Equinox Gold (TSX: EQX) – Gotta do it, gotta do it big, Big, ba-ba-bi-big (Transcript)

The Equinox Gold company logo.

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Interview with Christian Milau, CEO of Equinox Gold (TSX: EQX)

Equinox Gold, listed around 2 years ago with Ross Beaty as the main shareholder, with goals to become a multi-jurisdiction, large-cap gold mining company.

Equinox has a promising portfolio of assets: Mesquite Gold Mine, a Californian project producing 125,000-145,000oz gold per annum with an AISC of US$930-$980/oz and a grade of 0.46g/t gold (exclusive of reserves), Aurizona Gold Mine, a Brazilian gold mine producing 75,000-90,000oz per annum with inferred resources of 1.1Moz @ 1.98g/t gold (with an exploration upside) and an AISC of US$950-1025, Castle Mountain Gold Mine, an under-construction gold mine with a PFS and production potential of 200,000oz per annum and a 16-year life-of-mine, and a copper-focussed spin-out operation in the form of Solaris Copper Inc.

Equinox has had a quite remarkable rise over the last few years, with its share price hovering around CA$5 at the start of 2019, now standing at CA$10.95 today. The market cap is an impressive CA$1.24B.

We spoke with Milau about a variety of topics. Targets that were set have been well and truly delivered. Mesquite and Aurizona are up and running, producing at a reasonable scale with a good AISC. Castle Mountain should be ready to rock by Q3/20. Equinox has kept things simple and it is reaping the rewards.

The portfolio is focussed; thus, projects aren’t lying around waiting to be put into production like they are for so many mining companies. Equinox’s message is simple: make good acquisitions, and get that gold out of the ground! 11% insider ownership is another reassuring fact for investors, alongside a more diversified shareholder base than when we last spoke with Milau.

We then move into Equinox’s spending strategy, in addition to the gold macro story. What does the outlook for the gold market look like for 2020? Milau states that his thesis denotes this is only the beginning of this new gold cycle. Milau is conscious it won’t all be plain sailing, but this is an early stage of the turn (US$17T of negative-yielding debt, solid stock markets and slowing global growth). The best is yet to come? Equinox has no intention of being taken out. It plans to become a long-term investment opportunity that can last through several cycles. Equinox appears to have the leverage to make use of a rising gold price. We appreciate Milau’s pragmatic take on gold margins: Equinox is not rushing to produce; there is no spike in production. Equinox is managing a steady, structured increase. To continue to grow, Equinox will proceed with developing its current assets and look at new acquisitions when the time is right. It recently announced a (28th Jan) merger with Leagold Mining Corporation that will combine the companies, ‘creating one of the world’s top gold producing companies operating entirely in the Americas.’ This should position Equinox even more strongly. Equinox has recently had debt repaid to it by Serabi Gold, so it is in an even stronger position as it looks to become more than just a 1Moz per annum producer. Equinox is proceeding cautiously and isn’t getting ahead of itself. As far as remuneration, one of our favourite elements of the story, Equinox continues with its remuneration policy of mainly shares as opposed to a conventional cash salary. Milau claims he hasn’t cashed any in yet.

Interview Highlights:

1:59 – Company Overview
3:17 – Targets Set & Achieved
8:57 – Running a Large Company: How are They Monitoring Spending?
12:49 – Market and Gold Price: Will it Continue?
15:07 – Cost of Production: No Mention of AISC in the Presentation
16:29 – A Means of Being Profitable
19:54, 27:11 – Lessons Learned and Moving Forwards: How Will They Grow the Business?
26:03 – Remuneration: Any Changes?

Company page: https://www.equinoxgold.com/

Matthew Gordon: Hello Christian, how are you, Sir?

Christian Milau: Very good. Good morning from Vancouver.

Matthew Gordon: Yes, good afternoon here from London. Long time no speak. I think when we last spoke, you were one of those tiny little USD$400M companies, right? How times have changed.

Christian Milau: Right. The world has changed very significantly; both the market and Gold, but also I think with this recent merger, it has really given us some scale that has come on the radar for a lot of people right now.

Matthew Gordon: Brilliant. Okay. Well, we are going to get into that. Let’s kick off with that usual one-minute summary for people, unbelievably, who may not have heard of your story.

Christian Milau: Yes, so it’s Equinox Gold. We started it about 2 years ago. Ross Beaty is the core shareholder and the largest shareholder. This is kind of bookending his career; building his company basically in parallel to Pan American Silver. So our goals do really create that multi-asset, multi-jurisdiction, larger cap, eventually, investable Gold company that will see through many cycles. We started in Brazil and in California with now two operating mines and a third one being built, being Castle Mountain. And then, with this recent merger here, we are going to add a large mine in Mexico, in Los Filos, and then as well, another three operating mines in Brazil with a fourth one to be built. So, we will have 6 operating mines and 4 growth or development projects with 600,000oz or 700,000oz in annual production now, going towards 1Moz in the next couple of years as we build our profile and portfolio of the company. So really going from, you know, as you said, smaller cap, mid-cap space into that good size mid-cap, to maybe even the lower end of a larger cap space.

Matthew Gordon: Okay. Thanks for that summary and we will get into some of those moving parts in a second. I remember when we talked, as I said, you were only a USD$400M company, but some of the things which we quite liked at the time were the fact that you guys were taking very  small remuneration packages in terms of salaries etc, but you were taking a lot of this in shares. You laid out your plans for us then and you seemed to have delivered those so that is all positive. And I think with Mr Beaty on board, and you talked about Mudabala  as well; there’s potential there. Those things have come on board, Ross has followed his money. You are talking to a lot more institutional players at the moment and you kind of have in a way, buying your success. You are capable of buying the success. Can you just tell us about some of the targets that you set yourselves then and whether or not you feel you have met those today?

Christian Milau: Yes. In a way, they come in two baskets: we set some targets to basically finance and build out our portfolio, which we did, we built Arizona and got it into production in northern Brazil last year and it has been producing very nicely for a couple of quarters now, so that was the first target. Second one was to finance and get Castle Mountain into production, which is basically half way through construction now and will be ready to pour Gold in the third quarter of this year; so months away. And continue to operate that smallish portfolio and deliver some value to shareholders through some liquidity and increased scale. Getting into some of the indices eventually. And I would say that we are well on track to be doing that, but our second sort of basket of growth and opportunity, was really on the acquisition front and merger front and that’s where the Leagold deal falls into this. It sort of doubles the scale of this company and as you said, Ross has followed his money: he’s putting another USD$40M into this deal at market, and you know, we continue to hold a significant portion of the shares and on a proforma basis, I think we will own 11% as insiders, Ross obviously being a large proportion of that. I think that our next closest peer in the 500Moz to 200Moz per year production range is about 1.7%, is what I’ve heard from a couple of commentators. So, really differentiates people. This is long-term business with a long-term course of owner-managers.

Matthew Gordon: Yes. That’s absolutely the case. You set that out at the time and I’m glad to see that continues to be the case today. But can you tell me about some of the targets you have set yourself and why you have set yourself those targets? For instance, you have obviously got a greater institutional shareholder, the Register is much more institutionalised. Why was that important to you?

Christian Milau: Yes, I mean I think the capital pools out there, certainly sit the larger ones in institutional hands and a lot of our peers, and certainly in the USD$1Bn to USD2Bn market-cap sort of range, you know, they are heavily supported by some of the precious metal specialist institutions, but also some of the generalists out there, looking for exposure to Gold, particularly as the cycle turns and it looks like it’s going to continue to turn. And our goal really was to diversify that shareholder base. We have been supported very heavily by the Ross Beaty’s, Lucas Lundin’s, Richard Wark’s of this world, high net worth’s. And I think it is time to also be hopefully give an opportunity for those institutions to come in, and we have seen that slowly happening and I believe that in the next 6 to 12 months, as we become that sort of scalable producer, and we start getting into the indices, you are going to see more and more of these institutions buying in. There’s even anecdotal evidence recently with this high liquidity since we announced the merger, that a few of those funds are already dipping their toe in the water.

Matthew Gordon:  Yes, I think that is the case but these funds have thresholds that you need to be, your share price needs to be over USD$1, or USD$5, or USD$10 for them to come and play. But you mentioned the indices there. That is a game-changer. You now, well, once the Leagold deal goes through, I think you are waiting to hear from the Mexicans as to whether or not that will happen. Was that a big target that you set yourselves back in August, September time when you were looking at, you know, how do you advance this thing?

Christian Milau: Yes, certainly as Equinox Gold, one of our targets was to get into the indices and on a stand alone basis, I know Leagold had the same target in the sense we were a similar size. By getting our assets into production, doing some exploration, continuing to build up our portfolio; both of us and on an individual basis, we were very close and on the cusp of that. You know, needing daily liquidity was probably the key threshold for both of us to meet. We were both doing give or take, maybe USD$1M, maybe up to USD$2M a day on occasions, and now since the merger has happened, you know, quite often we have been doing USD$10 to USD$20M a day. Which is a huge step change and that kind of threshold has really opened the eyes of a lot of larger investors and certainly, we have talked to Joe Foster in New York, who runs VanEck and who potentially could be the largest, or the second largest shareholder in the next 6 months as we come into the indices.

Matthew Gordon:  So it is nothing short of good news all around and when you close the Leagold deal, life is great. I’ve looked at you share price, obviously, like a lot of producers, in August your share price went up, which is great news and the announcement of the potential of the deal around December time, you saw another big spike. So that’s fantastic. So I want to talk to you today about running big companies because, as you know, with size you get cost savings but you also see companies get a little bit lazy, they get a bit fat, they get a bit casual about it because times are good, there is a lot of cash around. And we have seen the industry is littered with such stories. So what are you guys doing? What’s the plan here? Are you going to continue; you want to get to this million oz production a year, which is a great threshold to aim for; very few companies, very rarefied air. But do you feel that with that comes a responsibility to look after the pennies, as it were? Because margins start getting eroded. You are a bulk, low margin business, so how do you, or as a company look at that?

Christian Milau: Yes, I think you are absolutely right and one of those keys is not to lose that focus as you grow. Part of it is about building a culture and a support base that has got that entrepreneurial spirit and flare that continues on. And again, having that largest shareholder being the chairman and sitting on the boardroom table does focus the mind in a sense. And owing shares ourselves: we have been through this a few times before and you learn some lessons along the way. When we looked at this deal, this merger, we set ourselves some targets here, a certain level of synergies to have some cost discipline in it. I think we set a reasonably low threshold because we wanted to be able to deliver on it. And we will look at cost-savings of corporates and in-country levels. There are going to be purchasing synergies. There’s obviously going to be the cost of capital savings and I think that the announcing of the refinancing on the back of this deal already shows that savings potential will come through on day 1.

All the global banks are coming in and reducing the cost of capital. Mudabala continues to support as well. And Ross has been investing at market – no discount, so I can say that we are already showing some of the potential synergies that just will be basically brought into place as soon as we close in probably late February.

Matthew Gordon: Can you just share with us some of those variables? Okay, the cost of capital is usually one of the most single expensive components, you know, that companies have to endure. What are the other areas in terms of the savings you talk about with the completion of this merger and obviously earlier mergers?

Christian Milau: Yes. When we announced this, this was at market, nil-premium merger. In the last year, I think there have been two of them: us and Barrick and Rangold. And both of us were up almost 30% within the first month, so the reaction has been very good. The way we looked at was that neither side was giving away or taking a premium. We were both getting the upside and sharing in it. And I think the synergies required were not necessarily, they don’t have to be large. And what we have articulated is, you know, up to $10M of synergies, I believe there’s probably more there in the mid-term, but you are certainly going to be having two head offices in Vancouver combing into one so there will be I guess, fortunately, some opportunity there to combine and use the best skillsets of both parties.  In Belo in Brazil, we will be combining offices and using the best skillsets there. We’ve got actually the extra scale there now in Brazil and we will be looking at saving on purchasing. And interestingly, Neil Woodyer, he will be the CEO, and I’ll be supporting him here. We did this together in Africa; we sort of went from 1 mine up to 4 or 5. You start getting your purchasing synergies, your scale and your ability to leverage profits, and then there’s the cost of capital savings on the side.

Matthew Gordon: Right. But there’s a couple of things that you can’t control which will impact you hugely. One is obviously spot price for Gold – what’s it actually doing in the market place. And the second thing being that you are a bulk, low-grade operator here, I think your grades with some of these acquisitions, we were talking about 0.3 when we talked last. Obviously, they have gone up a bit so that gives you a bit more room to make a bit more money, but those two components, you have got to closely, well, I suppose with the price of Gold, you can only understand it and have a view in the future. Do you have a view on how long this price is going to sustain for? Let’s start with that one.

Christian Milau: Yes, I guess part of our theory and thesis here is, I know that Ross uses a baseball analogy but in the fourth of 9 innings, you are still in the first part of this cycle turn. You know, Gold has had a decent run, I’d say that it has probably run a little faster than I expected at this stage. We are preparing the business to see through the cycles. We don’t believe it is one way and it only goes up. We think we are in the early stages of this turn here; there are still USD$17Tr of negative yielding debt out there. Stock markets are still doing well, generally. Global growth is slowing a bit. It’s lining up fairly nicely for things like Gold and other commodities generally.  I think our business is going to have the leverage and the ability to take advantage of that Gold price, but it doesn’t need it. We will manage the costs. Particularly at the moment, you are not seeing a lot of inflation coming through in terms of imports for our business at the moment. So you know, it has been a fairly nice and steady environment on that front.

Matthew Gordon:  What do you mean you don’t need it? Everyone wants to make as much money as they can, don’t they? When you say you don’t need it..?

Christian Milau: I guess when you see what has happened in the past in a few of the cycles, if Gold runs up quickly, you tend to see everyone kind of saying,  I remember when I was working in Africa; everyone is making ‘super profits’ which may or may not be the case, Governments tend to want a bigger piece of the pie, employees obviously want more of it, communities do. And the problem is that they don’t recognise that quite often, the oil prices are going up, the input cost is going up, the labour costs are going up. So margins tend to expand and contract as the Gold price moves up. And they do widen when the Gold price moves up but it’s not just a linear relationship where if the Gold price moves up, your costs stay flat. Quite often they move somewhat in tandem, although I agree that your margins can widen if the price goes up. So a steady increase that is slowly happening or managed rather than some spike because of some event or incident is much better for the industry.

Matthew Gordon: Okay, so Christian, let’s talk about the converse there, let’s talk about the bit which you can control to a large degree, which is the cost. So you have got this kind of low-grade ore but it is quite similar across all of your projects? That is the style of ore that you are going to be mining? So how do you keep that under control? Because I’ve had a look at your presentation, you don’t talk about AISC, at all, and I wondered why?

Christian Milau: Yes. I think part of the hesitancy at the moment is that we would like to close the merger with the Mexican Anti-Trust, we expect later this month, maybe even the third week, then we can actually put out combined guidance. We want to be cautious here: theoretically, we shouldn’t be putting out some kind of combined guidance when it’s only been a closed deal. But I think people can see from our prior years’ production and costs, how both sets of assets have performed, you get a good idea, you can see our rough production levels at the mine sites. You can see our All In Sustaining Costs of the mine sites and analysts do a good job of covering us; I think we have 6 or 8 in total and 6 in common between the two. As soon as we close, we can then put out something fairly quickly thereafter that’s on a combined basis and is going to allow us combined board management to get behind it but it’s just a few days too early right now to put that out.

Matthew Gordon: Okay. Fair enough. Now I used the phrase earlier which was, ‘buying success’.  You are buying ounces, okay? You are building this into a large producer and I guess what people are going to be very keen to understand is, are you going to be doing this profitably, or is this just a case of producing enough dollars to be, you know, interesting? It’s a large machine that you are constructing here. You have got similar ore bodies, similar processes and as you say, you are very, very good at it. But if it’s low-margin, is that of interest to Family Offices? Retail? High Net Worth. Are you missing the fundamentals of business here, or are you just in the business of building scale? Again, if I looked back through history, you have got companies that have built themselves up into such a size that they feel they are almost too big to fail. But they do.

Christian Milau: Yes, I know. That’s a very fair question and comment. For us, we set a target of roughly 1Moz. Leagold wasn’t quite so specific, but we have similar goals of building a business in the Americas that is diversified, scalable, investable, and I would say that this transaction is the first catalyst in getting there. What it brings us is some scale, but really the goal of the company over time, is to create a company that, eventually. I suspect that we would sell or divest a couple of smaller assets. We will add a longer life or a new asset that will continue to improve the quality of the assets in the portfolio. And in the long-term, and I’m going to say 2 to 4 years here, we want to be paying dividends. Our largest shareholder wants dividends. Ross would like dividends like he is getting paid at Pan Am Silver and so one of the largest institutions. But we are still a growth company at this stage. We still believe that we can continue to extract some value, create some value through sort of enhancing the portfolio. And so we will continue to do that. And I think that a lot of companies have got caught in a trap of being either single asset or smaller, which I think can be an exciting story in that asset, and you can see some huge stories in exploration plays but they are few and far between at the end of the day, whereas this will be a very liquid, investable company for the long-term and through cycles. And we are not exposed to one single jurisdiction or asset that will cause us challenges if there is an issue. We can weather the storm, in a sense. The other piece of it that I think is really important here is the fact that insiders will own 11% of this which is a very significant amount for a company of this size. I think our next closest peer is 1.7%, in that sort of mid-cap or larger cap space. So it will also have an owner focus from the management team and the board as well.

Matthew Gordon: So, just to help me understand this because I think it’s important that people understand they type of company that you are or are trying to be, and where you are in terms of an investible company for them. So you want that scale. So you want to get noticed by buying these assets, you are saying to me, at some point then, you will take stock and go well, let’s take a look at our portfolio here as some of these things no longer meet the new criteria for this entity, we may offload them, you may cash in, as it were, to some degree, and then go after a different type of profile to make sure that your company continues to be I guess, profitable or more profitable, the grade goes up maybe? Is that the way you are picturing it? How does this evolve, is what I’m saying? I know what you were when we last spoke in August, I know what you are telling me you are going to be after Leagold but what is the thing that you are trying to be? It can’t just be, we want to be a 1Moz company, it’s got to be more to it than that.

Christian Milau: No, we want to be one of the most profitable, long-term companies that can actually see through cycles. We are not building a company to flip it, to sell it, etc. We are basically building something that people can in invest in long-term, and when you put these two companies together, we’ve used some charts that I think are a good analysis of this: combined market caps let’s say on the merger are USD$1.5Bn to USD$1.7Bn. We’ve already had a little bit of a re-rate towards that CAD$2Bn to just over that CAD$2Bn range Canadian dollars for market cap purposes. And when you look at a lot of our peers who are give or take 800,000oz, 1Moz in annual production, a lot of them trade between USD$2.5Bn to USD$3.5Bn up to USD$5Bn. We are only, give or take, half of that range at the moment so what we are creating is something that has some re-rate potential, long-term diversity and scale and investibility, with a growth focus to it at this stage. And eventually, it will become a little more income-generating as you get some yields from eventual dividends here, and that’s when investors have asked about that capital discipline, I think is really well rewarded as well; when you can pay some of that money back to shareholders at the end of the day.  

Matthew Gordon: Right, because I’m thinking about people like IAMGold – at one point, they were USD$9Bn, just under USD$2Bn now. You’ve got B2Gold who have been through the same kind of growing pains and falls in value. So scale gives you, well, I think scale gives you some options here but if you are not looking after the business fundamentals, if you are not looking after margins, if you are not looking after share price, because, let’s face it, when you are a big company, it gets harder to double in size every year, okay. You can buy some of that, sometimes, but again, the business fundamentals catch up with you. So, what are the lessons that you’ve learned by looking at what’s been going on out there? You are an experienced guy; you have worked in large and have built large companies before. And you have got some fabulous people on the board, but what are the things you are concerned about? Or have you just been focussed on M&A, M&A and M&A. What are you talking about, you guys?

Christian Milau: No, for us, there’s also got to be a shift to continue to execute internally, we have got 4 growth development projects where we will make sure that we’ve got a tension on those over the next couple of years. M&A becomes more opportunistic in the future, I would say, where it’s maybe not as front and centre as it was in the last couple of years here. And we’ve got to keep that culture, that spirit, that entrepreneurial style to the way that we approach things and part of that is being somewhat lean and mean, but also, you know, when you bring people into that culture, whether it be leadership at your mine sites or even at the corporate office, they really come with that mentality and experience and really knowing what we are about. And I’ve seen a number of companies overextend themselves where, you know, we are used to putting together that 100,000 oz to 300,000oz, maybe 400,000oz producers into a portfolio of assets. You know, building something now that is USD$1Bn plus in capital would probably be a different strategy for us, we really want to be careful of that right now. There are some deals in size; we have seen a few companies go, alright, now we are going to take on those big ore class projects, but they don’t have the balance sheet for the capital, maybe the experience to actually take it on, and it can very quickly blow up your balance sheet. So we have stuck to our needs in that sense and, you know, adding assets that can focus on our portfolio in that, give or take 400,000oz of annual production. You know, the smaller scale growth and development projects, which I think everything that we have been building and doing, is between USD$50M and give or take USD$100M. You can manage the capital, even if you have an overrun in terms of time or cost, it doesn’t blow up your balance sheet, so I think that’s also very important.

Matthew Gordon: Okay. So who is driving this? You talk about entrepreneurial spirit, okay? And that’s an easy phrase to use but the reality of entrepreneurial spirit is very different in a corporate environment; it can get killed, it can get forgotten. People can, as I said, get really lazy, really quick here, so who… I guess you are going to tell me Ross Beaty… but who is the guy that says, you guys have got to keep this lean and green and mean for a long-time coming? Because if you talk about timelines, we’re going to talk about keeping this thing running, there’s no end in sight, I think it’s hard to keep focussed, so what are the things that you are being told that drive this entrepreneurial spirit that you talk about?

Christian Milau: You are absolutely right: Ross is the key driver of that. I mean, he has built 15 companies over the last 30+ years and you know, it’s about putting a management team in place and keeping incentivising them also, in the right way and this tends to be that long-term link to share price and company performance, rather than big annual pay packages that ultimately reward us just for doing our jobs on a day-to-day basis. And I think that that helps keep that focus. And when we hire, it’s a very disciplined approach to finding people that will fit in with that culture and that really want to roll up their sleeves and be a part of it. You know, we don’t necessarily have a large corporate footprint because a corporate footprint can detach you from what is going on at the mines; if there are layers of people, regionally or even in corporate office, then you know, we have very direct contact on a regular basis with the mines, and to be honest, Ross is on every week or two, just getting an update on where we are going. He makes a tour of the mine site. He just loves getting out there; he is a geologist by background and he loves getting out to the rocks and wants to be out in the field. When you look at the way Pan Am has done, and I would say they have a similar style, and I would say that that is not a bad model that they are looking to emulate to a certain degree.

Matthew Gordon: Yes. Has your remuneration changed since we last spoke?

Christian Milau: No, no it wouldn’t have. I have been at the same all year: I’m still at the bottom quartile and we had a good year, so I did okay this year.

Matthew Gordon: Have you cashed any of it in?

Christian Milau: No, no. I’ve put USD$2M in. It’s still there. I continue to have my RSUs, or anything that invests in a way that I keep a hold on my brokerage account. You know, I see this going much higher. Part of this is the delivery on our business platform and on our strategy and our vision. But also, I believe the Gold price and our markets are at a really interesting point; look at Gold – it has been at USD$1,550 for a while now. I would say that the average person doesn’t recognise that it’s USD$400 higher than it was when we bought the scheme, less than 2 years ago.

Matthew Gordon: Yes, well what the Gold price will do? Who knows in today’s climate, but you know, when we spoke, it was around USD$1,250, USD$1,300, for a long, long time. But again, we will see what happens there. You want to hit this 1Moz number – are you going to be able to do that through organic growth now? By getting your current assets into production, or is there some more M&A on the horizon?

Christian Milau: Yes, we do have, as I say, those 4 development projects and those will allow us to get to that point in the next couple of years. It’s fully funded as well with our new refunding of the balance sheet, which was also a nice reason to be doing this deal, or helpful for doing this deal. Both companies are lightly capitalised; capable of delivering in a methodical way on their strategies, but now we can actually say that the balance sheet is sold and strong. The data at those ratios are very manageable and low, and the cashflow from the operating business will help to fund that as well. So it really will be deliverable in the next couple of years.

Matthew Gordon: And do you intend to keep the company leveraged at current rates or is the idea, to once you actually get cash flowing, to deleverage and actually make it slightly less reliant on debt? Because again, debt can kill companies, large companies, if things turn in the market.

Christian Milau: That’s absolutely the case: we do want to deleverage to a degree. I think this deal is starting to allow us to do that. As we get through these and develop the cash flow assets in the next 2 years, you’ll see that continue. Then obviously, it moves through more steady states and it allows you to start thinking about those dividends.

Matthew Gordon: Beautiful. Christian – great update. It has been a while since we spoke. You have delivered everything you said you were going to. The tone seems to be the same. I’m excited for you guys; this growth has been phenomenal. You just need to get yourself on the GDXJ and the GDX, and who else are you aiming for? The TSX composite, I hear? Stay in touch and let us know how you are getting on. If you come through London, obviously come and say hi.

Christian Milau: Yes. Stay tuned for the next 6 to 9 months; I think there’s a lot that is going to happen here.

Matthew Gordon: Buckle up. Buckle up, guys.

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Equinox Gold (TSX: EQX) – An Exciting Gold Opportunity

A picture of cartoon gold bars.
Equinox Gold Corp.
  • TSX: EQX
  • Shares Outstanding: 113.5M
  • Share price C$12.6 (21.02.2020)
  • Market Cap: C$1.43B

Equinox Gold, a multi-jurisdiction gold mining company, has had a quite remarkable rise over the last few years. Its share price hovered around CA$5 at the start of 2019 but has more than doubled today.

We recently sat down with Equinox Gold CEO, Christian Milau, to discuss why this could be one of the most exciting gold investment opportunities around. Alternatively, you can read one of our recent gold-related articles, or you can watch a different gold mining interview.

We discussed:

  1. The Gold Market: What Does 2020 Look Like?
  2. An amazing increase in share price: how?
  3. Gold grades and quantities.
  4. A unique remuneration policy.

Company website: https://www.equinoxgold.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.

A picture of cartoon gold bars.

Equinox Gold (TSX: EQX) – The Sum of the Parts Sets it Apart.

A graph of rising gold bars with a red arrow curving up them.
Equinox Gold Corp.
  • TSX: EQX
  • Shares Outstanding: 113.5M
  • Share price C$9.73 (29.02.2020)
  • Market Cap: C$1.1B

We recently interviewed Christian Milau, CEO of large-cap gold producer, Equinox Gold (TSX: EQX). CLICK HERE to watch the full interview.

Equinox Gold Corp.

Equinox Gold is a story most gold investors should be familiar with: it is the model of how to build a gold producer in a short timeframe. This gold producer has had a remarkable rise over the past 18 months. Its share price hovered around C$5 at the start of 2019 and rose to heights of C$13.54 this year.

However, this week has seen even successful gold producers, like Equinox Gold, have their share prices brought to a shuddering halt, and even drop back. Equinox Gold’s share price has fallen this week alone from C$13.34 to C$9.73; this has been a truly extraordinary and noteworthy week of panic selling of a commodity that has been traditionally positioned and heralded as a ‘safe haven.’ It seems that truism isn’t true.

Let’s try to look to the world before the Coronavirus and hopefully the world after it. I know that may seem like a casual, almost dismissive statement, but it is not meant to be. There is clearly great global concern about the near-term impact on society and business, and possibly in the light of the current media spotlight, a normal future seems implausible, but history tells us that we humans persevere, adapt and survive, and we will again.

So let’s look to the future, if we may.

Equinox Gold was listed around 2 years ago, with the prodigious Ross Beaty as the main shareholder; if you are familiar with the school of ‘Bet on Beaty Bets’ investing, it will be no surprise to see Equinox Gold doing so well. Its founding goal was to become a multi-jurisdiction, large-cap, low-grade, bulk-tonage gold mining company.

Assets

Equinox Gold has a promising portfolio of assets:

  1. Mesquite Gold Mine, a Californian project producing 125,000-145,000oz gold per annum with an AISC of US$930-$980/oz and a grade of 0.46g/t gold (exclusive of reserves)
  2. Aurizona Gold Mine, a Brazilian gold mine producing 75,000-90,000oz per annum with inferred Resources of 1.1Moz @ 1.98g/t gold (with an exploration upside) and an AISC of US$950-$1,025
  3. Castle Mountain Gold Mine, an under-construction gold mine with a PFS and production potential of 200,000oz per annum and a 16-year life-of-mine (LOM)
  4. A copper-focussed spin-out operation in the form of Solaris Copper Inc.

Our Interview

Milau covered a variety of topics. Equinox Gold’s targets have been well and truly delivered. Mesquite and Aurizona are up and running, producing at a reasonable scale with a good AISC. Castle Mountain should be ready to rock by Q3/20.

These have not been without their hiccups; after all, this is mining. Equinox Gold has, however, kept things simple and it is reaping the rewards. The portfolio is focussed. The management team has created a relentless mining business for low-grade bulk processing. Equinox Gold’s message is simple: make strong acquisitions, then get that gold out of the ground!

Equinox Gold's Corp.'s share price for the last year.
Despite a late tail-off, what a year for Equinox Gold!

Equinox Gold has a significant 11% insider ownership: another reassuring fact for investors. The management team has succeeded in attracting a diversified shareholder base since the last time we spoke with Milau.

Milau also discussed Equinox Gold’s spending strategy and his view on the gold macro environment. What does the outlook for the gold market look like for 2020? He states this is only the beginning of this new gold cycle. He is conscious it won’t all be plain sailing in the gold sector, but this is in the early stage of the turn (US$17T of negative-yielding debt, solid stock markets and slowing global growth). Is the best really yet to come? Gold investors will be breathing heavily and hoping for more.

Equinox Gold has no intention of being taken out, and why would it? The company plans to become a long-term investment opportunity that can last through several cycles. Equinox Gold has had great momentum for those seeking fast returns, but it now also looks supremely appealing to those looking for steadier returns. Could it be a dividend payer in the next 2-3 years? Milau suggest so, but that is a long way away, and markets change. Let’s focus on today. Can that share price continue to grow at the same rate?  

As a gold producer, Equinox Gold has the rising gold price working in its favour, should the price continue on its recent trajectory. Can the management team start to accumulate cash, given they have been buying ounces in the ground? We appreciate Milau’s pragmatic take on gold margins: Equinox Gold is not rushing to produce and there is no spike in production. Equinox Gold is managing a steady, structured increase. However, the markets often don’t reward pragmatism and sensible management decisions. They often prefer pie in the sky stories of twenty-baggers and miracle proprietary technology. The fact the market has latched onto Equinox Gold with such excitement is a testament to just how solid this project seems to be. 1Moz per annum of gold is impressive, but this degree of investor enthusiasm is rare to say the least.

To continue on this trend of growth, Equinox Gold will proceed to develop its current assets and look at new acquisitions when the time is right. On the 28th January, Equinox Gold announced a merger with Leagold Mining Corporation that will combine the companies, ‘creating one of the world’s top gold producing companies operating entirely in the Americas.’ This should position Equinox Gold even more strongly.

one of the world’s top gold producing companies operating entirely in the Americas

Equinox Gold has recently received Serabi Gold’s C$14M payment for the Coringa project in Brazil, as it targets becoming a 1Moz per annum producer.

As far as remuneration, one of our favourite elements of the story, Milau stated that Equinox Gold has continued with its directors’ remuneration policy of paying them mainly shares. Milau claims he hasn’t cashed any in yet, but we can’t see any reason why he’d want to.

A photo of a Seal with a sign saying 'yes.' The words seal of approval are written underneath.
We Are Big Fans Of The Equinox Story

Equinox Gold is an anomaly. It is an abnormal story of inspired management, favourable prices, excellent assets and, as is always the case in mining, luck. We expect Equinox Gold to keep delivering on its promises for shareholders; the team has shown us nothing to make us believe otherwise. No, they don’t pay us and no we don’t own any shares. In an industry of over claiming and under delivering, we see Equinox Gold as company that does what it says.

Company Website: https://www.equinoxgold.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.

A graph of rising gold bars with a red arrow curving up them.

Equinox Gold (TSX-V: EQX) – Increase of Market Cap to $725M in 18 Months (Transcript)

We interviewed Christian Milau, the CEO and Director of Equinox Gold (TSX-V: EQX). We ask him about potential M&A, and where the potential shareholder gains are coming from. Do they need to diversify? Is there a retail investor story here? And will the Gold price stay steady?

Really robust conversation and an insight into some of their problems and challenges. This is the coming together of 3 Gold assets, 2 in California and 1 in Brazil, and 3 big names in the shape of Ross Beaty, Richard Warke and Lukus Lundin. A strong management team, who has invested a significant proportion of their own wealth, and is incentivised on deliverables and share price. They pride themselves on being in the lowest quartile for salary in Gold companies. This is a low-grade bulk tonnage business – so it’s about moving dirt effectively and extracting Gold efficiently. Achieving a market cap of $725M in 18 months is no mean feat.

Christian talks through their strategy and business model, including their 5 year plan. Long-term planning is the game, not short-term decision making. They have access to cash if they need it. Their Aurizona Gold mine is getting in to production which is important to the market and they feel they will do this following some delays caused by heavy rains.

Some highlights:

  • The start of Equinox Gold and how Ross Beaty got involved with their new partner.
  • The three Assets, bringing them together and issues that had to be dealt with .
  • Company Financials: a $725M Market Cap and the costs of the Assets.
  • Mining in Brazil: positives and negatives.
  • Equinox Gold Business Plans: Why a Convert? 5 year plan?
  • Share price and The Gold Market.
  • M&A Activity?
  • ETF’s and their impact on Equinox Gold.
  • The Upcoming Year, Remuneration, And Reasons to Invest.

Click here to watch the interview.


Matthew Gordon: We spoke back in February. A lot’s happened since then and I guess we’ll get into that in a minute. But why don’t you kick off for newcomers to the story, gives us a 1-2 minute overview of the business.

Christian Milau: We’re now a mid-tier Gold mining company based in the Americas. We’ve now got one producing mine in Brazil, which we’ll talk about, but also we’ve got a producing mine in California and we’ve got another we want to build in California starting in the next 6mths here. So we’re now going to be a three-asset company that’s focused on the Americas with roughly +200,000oz production today and with a goal of going to 400,000oz-500,000oz of production in the next few years. So we’ve got a nice platform in this kind of market where Gold seems to be picking up.

Matthew Gordon: Let’s get on to that in a second. We’ve got a few questions from subscribers. I’d love to throw a couple of those at you. They’re really about the origins of this all because you’ve brought together three Gold assets. You’ve got some big names attached to those assets: Ross Beaty, Richard Warke, and your team, obviously.  Tell us about that first conversation that you had, how did this come together?

Christian Milau: Yeah it was interesting. I guess with Ross, he had a Brazilian asset and company called Anfield back in the day, a couple of years ago. We started with Luna Gold which was the Brazilian asset in Arizona which we now have put into production. We had some commonality and we obviously interact in Vancouver on a regular basis, see each other – it’s a small city. And we always talked about ‘how is it going in Brazil’ and ‘what do you plan to do in the future’ and we realised that we had the same vision and goal. We both want to create sort of that mid-tier to larger Gold mining company at this bottom point of the Gold cycle. Ross’s vision is really around building something in Gold, it’s very similar to Pan American Silver, which is now an 11-mine company, which is a good larger silver company, wants to do the same in Gold at this point. And my view is, do the same as we’ve done recently, myself, and some of their team, and Endeavour Mining. And start with one asset and try and build it into four to six assets over time. So we really had the same vision and Ross said he started his career with Equinox Resources back in the 80s and 90s and that was a success and he wouldn’t mind book-ending it with something like this at the end and we suggested the name Equinox Gold and he loved it. He said ‘it’s a great end to my career’.

Matthew Gordon: So it isn’t one of those the-sum-of-the-parts stories? You get some people who are very protective over their assets, they want to do their thing and they don’t need any help. But you guys all seem to have a track record of bringing together assets and building something bigger and, therefore, hopefully, better for shareholders. Is that what happened?

Christian Milau: I absolutely believe that. I mean, to put it in real context we sat in a room together myself, and Greg on our side, Richard Warke from the Newcastle side, and Ross from the Enfield side and we sat in a room for a couple of hours and we said, with no advisers, no lawyers, anything. We said ‘Hey, what is our vision? Is this common? Who could run this, who wants to be the face of it and contribute to the financing of it’. And we actually came up with a board and structure very quickly, and a valuation effectively that at least got it kicked off. And that was all because we had the common vision. Richard Warke again has worked with Ross over the years in building companies like Ventana and other things. And Ross tends to be more of the market-facing person of the group and was very happy to take the chairmanship. And obviously myself and the team are very happy to run the business so there was no stepping on each other’s toes, it really fit together nicely.

Matthew Gordon: So how does something like that work? You’ve got two assets in California and you’ve got one in South America. They’re all Gold. So there’s that in common, but they’re all in slightly different phases of development, so how did you imagine that coming together and how’s that indeed happened?

Christian Milau: It almost worked better because they were in different stages or phases. So we had the one producing asset in California. So that’s kind of our starting point we can actually use that for leveraging off knowledge skills etc. And recording all these different techniques of managing the business and then we had one in construction in Brazil. And then we had a third one which is sort of in that study phase, in the pipeline that could be constructed after we finished Arizona and Brazil. So, when you put them together you actually get a nice runway to becoming a mid-tier producer into the system. Rather than just slamming together three operating mines with different cultures, we are able to actually put them together, build the culture as we go.

Matthew Gordon: Because I actually watched our interview from February this morning, as a run through, remind myself what we talked about. The big theme that came through there was, not only have you got these three assets, but you have access to cash. You’ve got… Both Ross and Richard are very capable individuals, have track records, you are too. But cash wasn’t an issue for you. And where we are in the cycle, we talked about how advantageous that is for you in terms of being able to pick up assets cheap, and perhaps we can get onto M&A in a minute, but just again to remind people on the financial side, you know, where you started. You had these three assets, some assets you offloaded, something on the Copper side. But what did you start with and how did you value those and lets maybe get into where they are today?

Christian Milau: So when we did put this together we had obviously the three Gold assets, which were going to be the core to our business. We had a couple of our columns smaller, one was a processing mill in Peru, one was a small Gold project in B.C. And then we had a bunch of Copper assets. So what we decided was to focus on the core value-creating Gold assets. File out the Copper assets last summer into a separate vehicle which I’m happy to talk about but we’re excited and we still own 40% of Solaris Copper. Then we sold the mill in Peru to a local operator, I would call it. And then we sold the B.C. Gold asset just recently to a local group here because they were too small, not going to create enough value in a company now our size. We’re now $600M-$700M market cap, so we’re focused now on the pure Gold assets of scale.

Matthew Gordon: So do some simple Math for me. So you brought three assets together which were valued at what?

Christian Milau: Oh boy… I guess when we brought them together we bought Mesquite for just over a $150M. Aurizona and Luna Gold when it came in, I can’t remember the exact valuation, but I’m gonna say it was between $150M-$200M. And then Castle, again, was $150M-$175M and we put them together. The nice thing today that we’re excited about is, you see that our market cap is now greater than the sum of those parts.  We’re now $725M.

Matthew Gordon: $725M. You told me this morning.

Christian Milau: There you go.

Matthew Gordon: But how much money have you raised in there as well, which is obviously GNA, CapEx, etc.?

Christian Milau: So we’ve probably, during that process, we probably raised, I’m going to say it’s $50M, maybe it was up to $70M to help finish the funding on Aurizona in Brazil. But what we’ve really done on the funding side that’s more interesting is we’ve restructured the balance sheet completely, which, again, I’m happy to explain.

Matthew Gordon: Tell us about that because obviously we’ve seen mention of Abu Dhabi sovereign wealth fund in there and, obviously, project refinancing as well. So why don’t you give us that before we get into the projects proper?

Christian Milau: So everything over the last 18 months has probably moved faster than we even expected. We’ve had great support from guys like Ross and Richard and some of our core shareholders. And so we originally had a project finance loan from Sprott that was coupon 10%. That was financing the build in Brazil. It’s expensive money but we our single-asset development company was unfunded when that went into place, so it was market. Then we had an acquisition facility from Scotiabank and a group of other lenders that came in to acquire Mesquite. So you’ve had siloed structured financing or debt that sat at the asset level. What we did in, I guess it was February we announced and we’re just completing it right now, is we’ve paid out the actual loan that was project finance in Brazil. Replaced with the MOU Batalha convertible note, which is sitting at the corporate level and paying a 5% coupon, and brings in a partner that has a base of a trillion dollar sovereign wealth fund that is there to help us grow the business into the future. So they’ve replaced an expensive debt with, sort of, half the coupon cost but they’re also there to grow long-term as a shareholder and funding partner. So you bring that up to the corporate level. And the second piece was we took the same banking group that funded Mesquite and repaid and refinanced that acquisition loan and brought it up to the corporate level. And now it’s a corporate revolver that we can borrow and repay. It’s a little bit larger instead of $100M, it’s now $130M. So we now have all of our debt sitting at the corporate level, all of our cash flows are fungible and free to move amongst all of the assets in our organisation and they’re all Growth Partners. So as we grow, they all want to be able to fund us in a bigger way.

Matthew Gordon: Yeah, again we did talk about that last time and I do want to talk about it in a minute, but let’s just quickly go through, I think, a point which is talked about in the chatrooms, etc. And that’s your ability to prove the economics around the Brazilian asset and get that going, bringing that to market. So where are you with that?

Christian Milau: So we finished the construction in, I would say, early May and we were commissioning the asset. It was probably about a quarter behind, so a little disappointed with that.

Matthew Gordon: Why was that?

Christian Milau: Basically, there was no major factor. I mean, the rain was very heavy this year. I think we’ve had 3.5m of rain in the first three or four months, where normally you get 1m-2.5m for the whole year. So it’s a very heavy year. So doing electrical terminations and then the rain is probably at 50% productivity for that work. There’s a bit of extra piping and scheduling work at the very end so nothing that I would say was a major incident, like the mills falling off the trucker that ship or something.

Matthew Gordon: Right. There’s no issues from the Brazilian government? Obviously, a very high profile incident earlier this year but are they more nervous?

Christian Milau: No, the government… I give them their credit. They actually delivered us our operating license the day we poured Gold. Normally it comes about 6 months after you pour gold. So I would say, actually, a real tick to them, a check in that box where they delivered it early. And in terms of inspections on tailings dams, which obviously are a big thing in Brazil right now. That incident happened early in the year. They were inspecting all the dam sites around the country and they did come to ours, of course.  and we were just in final stages of getting it into readiness state of readiness and basically we our design is not an upstream down like Valley had there and had the issues with which is inherently less able. This is downstream in centre line which is inherently much more stable and we’re very happy with the inspections actually.

Matthew Gordon: So what do you think has happened there? Do you think, obviously it can go one of two ways. The government, or the Ministry of Mines can get very very nervous and take longer to get things done. Or, because it’s damaging to the reputation of what is a big mining country. They try and accelerate things to say we’re open for business. What’s your sense of what’s going on there?

Christian Milau: I almost think they’re accelerating things at the moment because of the urgency and the need, with the recent incidents there. And I do think when they’re not happy I I would suspect it was going to take longer to permit. There will be more hurdles to jump. But if you’re doing things on the international standard basis, that is expected of companies like ours, you really shouldn’t have problems. And we haven’t experienced any.

Matthew Gordon: Right and so the team that are down there, they are experience with South America and Brazil in particular. A quarter behind. But unfortunate event is what you’re going with.

Christian Milau: Yeah. And so what we said was ‘all right, sorry we’re a little bit behind a little bit over budget’. We were probably about 10% over budget overall which in the scheme of things, three months and 10% over is not the end of the world’s. It is a bit of a shame. But since May 14th when we did pour Gold, we’ve now gone for about 30 days of production and we are now producing or putting through the mill more than the rate of capacity. So I think we’re at 8,000 tons a day at our capacity and some days we’ve gone up to 9,000 – 10,000 tons. So it’s very nice to see that you’re 10% plus over, the mill is actually capable of performing at the expected levels.

Matthew Gordon: Right. Was there any doubts in your mind as to whether Brazil would work or not? Or has it all going swimmingly?

Christian Milau: I think anyone who would say there isn’t a risk or doubt, would be kind of kidding. But we did feel that we were investing in this project to make it successful. The idea was not to cut corners. Because of the past history here, when they originally built this in 2008 or 2009, they didn’t have a proper crusher at all and they didn’t have a proper milling circuit, it was a fairly old six year Asbestos mill from Quebec. So it was almost setup to have challenges and it still performed okay. So we figured if we spent the money and put in the proper equipment with professional contractors, you were bound to have good success here in due course.

Matthew Gordon: If I may come back on the on the refinancing that you did. I know you’ve got all at   corporate level which is much easier to deal with and you’ve re-financed it. You’ve got a little bit more cash there, a bit more flexibility. Are you happy with the with the terms there. Or is it a case of ‘actually, I like who it’s from’. Because obviously the Abu Dhabi sovereign wealth fund has a lot of cash available and if likes what you’re doing, that bodes well for M&A activity, which we talked about previously. Were you happy with those terms.

Christian Milau: We’re extremely happy. When you look at that convertible bond, we have a partner who is not out there shorting or hedging your stock, like a normal convertible might be with normal hedge funds. They are a long-term investor. They have no short term time horizons. They wanted to work with Ross, and Ross has probably been talking to them on and off for at least 5 or 10 years. I think they were excited to partners someone to build a great Gold mining company that they could trust. So I think we got really good terms. And we looked at various market comps and what we might have been able to do in the market I think for exceeded those.

Matthew Gordon: So why a convert? They could’ve structured it any way. They’ve got the money, they could paper it up anyway, so why convert? Why did that work for you?

Christian Milau: It’s interesting. At this stage of our involvement and growth and development, they would like to be a long term equity holder but they’re used to actually making investments. I’m going to use a big round number, but a half a billion dollars, so it’s a very small investment of $130M for them to come in. There is a debt instrument in place already that could be re-financed and clearly replaced. And even that link ultimately to being an equity investor, which we would like them to be in the long-term because I think there would be a long core stable shareholder along the likes of Richard and Ross. So it almost this hybrid interim instrument that allowed you to solve your current debt, expensive debt situation, but sort of  link them into a long term equity position. And it’s a smaller ticket than they’re used to so it does I guess come in a form that gives them a little more security on day one than it would if it’s pure equity, a small check basis.

Matthew Gordon: Yeah. What is the coupon on that?

Christian Milau: 5%.

Matthew Gordon: 5%. OK. Pretty good. And what are the rest of the terms on then?

Christian Milau: So it’s a five year term. It’s 5% coupon. It converts at a 25% – 27% premium depending what share price you’re using. That’s $1.38 Canadian. Interestingly  when we announced it in February, the share price went up. And we’ve seen so many people announce convertibles that are market oriented, where the actual share price goes down. People are shorting your stock. Ours did the opposite. So we saw that as a nice vote of confidence that we had a long-term partner. And one of the biggest things I had was I was at a conference time, I had a lot of other peers come to us and say ‘can you make an introduction? How can we get access to that capital. It looks like a great partner that’s there to stick with you through the ups and downs of the cycle’. And right now, as you know, we’re towards the bottom end of our cycle and the smaller the company the harder it is to finance. And I think we’ve been well above our weight a little bit there.

Matthew Gordon: Yeah to just stay on that point, you did you did have a bit of a spike and then it kind of came down as his low as $1.01 on a couple of occasions, and your now back up at one $1.31-ish again. What do you think those drops were?

Christian Milau: Well the one thing for sure, Gold had its dip although it’s obviously much more positive, it hit $1350 this morning. So it’s much more positive. We’re in a $1270 to $1280, $1290 range. And below $1500 I see there’s not a lot of conviction from some of the precious metals funds, some of the generalists. They really want to see it pop over $1350 to really get some confidence. The other side was we were right in that crux period of finishing off Aurizona and until you’ve announced you poured Gold or you’re in commercial production, people have their doubts.  I guess rightfully so, they want to see that there’s no hiccups and major issues along the way. And we weren’t able to announce that until May 14th. So we had a double whammy of those two items I think.

Matthew Gordon: MOU Batalha, they are in. They are a partner now, equity and debt. What are there expectations? I see no board seat for them. But they have a big say in what they expect you to do, presumably. Or are they are a passive investor?

Christian Milau: No they do have a board seat.

Matthew Gordon: Oh they do, sorry.

Christian Milau: They are partners with Ross in many ways here and they see themselves on a pro forma basis, they would be an 18% shareholder if you were to convert at all. So we think of them as a core shareholder also, in the long-term. We very much want to work with them and their vision is actually very similar to ours, and they want to grow into a larger-scale Gold mining company. So we will definitely look to them to support us on growth activities, being acquisitions or growth internally.

Matthew Gordon: So if we go back to the first question, which is how do you guys come together and what was it it was and it was a common thought about what you could do. With MOU Batalha on board is that thought changed? Have your horizons expanded?

Christian Milau: I think it gives us maybe a bit more impetus to move quicker or at least it gives us the ability to think a bit more actively about how we can grow this business now because we know there’s availability of capital in the near-term and we don’t have to necessarily go and source it from new sources, if we do find an acquisition opportunity.

Matthew Gordon: Yeah so that so that saves a lot of time. Again just remind people the type of company you are. You are a bulk processor of Gold. You aren’t chasing veins around. So just quickly describe that for people because I want to ask you about that.

Christian Milau: Yeah. Our three, or two operating mines, and our third to come into operation are really are larger open-pit mines. So they’re big dirt moving exercise as you described it. Our goal here is to build scale and to be a growth oriented company and we’re not shying away from growth. A lot of the bigger companies in this part of the cycle have been paying down debt. And I’d say call it right-sizing or making themselves smaller and selling off assets. Where we’re trying to actually do the opposite because as the cycle does turn, we will have already been ahead of that curve and we’ve set a target. And it’s maybe a round number but we’d like to be a 1Moz a year by round the 2023.

Matthew Gordon: What are you today?

Christian Milau: So we’re probably 200,000oz and 230,000oz today. And with the assets we have in our pipeline we could go to 400,000oz to 500,000oz so roughly halfway there. And so the goal, we’ll need to add another at least two assets I think along the way to get to that sort of mark. And it doesn’t have to be a million, but it’s a good target.

Matthew Gordon: Yes. Nice round number as you say. So if I look at the type of company you are, the type of business that you are good at being, this large earth processing business, you’ve got the skill sets there. To find those types of assets globally, at the moment, well I know you’re kind of America’s focus but I guess it’s no restricting you. People don’t sell good assets cheaply. The Gold price is going up. So have you guys found things that you’re looking at or are you constantly evaluating now? What’s the chances of some M&A activity this year?

Christian Milau: We’ve been really inward looking because of finishing off the build in Aurizona and finishing off the integration of Mesquite. So I’d say we hadn’t been looking externally but I would say the last month or so, Gregg and Ross particularly have gotten really active again, thinking about what we could acquire. And so you look at several categories. You’ve got single asset producers out there, you do have a few multi-asset producers that are listed. You also have the major Gold companies who have been merging and there will be some castoff assets or some they’ll sell. They may be good or not good but they also might be just too small for them. And that’s one of the challenges now as a big company. And they might fit us perfectly. There are a few private assets owned by private equity groups that will come available in the next few years. And then there’s the smaller strategic assets that might be earlier stage for us. Maybe they’re not perfect for us today but could fit into our pipeline in a year two. So there’s a bunch of different categories, and we prefer to be in the Americas to start but we aren’t completely closing the door to Europe and Africa and Oceana necessarily.

Matthew Gordon: I think there’s a lot of people with a lot of ideas and I think it’s like when a celebrity turns up in a capital city, people talk about it and Ross has been spied at various locations so people are making assumptions. Not least various parts of South America. So it’ll be interesting to see where that goes and where that leads. But now is the time. From what you said before, now is the time. Now while it’s cheap, the the price of Gold is going up slowly and the confidence is slowly- well would you agree with that? Is it slowly returning?

Christian Milau: I think it’s slowly returning but it’s still… when you talk to our peers out there… it’s still pretty depressing, maybe not the right words, but people are pretty… they’re struggling to find new money, shareholders, people to get invested and interested at the smaller scale. And I’m talking sub a $1Bn of market cap. Interestingly it was two Fridays ago, we had a big block trade for 20M shares.

Matthew Gordon: I saw it, yeah.

Christian Milau: Sandstorm sold their whole position to a new long-term only fund. Who is not a Gold investor. I mean they do invest in a little bit of Gold, but historically they invested it all across different sectors and they have a good 25 year track record. So we’re really excited to see that kind of money coming into our stock, number 1, but also into the sector where there are people who are generalists, who’ve been talking about investing in Gold, who are now taking some action. And I think this last little tweak here where the dollar hasn’t fallen off a cliff, and it has stayed reasonably strong, the markets are a little bit wobbly. People are looking for somewhere else to invest their money and Gold has become a little more popular. And I think getting close to $1,350 and maybe if we can hold it for a little period here, I think there is some conviction that will start coming back, somewhere above $1350. Could we drop back down? Yeah absolutely. But it does feel a little more positive.

Matthew Gordon: Yeah. I think Ross was interviewed recently talking about the Gold price, and he was saying in the end 2017-2018, even though the Gold price went up, the equities fell down. These are some strange times when normal rules don’t seem to apply. And we talked previously about the distractions of Cannabis, Bitcoin and Blockchain before that. Well Bitcoin is coming back again. But do you think those distractions have gone away and this is just about people wanting to see how the geopolitical dust settles, or it’s just more fundamentally about the dollar?

Christian Milau: I think some of that speculative money in cannabis and cryptocurrency has come off the boil. I wouldn’t say it’s gone away. People are still making some money, but it’s not easy money anymore. I do think consolidation in both those sectors will happen. And people lose interest when they can’t make a quick dollar in the first three months of investment. And I think Gold is seen as a now coming to the right point this cycle. And I think what the markets are rolling over I don’t think anything major is happened there. Yes and the dollar maybe is going have a rougher patch with all these trade issues hanging out there, and all that excess debt in the system. Interesting it’s the first time in years, they’re talking about interest rate cuts. And I’m actually surprised they talking about that so quickly and so soon. That seems like to me a little early, but if we’re talking about interest rate cuts that can only be good for Gold, because it will probably impact the dollar ultimately. Right now Gold is seen as one of those bombed out industries and sectors that most other sectors are not in that position. Most other ones have had a good run over the past 9-10yrs at least at some point. So we are maybe going to be one sector that’s seen as having some value today.

Matthew Gordon: Yeah. Well it will be interesting to see how it plays out because I say I don’t think the normal rules have applied over the past couple of years with regard to Gold.

Christian Milau: Yeah that’s the hard part.

Matthew Gordon: Very complicated. It is very very difficult. You said something like a third way at a throwaway line though no one unless you’re over a $1Bn right. You’re at $725M. You know another acquisition you could get to a $1Bn but like you say, a $1Bn company. That’s that’s nothing, really.

Christian Milau: For the US it isn’t.

Matthew Gordon: For the U.S. It isn’t. But also is that how you measure yourself. Is it market cap? Is it to do with shareholder returns? Is it to do with how many assets he got? Is it to do with the potential exit in the future? What are you targeting?

Christian Milau: The thing that really matters is shareholder returns here. And the reason I say that is, Ross owns 12%. Richard owns about 6%. I have my small stake but it’s very meaningful personally. I really don’t care if I’m a $1Bn company, $500M or $3Bn.

Matthew Gordon: You’ve got a 5 year plan. We talked previously about a 5 year plan. You’ve got a 5 year plan. Today doesn’t matter so much. It’s like whereas the end point. And I assume..

Christian Milau: It’s not a quarterly business. We’re trying not to be overly quarterly results focussed. I mean that’s something where the UK I do actually misheard the system or is on a six monthly basis, where in a way it allows management to put their head down for every six months and focus on the business not have to worry about each quarterly reporting period. But we have that 5yrs plan or working hard to get towards that we’ve now put in place to financiers to allow us to deliver it. And interestingly that $1Bn mark I mean that’s not exactly right. But if you’re not in any of the indices the passive funds and I know there’s a big difference between Europe and the UK in particular v North America now. So much of the money over here in North America has moved into the ETF and passive funds.

Matthew Gordon: I was going to ask you. Has that was being distracting for you? Sorry to interrupt. I was going to ask you, how distracting have ETF’s been to you as a company?

Christian Milau: To distract, partly because you can’t talk and right. How do you convince them to buy your shares because they’re have to buy or have to sell. But on the other side of it, we are not in one ETF or indices but we are getting on the cusp and threshold of getting into them. And once you’re in them, and you have to have that buying. I mean I had someone say to me, there’s 30M shares with the buying coming once again GDXJ. And our key stumbling point is liquidity. But with this big block trade last week or the week before and the daily liquidity over the last few weeks is well in excess of a 1M shares we should in due course get a good shot at getting into the indices later in the year. And what we’re going to do to help that along is work hard to list in the US and to move up to the TSX. We have two California assets with a lot of U.S. shareholders and interested parties in the U.S. I gotta believe that both of those events will help us in addition add liquidity and a really good market.

Matthew Gordon: I think what for sure. So what do you think the criteria is to get on the GDXJ?

Christian Milau: I mean you do need to be a certain size in that and I know lots of companies are a lot smaller than us and they’re listed. But it’s roughly $1M a day of trading. That’s the key one. And it’s over an extended period. I can’t hear it’s 30, 60 or 90 days but it’s long enough where you need to keep it up, and you can’t just have these little blips that’s going to get you in there. So our goal really trade for the quarter at least over a 90 day period, $1M a day plus and look to get out it’s why you exchange the indices later in the year. And part of the other benefit to us is we have two operating mines. I mean we haven’t had an operating quarter yet from more has only got two operating quarters or two operating mines for a quarter or two and you’re in various different stock exchanges have greater liquidity and we’ve had this uptick in Gold. Got to believe that momentum is moving us in the right direction.

Matthew Gordon: Right. I agree with you. I think that’s that’s good news that you’re at that point now. Just on the market still we talked about ATX but you know there are people talk about the sector being under invested. Okay. That means that’s going to be a good thing for you hasn’t it. In terms of what you’re trying to create here the scale of what you’re trying to create right now.

Christian Milau: It’s fantastic in a sense because where we’re trying to build something that will be an investment of choice when it’s not under invested when when that generalist money and the allocation of funds that need to have whatever is 5-10% of their money towards something like Gold or harder assets would be one of those investments choice with liquidity that’s high enough to allow them to invest in our stock but also to get out of it. That’s what a lot of investors need to know is they can get out when they need to.

Matthew Gordon: Yeah. So in a case we just come back to the the assets side the side of things and you’re getting a couple assets into production now. The SEC is the exec. You’ve got a. We talked about 18 previously there a ‘been there done it, got the T-Shirt’ kind of guys, but you’re trying to lower the AISC, increase the margins here. How much time and effort are you spending on that because we’ve talked about a lot of M&A now but can we just look where the projects themselves would have been the issue has been this year that you’ve been trying to overcome an Iowa spike of some angst because it suggests margin to mean. Talks about profitability hopefully. So what are the issues that you’ve identified that you were focused on with your team.

Christian Milau: Yeah I mean for Arizona and Brazil you know getting it ramped up and running smoothly is the first thing and then working on actually making sure your costs are nice and steady and where you expect them to be. So the benefits with Brazil’s we now are coming through that period. I mean if all goes well I hope certainly sometime early ideally in Q3 we’re getting into commercial production. Then we start measuring it on a on a ongoing cost basis. And the benefit but the moment we’ve been trying to make sure that all of our inputs and supplies are as cheap as we’d expect in this type of market where I do think it’s not a huge demand. Things like cyanide and power etc. In these remote regions I think Labor has been pretty good to get recently because Brazil hasn’t gone through a great boom recently they’re probably coming off some eyes a few years ago. So we’ve been only piecemeal call it skilled labor in Brazil our supplies have been at reasonable prices. Power rates are pretty good in Brazil right now. We have hydroelectric power plants and then I think we’re setting ourselves up well with a good mining contractor as well that has great experience in Brazil but key components of the costs you’ve got to focus on locking them in getting good contracts getting good supply. So we rely on it. We’ve kind of come through that period now and now if your mill is getting the good throughput you know your cost just sort of fall out of that. And the other benefit that we have no control over obviously is the exchange rate. And in Brazil right now it’s been in that three point eight to four reply to all. You know historically it’s been lower so there’s been obviously the U.S. dollar has been strong so it’s hit kind of other currencies particularly know I know Australia Canada Brazil have been weak which is obviously a benefit to producers like us in that region.

Matthew Gordon: Right. And yeah I mean if you think I think that’s true if the exchange rate does it does hit people different ways. But just on that I mean this is the whole point about you know having multi jurisdictional deals risking your assets. I mean your Americas focused. Will you continue to do that obviously with this access to even more money than women. We lost hope is not a key driver for you in terms you’re risking process.

Christian Milau: Yeah I think having four to six assets is ideal.

Matthew Gordon: Is it Americas focused? Is that where you are going to stay?

Christian Milau: America’s focused. I’m not saying we wouldn’t go east or west of that but I think it’s easier to run where our corporate offices in Vancouver. Time zones are extremely good for South and Central North America. And travel is actually pretty good. I mean to get to the California site you can cover them both in a day for Vancouver effectively and is a bit further on sleep but I think we can manage it fairly well and turn the times on the communication there’s also travel and we prefer to stay in that kind of time zone.

Matthew Gordon: Okay. And I just want to I want to talk about this coming years in general terms and second budget. Just remind people in terms of your remuneration et cetera and he did tell us last time but I thought it was interesting and worth repeating since you got skin in the game etc..

Christian Milau: So the way that we’ve set this up for me myself and for the other guys started out to now four years ago here we made the commitment that we were an investment company so at the time we put in roughly two to half a million dollars with my continual investments and that we’re probably up to four to five as a management team which line up for us on a personal level as a big investment. ROSS I think in the last year put in about 60 million and so in turned the board and management were fully invested and these are not seed shares or cheap shares these are I in the market belong and block trades buying and financings and doing it reasonably regularly. So I’d say we’re investing alongside shareholders and our exit strategy is really long term. There’s no desire to be selling anywhere along the way here and remuneration on the other side of it. Ross is known to be fairly frugal as a shareholder and a chairman and we’ve taken that same sort of stance. We set out compensation to be roughly in that fourth quartile. So the lower end of the scale we’d like to see that performing in terms of share price particularly but also on the assets will give us a bit more return because we actually met goals and expectations. So we’ve we’ve done a little differently and we’ve not also linked at all to options which some people see as sort of free money. So you have your base remuneration which is fourth quartile then you have your own investments and then you have some long term incentives that generally are linked more performance right.

Matthew Gordon: This is actually I think it’s worth pointing that out and the read the reason is because you know people in Science Forums are subscribers that they go through the accusation. Well yeah they got some money in the game but they’re pulling pulling these big salaries down. So they kind of don’t care they can they. It doesn’t matter to them whether it works or doesn’t work. They are not truly aligned with us. But what you are saying is a significant part of your wealth is invested in this business you are directly lying because you’re buying in the market not options and people need to understand that.

Christian Milau: And probably on a personal level for me I guess a third to a half of my investable net worth is in this stock. Anything that I’m involved in as a manager or a board member I put my own money in because I believe. Why would you get involved in something and expect others to invest it if you told yourself. So right we take it personally in that sense.

Matthew Gordon: Right. So say I say the management’s interest to make the right decisions. You’ve also got Ross Richard also because lending is still in.

Christian Milau: Yeah. Yeah. He’s still own one percent anyway is that right.

Matthew Gordon: See you got some guys who know what they’re doing. I opened a few doors and you’ve got the capital to be able to deliver the strategy which you’re working towards. I suspect that will that’ll change as we find new assets or not. And you look you’ll adapt accordingly but. Thanks for the update. I think that’s been really interesting to hear. There’s a lot happened the refinancing is sounds fantastic. The new ambassador involved sounds. Well I think a lot of people would be very jealous of that. We look forward to seeing the you know the assets come on and the answers start coming. Being port.

Christian Milau: Yeah. No. Appreciate you talking again and maybe do it again in six months and we’ll keep keep moving forward.

Matthew Gordon: Thanks Christian, appreciate your time today. Good luck.

Christian Milau: Thank you.


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