollar amount being asked for is small, then pay it. If it is too much, for me that’s anything over $100, then ask to see their boss.

So there I am in a police cell, waiting for the boss to turn up. Never listen to my travel advice. An hour later, a soldier collects me and brings me in to a small room. I look around to see 4 armed-guards and there at a desk is the boss, a sergeant, his pistol in front of him. He asks why I am not agreeing to pay the fine. I say that $400 is too much. Well how much do I want to pay? Nothing, I say. He is unhappy with this answer. At this point I should mention my trump card (no not that guy). Remember the General at the beginning of this rambling story. I was his guest. One short phone call later, I am being driven high-speed in a military convoy, including motorcycle outriders, sirens blasting, cars being kicked in to touch, into the heart of the City to meet with the General.

“Matthew, where is your luggage?”, he shouts across the air-conditioned room as I stride towards him. I shrug. “My friend, we need to get you some ‘clothes’es’, as he pronounced it, “You should not be naked.”. But first some water and a local tea. I am tired, but grateful for his offer. My clothes’es have been on me for 30 hours now and I imagine the people unfortunate to be around me were even less keen than I was to be still wearing them. We all know that claustrophobic feeling as your clothes stick to you.

Do you remember the eighties? Starsky & Hutch, Dukes of Hazzard? Well it turns out the owner of “the best shop for men’s clothes” did. Bell-bottom trousers and long collars on shirts were de rigueur that season in the City, and I suspect many seasons before that one. I felt I could deal with the fashion faux-pas as I wouldn’t look out of place, but the strong, and at times over-powering odour of mothballs on all the clothes’es was, as the Dalai Lama said to me with his smile, to be endured.

But back to business. I met with the Minister and the President and indeed the Vice-President. They needed money. Money to build infrastructure for the people. And as we later learned, money to line their own pockets. They could offer oil, gold, copper, you name it they had it…under the ground. Whatever we wanted. I asked about unfinished airport building.

‘That was the Chinese. They promised to build an airport in exchange for oil.’

What happened?

‘They could not do the oil project because of the fighting.’

The fighting? What fighting?

‘Just some tribal issues.’

Will the Chinese be back?

‘Yes.’

When?

‘We do not know.’

Without getting in to too much detail the UN, the US, the French, the Germans and two Asian governments all had some say on the financial affairs of the country, each with their own business interests to protect. And rightly so. Promises had been made. Agreements had been signed by a succession of under-qualified Ministers and in some cases illegally.

When I first got in to banking, my boss said, understanding the jurisdiction into which you are thinking of investing our money is important. You need to understand how it works, because even the best assets in the world will not work if there is political or civil unrest, legal and regulatory uncertainty, terrorists operating near by, money laundering, exchange risk, lack of infrastructure, operation difficulty, geographic, ethical….the list is long.

In short, to our wonderfully inquisitive readers and viewers, if you or the company that you are thinking of investing in cannot clearly explain how they mitigate these risks, just walk. Keep your money in your pocket, because the good news is that there are always other deals. FOMO is not part of any investment strategy. After all no-one wants to lose the shirt off their back, no, matter how sticky 😉

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.

Pond Speak: You Say Zee

We Brits have much in common with our wonderful American cousins. But language isn’t necessarily always one of them. For instance, you put on sneakers, we put on trainers. You get in line, we love to queue. You lift up the hood, we look under the bonnet. And we can only apologise for the lack of ‘z’ in our spelling of certain words.

One of our super smart and delightful American readers has kindly helped correct us on something we wrote about yesterday. We thank him for helping us learn. Our article on the recent announcement by Energy Secretary Dan Brouillette, discussing the funding for domestically produced uranium, we used a phrase “discretionary funds”. We questioned what they meant and also what it could mean in terms of the allocation of the budget being discussed.

Discretionary to us means just that, at our discretion. In my banking days, if I had discretionary funds, I could allocate them at my discretion without seeking permission or sign off from my client as to where or how much, as long as it was in my mandate. In fact, the dictionary describes it as:

Discretionary: Adjective
Available for use at the discretion of the user.
“there has been an increase in year-end discretionary bonuses”
Denoting or relating to investment funds placed with a broker or manager who has discretion to invest them on the client’s behalf. Eg: discretionary portfolios

But in US Budget-speak, discretionary apparently means something quite different than it does elsewhere. So for the Non-US, or investors who perhaps are not quite 100% au fait with US Budget speak, buckle up. You and we are being schooled.

There are only 2 major types of budget allocations.

  1. Mandatory (a law was passed saying that funds must be used to do something enacted into law by Congress & Senate) and;
  2. Discretionary, which are budget requests that come up through the ranks from departments that may or may not be approved at the discretion of Congress.

The vast majority of budget items are discretionary, which doesn’t mean at the discretion of some politician or government employee. The budget document is broken down by Department and Agency to extent that every item is clearly defined by law there is no lack of clarity.

In our article we highlighted the questions that US producers want answered, ‘how much of this discretionary $150M is allocated to US producers and at what price’. So two questions.

And our very clever reader helps us with the first question:

1.  The description of the Uranium Reserve budget item says “domestic production” which means that the uranium MUST be produced within the borders of the United States. By definition, it would be impossible for any production from Canada, Australia or Africa to be “domestic production”. The whole point is to reinvigorate uranium mining inside the US. A question that investors ARE asking is whether Canadian or Australian based companies, like Cameco and Peninsula, would be eligible to compete for those DoE purchase contracts. Given those companies, just like Energy Fuels which could be cast as a Canadian-company, use wholly registered subsidiaries in the US to operate the mines, it seems a moot question. By definition, any mine operating inside the US where the product does not cross a federal border is domestic and would meet the requirements for a Buy America policy. So that seems clear, unless anyone else has an opinion that they would like to share. Great knowledge  shared.

The second question, which we added in a second draft:

2. A budget has been set for the purchase of domestically produced uranium ($150M x 10-years), but the price at which the US DOE will purchase? Well that is unknown at this stage. No companies that we have spoken to have been consulted on this topic by any US government department yet, either on or off the record. Yes, we asked! What we do know is that most CEO’s have said they will need $50-$55 to be incentivised, off the record some have indicated a higher would be needed. That doesn’t tell us much either unfortunately. Who and how the purchase price and contract terms are set is still a mystery. Different companies will breakeven at different levels. And who wants to just breakeven! And as we know from conventional mining AISC numbers can be manipulated to suit your argument, so the negotiations are set to be an interesting and revealing phase of the uranium saga.

So if you want to help us analyse or analyse the budget, we would welcome your thoughts in the comments below, or if you would like to come to our defence or defense, and write an article or just some wordz (too much?), we’d love to hear from you.

Love from you couzins across the pond.

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.

Best Foot Forward. I want a Clean Fight

What a week for Energy Fuels (NYSE: UUUU)

US Secretary, Dan Brouillette announced a package which signalled to many that the US Department of Energy has taken seriously the cry for help from the uranium miners and the Nuclear industry. A 10-year $150M pa budget which The Office of Nuclear Energy (ONE), which sits within the Department of Energy (DOE), is asking for to “re-establish the nation’s nuclear fuel supply chain through the domestic production and conversion of uranium.  Sounds positive in the best-case scenario, but more information is required.

But it seems to have set off another event which has started a passionate debate by Uranium investors on social media. Energy Fuels (TSX: EFR | NYSE American: UUUU) has issued a new release announcing a bought deal for $16.6M through Cantor Fitzgerald. It has not yet closed, but we would expect it to close within the next week.

This isn’t the first Uranium company to sortie into the market recently looking for capital. But it is one of the largest. So what is going on? We don’t know yet, but will request a call with the CEO, Mark Chalmers, when they close the Deal, as we won’t get much out of him before then.

So why would they raise money now with their shares so depressed, and at a discount? It doesn’t make sense. Or does it?

Firstly, it’s worth remembering that Energy Fuels has around USD$16M of unsecured, convertible debentures with annual interest-only payments of c.USD$1.4M and a maturity date of 31st December 2020. That effectively is a large liability on the balance sheet which we will see in their March 2020 Quarterly Statement, so they need to do something about that.

Energy Fuels is raising $16M. They owe $16M. So maybe they are going to pay off the convertible. That would make sense wouldn’t it. Except it doesn’t. The uranium market has been hard to read for the last 4 years, it’s not any easier today. If you are company spending cash to keep the lights on, you need cash to hand, and not keep getting the begging bowl out. The smart thing to do would be to refinance the convertible and keep as much of that cash available as possible.

Also, what you can’t do is wait for the market to turn and save you. That has been the downfall of many a company. The response to the DOE announcement was mixed. It hasn’t had the super-charged effect that uranium companies needed. Don’t get me wrong, it was more positive than negative, but some doubt around the detail remains. So, in our opinion, companies need to get on to the front foot. Be in control as best they can. In the of case Energy Fuels, the USD$16.6M bolsters their balance sheet to somewhere in the region of USD$55M – $60M. Remember this is made up of cash and working capital in the shape of inventory (uranium & vanadium). About 50% is inventory, not cash, but only semi-liquid. That said the price of vanadium is creeping up again, c.$7-$7.50 at the moment, the c.1.5Mlbs of Vanadium in Energy Fuels stores is starting to look attractive again. We don’t expect that to be sold anytime soon, but is currently an appreciating asset.

Remember the $16M convertible is due at the end of 2020.

This reminds me (it’s not an exact parallel, but enough of one) of the actions of another company that we follow closely, RNC Minerals (TSX: RNX). The new CEO, Paul Huet, did a bought deal in September 2019 for USD$18.5M, much to the chagrin of his large retail following. The share price was depressed and cry from the crowd was ‘no more dilution’. But that raise turned out to be the making of one of the turnaround stories of last year. It bolstered their balance sheet and allowed them to put things in place to take advantage of the turnaround in the gold price from September 2019. It was a bold move. It didn’t win him any fans initially, but now the mood is much changed. The company is consistently producing and adding to their cash balance.

That is gold and this is uranium, but investors banging the ‘10- 50 bagger uranium drum’, probably won’t be overly concerned about the cost of this money to Energy Fuels as they will be swimming in cash, they tell us, when the market turns. The more conservative of us, who buy the macro story driving the demand cycle, may have winced at the price paid by Energy Fuels, but here is my take.

If the announcement from the DOE is the first salvo, it is a positive one. Right now, there aren’t US uranium producers capable of suppling annually the 2Mlbs – 2.5Mlbs of domestic uranium that the DOE announcement claims it will buy from 2021. Is this a case of Chalmers wanting to get on the offense to be able to claim as much of the $150M as possible? We think so. Can he do it? Well that’s going to come down to timing, luck and planning. Only one of those he can control. But if he has timed this correctly, even us conservatives would expect to make money on Energy Fuels. It doesn’t necessarily mean I’m happy today about what this does to the share price, but then I wasn’t buying into the short-term thesis for Uranium. And to be clear we do not own shares in Energy Fuels today. But after the raise next week that may change.

We talk in one of our other articles here about Energy Fuels belief that given there are only a handful of US uranium companies capable of producing uranium today, they would expect to the be at the front of the queue. And Energy Fuels, with the only working uranium (and vanadium) mill in the US – White Mesa, probably think it deserves to be at the head of that queue. In the current market it would be hard to argue against that.

So whatever your take on the DOE announcement, the conversation just got a lot more interesting.

Your opinion that matters, so please leave a comment below.

Company Page: https://www.energyfuels.com/

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.

Stranger Things

It’s been a strange year for the Nuclear industry. First, the long-awaited announcement by new Energy Secretary, Dan Brouillette, of Government financial support to the much beleaguered and depressed Uranium market gave food for thought, and early celebrations for some, this week.

Maybe the Energy Fuels (TSX: EFR | NYSE American: UUUU) and UR Energy’s (NYSE: URG | TSX: URE) Section 232 petition has finally had the effect originally envisaged. Could this be the beginning of something beautiful for North American uranium juniors; the first step in rekindling a once strong and seemingly lasting relationship. Or was it just watered down political speak, leading to more questions than answers?

The United States Nuclear Fuel Working Group (NFWG) made an announcement that they were recommending the allocation of USD$150M pa, starting 2021 through to 2030; 10-years and $1.5Bn, for the purchase of uranium to build a US uranium reserve. There are other discretionary funds available too, but it is less clear as to what those are allocated too. That’s the trouble with the word ‘discretionary’ when used by politicians.

In the scheme of things, that is not a lot of lbs compared to domestic consumption. The US consumes about 48Mlbs of uranium per year, not including military requirements. If we take this announcement at ‘face-value’, then this budget allocation could support sustainable domestic uranium production of about 2Mlbs – 2.5Mlbs per year (depending on the, as yet, unknown price mark agreed – that’s a whole other discussion).  However, if the US Government wants to have an industry capable of producing and supplying 5-10Mlbs per year, it’s going to take a lot more government intervention and money. 

There are less than a handful of US uranium companies capable of producing uranium today. And clearly those companies would expect to the be at the front of the queue. Energy Fuels with the only working uranium (and vanadium) mill in the US, White Mesa, probably think it deserves to be at the head of that queue. In the current market it would be hard to argue against that.

Energy Fuels and UR Energy may also be buoyed by a statement put out by The Office of Nuclear Energy, which sits within the US Department of Energy, asking for the $150M to set up a uranium reserve to further protect the nation’s energy security interests. The new program will help to re-establish the nation’s nuclear fuel supply-chain through the domestic production and conversion of uranium. The reserve is expected to support the operation of at least two U.S. uranium mines and will ensure there is a backup supply of uranium in the event of a significant market disruption that prevents entities from acquiring fuel. NE would begin the procurement process for the reserve in FY21.”

“…the United States uranium industry faces significant challenges in producing uranium domestically and that [sic] this is an issue of national security.”

US President, Donald Trump

At the very least it brings little more clarity to the July 12, 2019 statement, when the President determined that “…the United States uranium industry faces significant challenges in producing uranium domestically and that [sic] this is an issue of national security.” It would appear conversations were being had and budgets were being drawn up, albeit at the sedentary pace that politics moves at compared to the demanding equities markets. Will we ever know the detail of the who, the why and the how behind the negotiations? I doubt it, but uranium bulls have seen a chink of light and they like it. Chatrooms and social media is on fire. Lots of conversations, lots of ‘I told you so’, lots of hope and few fantastical scenarios too. This is the fun of equity investing. Like the WWE, it’s about entertainment and making money, but without the make-up.

Away from the dreaming and back to the guys doing the hard work. The questions domestic producers want the answer to is, ‘how much of this discretionary $150M is allocated to US producers and at what price’. This is unclear. Will it include US friendly countries such as Canada, or indeed Australia or Africa if they can get in to production. Both those seem dependent on Chinese funding so perhaps would be taken out of this equation. So that leaves the Canadians. Depending on where investors have placed their bets, the answer varies, but the truth is that it is still uncertain. More steps and more announcements are required to bring certainty and a change in sentiment to the market. We all hope that the previous sedentary pace picks up a knot or two this year.

“Nuclear energy is also critical to the Nation’s energy mix and the Budget supports an array of programs to advance nuclear energy technologies. This portfolio promotes revitalization of the domestic industry and the ability of domestic technologies to compete abroad. The Budget provides $1.2 billion for R&D and other important nuclear energy programs, including nearly $300 million for the construction of the Versatile Test reactor—a first of its kind fast reactor that would help the private sector develop and demonstrate new technologies.” Which budget they are referring to is again unclear, or at least unclear to us.

We gain some comfort from the DOE Undersecretary Mark Menezes, who commented on Monday that, “This is the beginning of a long process” to address the nuclear fuel cycle. “It won’t stop with the creation of the uranium reserve.” Let’s hope he means it. Actions, not words, gentlemen.

It’s time to address US strategic mineral requirements and initialize the rebuilding of America’s nuclear fuel cycle. Plain and simple, the US’s crumbling Nuclear reactors and facilities need more money too. More money than has been talked about today. How this is paid for and what role the government chooses is yet to be made clear.

We look forward to the release of more recommendations from the Nuclear Fuel Working Group (NFWG).

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.

West Africa Terrorism – UK Government Responds

A screenshot of the FCO advice for travel to Burkina Faso, pre-Feb 2020 to post-Feb 2020. An arrow is in between them pointing right along with a Curious Investor logo and a Crux Investor Logo. A Burkina Faso flag painted on a wall is the background.

Over the last few months, I’ve been covering the West Africa security situation in great detail. Investors need to be informed about potential geopolitical developments that could negatively affect their investment portfolios. It is the responsibility of individuals within the retail investor community to help warn each other about the increasingly extreme danger, when the information isn’t forthcoming from the industry itself.

So, let’s talk about West Africa and the rise of terrorist-led incidents over the last few years. I am thinking particularly of SEMAFO, but as you will note from my other articles, one from January and one from earlier in February, this is far from an isolated incident.

The Latest

So, what’s happened in the last few days? The UK government has officially recognised the further deterioration in Burkina Faso, due to terrorist activity.

Foreign and Commonwealth Office (FCO) travel advice in January:

A screenshot of the UK Foreign Commonwealth Office travel advice for Burkina Faso, pre-February 2020.
Pre-February 2020

FCO travel advice as of 7th February 2020:

A screenshot of the UK Foreign Commonwealth Office travel advice for Burkina Faso today.
February 2020 – Desperate and dangerous times for Burkina Faso

Burkina Faso is now a no-go zone according to the FCO. The surrounding West African countries are expected by most news outlets to be at great risk. Countries that used to be perceived as high-potential, unexplored safe havens, like Ghana, Cote d’Ivoire, Togo and Benin suddenly don’t look as appealing.

In light of such advice, would you travel to Burkina Faso? Next question: would you send your money there? Investors can choose to do as they wish, but at least make the decision armed with all the information. You don’t want to end up like SEMAFO shareholders.

If you are happy to invest in volatile jurisdictions, where the company you are invested in could experience brutal, large-scale disruptive violence, one has to pose the question: do you really care about your money? If you can afford to put your hard-earned cash at risk, then that is your choice. If not, you should seriously consider if the risk to reward ratio is worth it. Is ‘out of sight, out of mind’ really the way forward?

Investors create a lot of the artificial draw factor for mining companies to chance their arms in such volatile regions, but it is the employees that can sometimes pay the price.

Investors need to work out what kind of investor they are. The one thing all investors should insure is that they are aware. The worst thing an investor can be is oblivious. I’ll keep track of this situation as it continues to develop and check in with you soon.

Opinions expressed are solely of contributor, Curious Investor, and do not express the views or opinions of Crux Investor. Do your own research.

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.

A screenshot of the FCO advice for travel to Burkina Faso, pre-Feb 2020 to post-Feb 2020. An arrow is in between them pointing right along with a Curious Investor logo and a Crux Investor Logo. A Burkina Faso flag painted on a wall is the background.

The West Africa Security Situation – An Update

Burkinabe Soldiers perform a tactical reload drill in preparation for participating in Exercise Flintlock 2019, near Po, Burkina Faso, Feb. 17, 2019. Approximately 2,000 service members from more than 30 African and western partner nations are participating in Flintlock 2019 at multiple locations in Burkina Faso and a key outstation in Mauritania. (U.S. Army photo by Sgt. 1st Class Mary S. Katzenberger)

A few weeks ago, towards the end of 2019, I penned an article regarding the perilous state of affairs in Western Africa (the Sahel region as it is called locally). The response was… lively, to put it mildly. I had investors in Sahel-based mining companies calling me every name under the sun, and I even heard the article didn’t go down too well with a few PR teams of junior gold mining companies! They don’t want people talking about it.

Regardless of the backlash, I’m glad I brought the issue to the attention of investors with a fully referenced and factual article that was driven purely by an agenda to tell the truth. Like I said before, retail investors need to look out for one another, and that is exactly why I write these articles.

The Latest

Since the article went live, I’ve been pleased to see the increase in discourse surrounding the Sahel topic amongst investors, fund managers and mining CEOs. The Sahel is a region, not a country. It crosses borders, as do the tribes and people of several West African countries. It is the way it always has been. Investors have all had plenty to say, and much has happened since my previous article went out, not a lot of it good. Let’s take a look at the latest information.

Mainstream media has begun to cover the situation. Last week, the Guardian (a well respected and independent UK newspaper) has called the situation ‘an unprecedented wave of violence, with more than 4,000 deaths reported last year, and a bloody start to 2020.’ It explained that ‘the number of attacks has increased fivefold in Burkina Faso, Mali and Niger since 2016,’ based on UN figures.

A screenshot of a BBC graphic showing Sahel casualties for 2019 by region.
A major crisis is unfolding before our eyes, but nobody seems to be talking about it.

The United States has recently announced intentions to reduce its military involvement in the region, with the ‘Pentagon eying a reduction of its footprint in the region as terrorist groups expand in the Sahel.’ Not enough oil and gas to be of interest?

This announcement has left allied forces extremely concerned; ‘French Armed Forces Minister Florence Parly warned on Monday that expected cuts to US military operations in Africa would hamper counter-terrorism efforts against jihadist groups in the Sahel region.’ France announced that it would send another 600 troops to the region, now totally 5,000. Can this make a difference?

Last year, in Burkina Faso, ‘deaths rose… from about 80 in 2016 to more than 1,800 in 2019.’

On Saturday (1st February 2020), 20 civilians were killed in an overnight attack in North-Western Burkina Faso. This is becoming frighteningly routine in a country branded ‘too dangerous’ for children ‘to go to school.’ This is just a week after 39 people were killed when militants attacked a market in the province of Soum. The violence is constant, brutal and shows no sign of ending.

A screenshot of a BBC graphic showing total schools closed because of security incidents by region in Burkina Faso.
Schools closed because of security incidents in Burkina Faso. (11 March 2019)


The Sahel region includes Burkina Faso, Mali, Mauritania, Southern Niger, Benin, Nigeria, Senegal, Sudan, Eritrea and Chad. The threat extends to other countries including Algeria, Cameroon and Libya.

The porous nature of borders in the Sahel region means terrorist groups such as al-Qaeda in the Islamic Maghreb (AQIM) are able to operate across borders and carry out attacks anywhere in the region.

So, what does this mean for investors?

At the moment, as far as the Sahel situation goes, we’re all hearing the same thing from mining CEOs: silence. The few who do comment all make similar remarks. It’s either “this situation will not affect our operations,” or “the security forces in the region provide us sufficient protection from the threat.” Your ability to invest in a Sahel-based company comes down to one thing: your satisfaction with these answers. So far, only SEMAFO Inc. has been affected. Lots of the West African gold miners continue to explore and produce gold; from that point of view, it’s business as usual.

A screenshot of SEMAFO Inc.'s share price for the past year.
SEMAFO’s share price after the November attack that killed 37 people.

In fact, as Mark Kenwright, Associate Director of Wardell Armstrong, said in a recent interview with Crux Investor, “life goes on.” I am confident there are companies that will make shareholders money. However, I remain unsure whether this confidence would be enough for me to invest in the region. After all, I could very feasibly end up in a SEMAFO-esque situation.

Investors need to be aware of the risks before putting their money on the line. Is the risk worth it? There is a big, wide world out there for investors to explore and invest, so why bother with the Sahel at all? Mining CEOs in the region have to convince us otherwise. The ball is in their court, and I’m waiting to hear why I should choose a company in West Africa as opposed to one in a more stable jurisdiction.

For me, the jury is out, but I will keep checking in and providing investors with this valuable information as the situation continues to develop or deteriorate.

Opinions expressed are solely of contributor, Curious Investor, and do not express the views or opinions of Crux Investor. Do your own research.

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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Burkinabe Soldiers perform a tactical reload drill in preparation for participating in Exercise Flintlock 2019, near Po, Burkina Faso, Feb. 17, 2019. Approximately 2,000 service members from more than 30 African and western partner nations are participating in Flintlock 2019 at multiple locations in Burkina Faso and a key outstation in Mauritania. (U.S. Army photo by Sgt. 1st Class Mary S. Katzenberger)

Serabi Gold (LSE: SRB, TSX: SBI) – Double the Fun

A picture of a man wearing a suit in a grey room. He looks at a laptop and dollar bills are flying out towards him. He smiles with his arms raised triumphantly.
SERABI GOLD PLC
  • LSE: SRB
  • Shares Outstanding: 58.91M
  • Share price: GB£0.77(15.01.2020)
  • Market Cap: GB£45M

There is no doubting the last few years have been tough for gold mining explorers & developers, and mining investors. However, gold producers have seen an uptick in share price since the end of August 2019 and the price of gold emerged from the $1,200 doldrums. Some gold producers have done better than others and have broken away from the pack. Serabi Gold looks to have safely made that cut by more than trebling their share price since the lows of May 2019.

Serabi had a quiet if unspectacular time until mid-2018 until May. A small, high-grade, high-cost, underground South American mine doesn’t usual capture retail investors’ interests, but it was consistent in its output and didn’t encounter any production problems. However, despite having an experienced and lively management team, they were loaded with debt, low margins (if any), and were unable to raise funds cheaply; there were lots of reasons for investors to look elsewhere.

The big move in May was due the market finally seeing the data from the acquisition of another underground gold asset, Coringa Gold Project, which is near their core project, Palito Mining Complex. A break in the gold price in August saw a further resurgence of interest in Serabi Gold and in the share price. In addition, it became clear there could be an opportunity to restructure their debt. Investors became very interested.

The acquisition of Coringa is the game changer for Serabi. Not only will it reduce their AISC to nearer the magical $950 mark, but it also will double their production to c.80,000 oz pa. This small, sleepy gold producer is suddenly on the radar of institutional investors, which should drive volume of trading and solidify the shareholder register.

Today’s record production news caps off a great 2019 for Serabi. The company achieved its highest quarter gold production of the year, 10,223oz. This brings the total annual gold production to 40,101oz, a 7% improvement over the course of 2019.

The total mined ore for Q4 was 44,092oz, at a high-grade of 6.69g/t of gold. 44,794t of run of mine (ROM) ore was processed through Serabi’s plant (combining the Palito and Sao Chico orebodies) at an average grade of 6.81g/t. On the exploration side of things, a sizeable 2,908m of horizontal development was completed in Q4. Serabi has managed to optimise its assets at little detriment to its share price or cash position: the company sits at GB£0.78 on the LSE today (moving back towards 2019’s peaks of GB£0.89), and claims year-end cash holdings of US$14.3M.

In terms of infrastructure, Serabi has also seen great improvements; chief of them is the installation of an ore sorter (sited between the crushing and the milling sections), which entered its final stages at the end of 2019, beginning electrical and mechanical testing. Investors should take note of this. Based on similar ore sorter data, this could improve productivity by as much as 20%. That is significant economically.

A screenshot of a diagram of a sensor-based ore sorter.
A sensor-based ore sorter

Serabi’s step out drilling campaign at Sao Chico has significantly extended the resource beyond current mine limits. A projection of full year production for 2020 stands at 45-46,000oz: a further improvement on an already strong figure as systems continue to be optimised. Serabi Gold has been positively moving along with consistent results.

Rough Assessment Of Serabi’s Current Debt Situation

Serabi currently owes c.USD$12M to Equinox Gold Corp. and c.USD$7M to Sprott Resource Lending Partnership, which it agreed to pay back over 22 months, (30/09/18-30/06/20), in addition to providing 145,479 new ordinary shares of £0.10 each (a 10% discount to the closing price on 14 September 2018).

The company is going to need to give guidance as to how it plans to restructure this. We would imagine Sprott would roll over as Serabi has been consistent with their debt payments. There is cash in the bank to pay back Equinox, but either that gets deferred at the deference of Equinox, which we think unlikely, or Serabi replaces that with cheap debt, serviced by their much-improved net cash production. If this indeed proves to be the case, Serabi holders will not be diluted and should be satisfied with how management has performed for them this year. The big question is how many will take the opportunity to cash-in and who will replace them? I suspect that this is now attractive to institutional gold funds.

The Palito Mining Complex, a high-grade, narrow vein underground mine, is already producing good results with an AISC of US$1,078 per ounce. However, Serabi’s aim to bring that figure down below the $1,000 mark. This is where the Coringa Gold project comes in. Serabi acquired Coringa from Anfield Gold Corp. in December 2017 for US$22M, and they have plans to get in to Production by end of 2021. Coringa is far more than an option: the team at Serabi feel it has an almost identical setup to Palito in terms of geology, size and necessary mining operations.

An aerial drone shot of the Coringa Gold Mine in Brazil.
Coringa Gold Mine

Coringa has a higher grade than Palito, at 8.34g/t, with a total gold production of 288,000oz, and a life of mine standing at around 9 years. Typical fully-operational annual production should stand at 38,000oz. Corringa would require an initial capital investment of around US$25M prior to sustained positive cash-flow, followed by sustaining capital expenditures of around US$9M that would likely be funded by project cash-flow.

To continue developing Coringa, I expect to see a revised PEA to whet the market’s appetite. Once Coringa is up and running, an annual production average of 38,000 oz pa, in addition to an AISC of US$852, could create a quarterly net revenue of c. US$2.5M within 12-18 months. When combined with the US$1.5M of stable cash flow from Palito, Serabi Gold could be churning out a net profit of US$3.5M per quarter for years to come, and this is without Palito’s ore sorter’s impact on results being taken into account.

The sense in the market has always been that Serabi will aim to be a 100,000oz per year gold producer in the not so distant future; institutional investors will likely push for further acquisitions, as mentioned in a recent Crux Investor interview with Nicolas Banados, Managing Director of Family Office Megeve Investments and investor in Serabi Gold.

To conclude, Serabi is performing well. It has a clear plan to create a business with a cross-mine AISC, production level and revenue that investors will welcome. With permitting at Coringa continuing to progress (the date for the public hearing is set for 6 February 2020), this ambition is moving closer to reality, and assuming public and stakeholder support, this is the solid final step for Serabi before receipt of the Licencia Previa (the Preliminary License). My message to the company is more of the same please with both assets; show us success with the drill on your exploration targets. We are watching.

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.

A picture of a man wearing a suit in a grey room. He looks at a laptop and dollar bills are flying out towards him. He smiles with his arms raised triumphantly.