Serabi Gold (LON: SRB) – A Big Step Forward?

A cartoon man, dressed in a shirt and tie, cuts himself free from the shackles of debt.
SERABI GOLD
  • LON: SRB
  • Shares Outstanding: 58.91M
  • Share price GB£0.76 (21.01.2020)
  • Market Cap: GB£44.77M

Gold is a hot commodity at the moment, and promising juniors like Brazil-based gold exploration and production company Serabi Gold have been a central focus for many investors. Serabi Gold has been trying to create a positive outcome for investors from its debt situation for over a year. However, according to today’s press release, they seem to have reached a solution. What sort of package has been formulated and how will this impact investors?

The Background

With gold now sitting at c. $1560/oz, many gold companies reaped the rewards and performed reasonably well last year. However, Serabi’s trebled share price in less than 6 months during 2019 is something of an anomaly; it seems to dispute the notion that Serabi Gold has simply benefited from a good year for gold, or has just recovered well from the sale of shares from two key investors. There appears to be more to this story.

In terms of productions figures, last year Serabi Gold broke the 40,000oz mark for the first time ever with grades of well over 6g/t from Palito Gold Mine. In addition, 5 out of their last 6 quarters have seen them reach 10,000oz. This level of consistent, strong performance is rare in junior mining companies; most trip over many hurdles before attaining stable productivity.

Serabi seems to have hit the ground running, and with the imminent introduction of an ore-sorter that is currently being calibrated on-site, Serabi will hope to see its production capacity increase further. This will be courtesy of liberated processing space at their plant. The ore-sorter will reduce the amount of ore going into the processor, and increase gold output, to see a 10-15% rise in production with the equivalent rise in mining costs but no increase in production cost.

A photo of Serabi Gold's Palito Gold Mine
Palito Gold Mine

However, this is all a long way off. Serabi has been drilling at San Chico for 2 months, performing step-out drilling and extensions to current mine limits. Deep underground drilling and strike at surface drilling will continue into Q2. Geophysical anomalies first discovered in 2018 now finally have a drill rig assigned to them and a resource update is expected by the end of Q2. Investors will want to see the share price rise again.

If everything goes to plan, this means Serabi Gold could see an increase in its US$6-7M revenue to add to the US$14M cash that sits in its coffers at present. However, Palito can only take Serabi’s share price so far. In order to gain access to a higher-grade resource, increase production, and reduce its AISC, Serabi’s Coringa Gold Project needs to be brought into production. How will this financial restructuring free up the Serabi’s management team to make decisions in 2020?

The Debt Package

The encouraging story of Serabi Gold has always had something of an Achilles heel. Serabi’s debt to Sprott Lending Partnership, c. US$6.5M, and Equinox Gold Corp., US$12M, has been something of an elephant in the room.

We imagine one option Serabi may have considered would be the standard route of raising equity, but this isn’t the option they have taken; perhaps Coringa’s status, at a PEA stage without significant underground development, may have deterred some potential investors. The solution Serabi has opted for is US$12M of convertible notes with existing shareholder Greenstone Resources, which will enable them to pay back Equinox. The remaining debt owed to Sprott will be settled from cash reserves. The convertible loan is a flexible arrangement that enables Greenstone to be repaid via cash or shares at their own discretion. Based on the terms set out in their release, conversion of the convertible loan notes would see Greenstone’s stake in Serabi Gold potentially rise to 37.8%. Will large shareholders Megeve Investments be happy? Is this good for liquidity in the long run? We shall see.

Investors will be happy to see dilution warded off, but a convertible loan can still lead down this path at the end of the 16-month term.

Coringa – Full Speed Ahead

With this loan in place, Serabi Gold can now look to push forward with the development of Coringa. It has not just been an inability to spend that has held Serabi back on this front; the collapse of the Valé tailings dam, in Brumadinho, Brazil in January 2019, meant mining companies had to spend a great deal of 2019 adjusting their tailings plans to create safer, more environmentally friendly dry-tailings arrangements. Serabi were not immune from this requirement. This also delayed Coringa’s preliminary permit hearing, because of the need to complete a new Environmental Impact Assessment (EIA).

However, with the tailings issue resolved and payments to Sprott and Equinox settled, Serabi will no doubt look to replicate their success at Palito. On the face of things, this does appear to be a bit of a rinse and repeat story. Coringa is geophysically and metallurgically similar to Palito, but with a higher grade of 8.34g/t. This is reliable, consistent and relentless underground mining which is exactly what Serabi has been demonstrating for the last couple of years.

Serabi’s team says Coringa is close with their preliminary licence, a hearing scheduled for the 6th February. Serabi claims to have worked with the local community to ensure the project will run in an environmentally and socially sound manner; the indigenous communities in the area have signaled their approval for the development.

Serabi now has plenty to do; the management team is certainly going to be busy! They will likely use their freed-up cash flow to bring Coringa through to production by Q1/21, with the target of a combined, cross-mine AISC of c.$950. Investors will want to see eventual production double. Until then, it remains to be seen exactly how this debt arrangement pans out and if Serabi Gold has what it takes to get Coringa up and running. History would suggest they do, but this is mining. Let’s remain quietly upbeat. There’s a long way to go.

CLICK HERE to read the full press release.

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.

Salazar Resources (TSX-V: SRL) – The Very Model of a Major General

SALAZAR RESOURCES
  • TSX-V: SRL
  • Shares Outstanding: 126.48M
  • Share price CA$0.21 (21.01.2020)
  • Market Cap: CA$26.56M

I am concerned, when interviewing a CEO, if they are unable to clearly articulate their business plan. Call it an elevator pitch, call it a sales pitch, call it what you like, but if you, as a CEO, cannot tell me in less than 2 minutes what separates your business from the crowd and how I am going to make money, you’ve lost me; big red flag planted firmly in the ground and I am onto the next opportunity.

My other bugbear is when I think I am being misled or the CEO is avoiding answering the question directly. Very few people are smart enough to hide the childlike tells. The furtive look, the eyes searching into the distance hoping to find inspiration to be magically plucked from the air and the awkward squirming in their seat. Non-verbal communication and reading body language in all walks of life is important and accounts for so much of how people see you.

Sometimes it can be fun to set a trap for the CEO: ask a difficult question to which I already know the answer and see how the CEO responds. If it is a mistruth or even a small misdirection, I now know I cannot trust this individual to report properly. Another big, and in this case, terminal red flag.

We tend to begin our diligence from a standpoint that places the burden of proof on CEOs: we will not be giving you our money. It is their job to tell me why I am wrong and why I should. I’m looking for faults in their argument. It doesn’t take much, and I’m off. It’s my money. There are thousands of ways and places I can invest it, so why take a risk?

That brings me to Salazar Resources.

Salazar Resources, an Ecuadorian exploration company, has appointed Merlin Marr-Johnson as Director. A mercurially fabulous name! I’m already intrigued. We spoke to him. Mr. Marr-Johnson is British, very British, and demonstrably intelligent. We set about our task of finding reasons not to invest.

A black and white portrait photo of Merlin Marr-Johnson.
Merlin Marr-Johnson, Director of Salazar Resources

The first thing Marr-Johnson talks about is their business plan. They are gold-copper project developers in Ecuador and Colombia. They have just farmed out their first gold-copper asset, the El Domo Curipamba VMS (Volcanogenic Massive Sulfide) ore deposit discovery. The PEA conducted at the site shows an economically viable resource.

So, here is the clever bit. Salazar received a royalty payment, courtesy of an ongoing partnership with Adventus Mining Corporation. Adventus has the option to acquire 75% interest in the project by funding initial costs of US$25M over five years; they must provide 100% of the development and construction expenditures up to commercial production after the completion of a PFS (scheduled to be conducted in 2021). Salazar Resources earns US$250,000 per year in advance royalty payments up to a limit of US$1.5M. As operator, Salazar receives an additional 10% management fee (on some expenditures), standing at a minimum US$350,000 annually. Salazar also has the option to lease out 3 of their drills and is fully carried through at 25% with no additional capital outlay needed. Salazar Resources currently has c.$5M in the bank and with this additional reoccurring income and low overhead, Marr-Johnson believes that their exploration programme for this year is fully funded. Marr-Johnson takes time to apply a formula for investors to consider how to value the deal with Adventus. It’s reasonable and not wildly out of line with our numbers. So far, so good. I’m still listening.

Salazar has four other 100% interest options; three are in the form of Ecuadorian gold/ copper/VMS assets with exploration licences: Rumiñahui, a 2,910 hectare exploration licence that hosts gold/copper porphyry targets; Macara Mina, a 1,807 hectare exploration licence that hosts VMS targets; and Los Osos, a 229 hectare exploration licence that features a system of gold/silver veins, combined with hydrothermal breccias and mineralised gold/copper porphyries. Salazar Resources also holds 100% interest in a drill company, Perforaciones Andesdrill S.A, that owns three diamond drill rigs.

A diagram of a VMS deposit.
A VMS deposit diagram

Each asset is at a different stage of exploration or development, and each asset has had differing levels of mapping, soil geochemistry and rock-chip sampling conducted. However, when he spoke to us, Marr-Johnson provided some reasons for confidence. Salazar, in the shape of CEO and ex-Newmont in-country team leader, Fredy Salazar, has a ‘proven track record of discovery in Ecuador.’ In addition, the mining jurisdiction of Ecuador is seen by some to have a huge degree of untapped potential. The major mining companies have flooded into Ecuador in recent years, so there is clearly truth in Johnson’s claims regarding the unexplored nature of the geology. Ecuador could have a lot to offer for investors looking to invest in a region in its mining infancy.

We like the gold/copper/VMS side of the story, but the options keep on coming. Their joint venture with Adventus Mining Corporation also treads into the realm of Zinc exploration, with two licences at two different sites: Santiago and Pijili. Adventus possesses 80% ownership but is required to fund all activities until a construction decision is made on any project.

So, what does this mean for investors?

Salazar Resources is funded for 2020: no dilution anytime soon. We like the look of their cookie-cutter approach to developing their portfolio of assets with minimal cash burn. If they can continue to replicate the Curipamba farm-out model, the numbers start to look very attractive. There is scale to this project. Marr-Johnson was keen to point out that Salazar does want to develop some of their own projects too.

A robust and, more importantly, refreshingly honest appraisal from Marr-Johnson. So far, no red flags, but this is mining. We are waiting for news on the water permit before we get too carried away, but if that comes, Salazar Resources is something that we can see ourselves investing in.

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.

Serabi Gold – 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
  • LON: SRB
  • Shares Outstanding: 58.91M
  • Share price: GB£0.77(15.01.2020)
  • Market Cap: GB£45.36M

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.

Scared About Investing? Read this.

More Of The Upside, Less Of The Down.

People have been putting their hard-earned cash into junior mining companies for decades. What exactly do these companies do with your money? They throw it into a hole and hope something good comes out. But let me be clear, investors can make a lot of money investing in mining companies if you know what to look for and are clear about your investment strategy.

An aerial photo of one of the world's largest mining holes, the Mir Mine in Eastern Siberia.
The Mir Mine in Eastern Siberia; is some of your money inside?

This article is for those investors who may be less knowledgeable about mining and nervous of miscalculating the risks. I would also like to introduce you to a very interesting business model within the current electric vehicle (EV) thematic which removes a lot of these risks for investors. 

First, let’s talk about mining risk. There is an ever-present risk factor that is inseparable from junior mining investment, and it is every investor’s most loathed buzzword: uncertainty. ‘Indicated resource’ and then ‘inferred resource’ estimates from preliminary drilling can become the flimsy foundation for investment decisions. Forming the top of this wavering base is the decision-making capacity of a company’s management team; they may have a promising asset, but without mitigating risk effectively, and employing an astute business plan or the appropriate strategy to deliver that plan, the asset can become uneconomical. Not only is the potential value of investment opportunities nebulous, but this value might not even be extractable. 

The truth of the matter is all junior mining operations have an element of luck. We are dealing with resources that are hidden underground, with a list of risk factors that would make Evel Knievel wince. There are an innumerable number of things that can go wrong on a daily basis, and this is just on a company level: expand that logic to the wider financial market and the extent of risk becomes clear. The day to day role of junior mining management teams is to mitigate these risks in the best interests of their shareholders, but the reality is there is only so much influence they can have over an industry more akin to gambling than one might realise.

Junior mining companies have to sell us an idea that doesn’t necessarily require substantial evidence. Boards of directors and management teams are usually master salespeople who can coerce their way to funding they often don’t deserve. Unfortunately, this is the cold, hard reality of investing in junior mining companies; just as gamblers will head to the casino and get the fruit machines bleeping, people are always going to roll the dice and take a punt on a company they think can give them an exciting bang for their buck. Junior mining investment isn’t quite a casino of pure luck, but luck is of undeniable significance.

However, what if there was a better way? What if there was a way to gain exposure to much of the exciting upside of mining investment, but that steer away from geological risk and mining difficulties? The answer is in extracting value from materials and products that are already at surface. This provides a reliable, unequivocal inventory, and helps work towards the green energy sentiment sweeping the western world with all the ferocity of the awful Australian bushfires.

A screenshot of three dollar signs in a line.
More Money, Less Worry.

There is no doubt that mining is essential to provide the items we use in everyday life and no number of protesters outside mining conferences harassing mining executives is going to change that. The irony of these protesters filming themselves on phones made from mined materials, having travelled there on transportation made from mined materials, is not lost on me.

So, let’s get real. Mining is here to stay. If you want to talk about ethical mining, fine. Hold management accountable to those standards, fine. But if you go down this track, you need to go all the way. End to end.

I have previously spoken about true end-to-end green investing. We live in a time of disposable products. Many of these products contained mined materials which go to landfill and dumps. We then mine more materials out of the ground to make more products. It’s not just the ethical and environmental issues, commercially this doesn’t make sense. We are leaving billions of dollars of materials in dumps.

Mining ethically is one thing, but recovering value from end-of-life products is the, as yet, unanswered requirement for a fully functional and genuine green energy investment eco-system. A primary driver of the green energy narrative is the electric vehicle (EV) revolution. There has always been a contradiction when it comes to EV, because the very thing it seeks to positively effect, climate change, is only positively impacted at the front end of the process – less carbon emissions from the vehicles. If one is to analyse the process of battery and electric vehicle manufacture it is far from zero carbon neutral. In addition, the environmental challenges around battery disposal and destructive pyrometallurgic recycling techniques, mean the entire EV macro investment story becomes fatally flawed.

I recently wrote an article regarding an exciting solution to the cost and environmental ramifications of current pyrometallurgical norms. I explained how I discovered an Australian company, Neometals, who have a proprietary hydro-metallurgical battery recycling process which recovers +90% of materials (nickel, lithium, copper, cobalt, iron, aluminium, manganese). However, I didn’t fully explore the genius of their business plan, or how it relates to us investors.

Neometals is a company with value recovery at its core, and its plan will have the approval of the ‘green army’. Neometals signed a memorandum of understanding (MOU) with German-based private metal industry firm SMS Group to work jointly on the funding, research and evaluation of its lithium-ion battery recycling technology in October, 2019. If successful results are registered at the joint venture pilot plant, the companies will likely develop several fully operational battery recycling facilities.

Neometals’ market cap of AUS$103.44M bizarrely only equivalent to the company’s current cash reserves. They are equipped to make this happen technically and financially, and SGS brings all the contacts and cash to roll this out across Europe.

By partnering with a giant company like SMS Group, Neometals will secure contracts with vehicle manufacturers to provide large, stable quantities of feed-stock (scrap and end of life batteries) for their battery recycling plants. By establishing this robust supply, Neometals solidifies its dominance over traditional junior mining companies; there is nowhere near this level of certainty when mining underground resources.

In addition, Neometals will look to secure contracts to supply its >90% recovery of battery materials back into battery manufacturers. In my opinion, €5Bn SMS Group can confidently facilitate these arrangements, and can bankroll all aspects of the joint venture with confidence.

It is quite clear: by investing in Neometals, investors gain access to an undervalued, unique, proprietary solution that has the funding security investors wish for. The feedstock supply and market demand provide certainty, and the economics of the project provide junior mining upside but without the risks. The economics of the project also fit into the EV narrative in a way that junior miners have not yet been able to deliver on. By re-using surface-based material, Neometals reduces the costs, safety risks and environmental impacts associated with mining. The EV cycle now has an appropriate end, and it is an end that could make you a bucket full of cash.

The Neometals’ management team has pieced together an eco-system of people and partners. I am under no illusion; this team has a clear, solid plan for growth, with undeniable evidence of great success in the past. The company originally made their money with a lithium mining project, Mt Marion, in Australia, and timed their exit perfectly. They pocketed c.AU$140M, but more importantly returned c. AU$45M to shareholders. This is a team that clearly know what they are doing.

A picture of a 'risk-o-meter;' the risk is in the red zone: 'high.'
Why take a big risk when you can play it safer and still make big money?

In conclusion, let’s start getting smarter with our investments. While conventional mining is always going to have the potential to make us money, why not consider alternatives that can mitigate risk and still provide excitement?

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.

GET OUT NOW? WHY YOUR MONEY COULD BE IN DANGER

A picture of a map of West Africa. The Sahel region is highlighted with a yellow sign reading 'risk' in the centre.

If you are invested in mining companies that operate in West Africa, you could be about to lose your money. Here’s why you might need to get out while you still can.

We need to look out for each other as retail investors. We are the little guys in the world of investment. We don’t get access to insider knowledge. We don’t get a lot of information until it’s too late and our shares have gone down. Because of this, I’ve been acutely aware of a lack of investor-related coverage regarding a particular geopolitical situation that is growing more and more perilous by the day.

Many of my articles focus on exciting opportunities, but this one is of a much more sombre tone. Islamic terrorist attacks from a range of jihadist groups, including Al-Qaeda, the Islamic State splinter group, ISGS (Islamic State in the Greater Sahara), the homegrown jihadist movement, Ansar ul-Islam, and Boko Haram, to name but a few, have been occurring at increasing rates in the Sahel region. It has sparked a ‘new wave of extremist violence…destabilising…the vast and impoverished semi-arid region south of the Sahara. (1)’

A photo in the desert of armed fighters aiming an AK-47 assault rifle towards the camera, dressed in military-styled overalls.
The violence is an epidemic

The attacks usually take the form of hit-and-run raids on villages, schools and police stations; roadside IEDs and suicide bombings. In one of the most severely affected countries, Burkina Faso, attacks have taken nearly 700 lives since early 2015 (according to an AFP toll correct as of December 2019). In addition, around 500,000 people have been forced to flee their homes. Terror attacks in Burkina Faso tripled in 2018 to 150 (according to the US state department). Just last week, an IED attack on a bus in Toeni mainly carrying students back to their places of study after the New Year break killed 14 people. The week before, militants murdered 35 civilians, 31 of them women, in an attack on a military base and a town in Burkina Faso. 7 soldiers also lost their lives.

In a similarly horrendous instance last month, approximately 40km from Boungou Mine, Burkina Faso, an attack on a convoy transporting local employees of the company SEMAFO Inc. left 37 people dead and 60 wounded. This is devastating news for the community, the families and of course the country. These workers put themselves in grave danger in unstable jurisdictions in order to provide for their families, but at a cost.

Soldiers in Burkina Faso

This bloodshed was the third deadly attack on SEMAFO employees in the space of 15 months. In the following days, the market reacted by offloading SEMAFO shares: the share price plummeted and is down around 55% on Summer highs of CA$5.46. This is no temporary price drop and the situation in the region is only going to deteriorate further.

Investors need to hear the brutal truth about some companies: they are putting profits ahead of people’s lives. As an investor, this is not something I can stomach. Can you?

There are 8 countries that the UN, the French government and the UK foreign office amongst others say are most at risk from terrorist activity: Mali, Senegal, Burkina Faso, Niger, Mauritania, Ghana, Togo and Benin.

As some SEMAFO investors may tell you, companies, their employees and their investors are in danger. There will be casualties in the markets; take gold, for example, an area of particular focus for Ansar ul-Islam amongst others:

  • In Mali, IAMGOLD’s Sadiola Mine (NYSE: IAG), Resolute Mining’s Syama Mine (ASX: RSG), Barrick Gold’s Morila Mine and Loulo-Gounkoto Mine (NYSE: GOLD), Hummingbird Resources’s Yanfolila Gold Mine (AIM: HUM) and Endeavour Mining’s Kalana Project (NYSE: EXK).
  • In Senegal, Teranga Gold Corporation’s Massawa Gold Project and Sabodala gold mine (TSX: TGZ).
  • In Burkina Faso, SEMAFO Inc. (TSX: SMF) has already brutally suffered, and companies like Nordgold may also be subjected to the risk of more bloodshed. The pits around Pama, Burkina Faso, have been taken over by terrorists, who rode in on pickup trucks with assault rifles causing local security forces to flee.
  • In Niger, Sahel Mining Company’s Djado Gold Property and other junior explorers in the south will face turmoil and aggression.
  • In Mauritania, Kinross Gold’s Tasiast Gold Mine (NYSE: KGC) and First Quantum’s  Guelb Moghrein (TSX: FM) face uncertainty.
  • In Ghana, AngloGold Ashanti’s Obuasi gold mine and Iduapriem gold Mine (JSE: ANG) and Golden Star Resources’ Wassa Gold Mine and Prestea Underground Gold Mine (NYSE: GSS)
  • In Togo, Premier African Minerals’ Dapaong Gold Mine (LON: PREM) and Gold Fields’ Damang (JSE: GFI).
  • Lastly, although most of the region is mined artisanally, some Benin-based exploration companies find themselves exposed.

These gold companies could be at risk. If you are invested, you should do your research to see if your money could be too. Imagine extrapolating this to the entire mining industry in the region...

Security firms are stating that the situation is now an epidemic. The violence is deadly and has ‘raised fears among European and US allies that the Sahel will become the next haven for fighters returning from Iraq and Syria, (2)’ particularly after the killing of ISIS leader Abu Bakr al-Baghdadi in late-October.

The ideology claiming to have caused these attacks has made its way from Libya to Mali via social media and is propagated by local extremists. The regional statistics provide a serious cause for alarm. ‘Over the last six months…the security situation in the Sahel has continued to deteriorate with a rising number of attacks against civilians and security forces. (2)’ Jihadis killed around 50 Malian soldiers at the start of November. Moreover, just a few weeks ago, ISGS militants ‘claimed responsibility for an attack on a military installation in western Niger near the border of Mali on Wednesday, which killed at least 71 people and left 12 injured. (3)’

Such violence now threatens to spill into the entire region. According to U.S. Department of Defence research group, the Africa Center for Strategic Studies, the number of violent attacks by Islamist extremist groups in the Sahel has doubled each year since 2016; deaths linked to these attacks have doubled each year.

…people are realising the failure of the strategy that has been used so far to fight violent extremism

Last month, the UN security council commented on the Sahel issue: ‘meeting recently in Dakar, regional Heads of State renewed their calls for a more robust mandate for the joint force.  “The situation in the Sahel is of serious concern and urgent action is needed.” (4)’

Throughout the region, ‘people are realising the failure of the strategy that has been used so far to fight violent extremism. (2)’

 The Sahel region (West Africa) has issues that could be in flux for the foreseeable future. There are three possibilities when it comes to the incentives for the terrorists:

A photo of ISGS militants in a desert holding assault rifles, ISGS flags and one holds a mobile phone, taking a photo.
ISGS militants
  1. Radical Islamic Terrorism

    This is how these attacks are being positioned by the national governments, mining companies and financial institutions. If this is the primary driver for terrorism in the Sahel, this is an unpredictable enemy devoid of moral human thought or logic. An idea is an incredibly difficult (maybe even impossible) foe to contend with.
  2. Tribal Warfare

    Though more of a prominent issue in central Africa, tribal attacks have a devastating impact on the Sahel. A tribal militia killed as many as 150 men, women and children in a village in central Mali in early June; at least 65 people remain unaccounted for. The raid appeared to be a reprisal for an attack carried out by a pro-government Dogon militia elsewhere in the Mopti region in March that killed 157 Fulani villagers.
  3. Criminal Enterprise (under the guise of ideology):

    This is perhaps the reality of the situation as it has been in some of the oil-producing countries. Terrorists are no longer uncivilised renegades lacking the infrastructure and finances to make big things happen. Terrorist cells the world over are incredibly well-financed, and have a worryingly high level of business acumen. They can monetise commodities in the black market. Groups like Al-Qaeda and ISGS are seizing control of mines, oil & gas facilities and pipelines, and are running their own operations, generating billions of dollars of income. While dealing with criminals is usually more straightforward, as these individuals have rational fears and value life, the ideology used to propagate such criminal activity is without rationality. Perhaps the heads of terrorist organisations are easier to combat than the brainwashed soldiers.

Whatever the driver and however it is dressed up by the companies, terrorists hold a tight grip over the Sahel region, and it is unlikely their stranglehold will be broken for the foreseeable future without involvement from external intervention, which in itself brings more problems.

Irrespective of the reasoned business aspect of Sahel terrorism, the perpetuation of the ideology propelling its success is now in danger of becoming generational. This has been building up for a decade without any meaningful intervention and the attacks are becoming more frequent and more violent. The political instabilities, and lack of organised security services throughout the region, render the countries almost helpless in the face of this brutal onslaught. Sooner than you want to believe, some of the companies (and their revenue) that we are invested in could be consumed and controlled by local terrorist groups.

Mining companies are going to tell you they’ve got this under control; they will tell you government forces or privately hired militia can quash the insurgents, but I am sceptical of these claims. Some attacks have featured hundreds of committed, fearless and well-armed terrorists. There is only so much small security teams can do to defend themselves against heavily armed militia with no regard for their own lives. The seemingly bottomless pit of brainwashed cannon fodder will be irrepressible until the idea itself is exterminated. Until then, why put your money on the line?

However, some companies have managed to mitigate the issues in the Sahel. There are three large American military bases towards the Sahara in central Niger, including the biggest American drone base in the world. The French also have a strong military presence in the country as a consequence of the 50 years of uranium production so critical to their energy and security needs. Uranium companies Global Atomic Corporation and GoviEx appear to have sufficient protection, because of their proximity to the military bases and the huge, barren, surrounding desert providing sufficient deterrent.

In addition, the criminal enterprise/tribal element becomes increasingly irrelevant. Terrorist groups are able to extract the value of assets with more simple commodities, such as gold or oil, via artisanal means. Uranium is one that is unlikely to be of interest to them, given the complexities and difficulty of extraction, refinement and sale. Because Niger is such an established uranium country, terrorists lack the economic infrastructure in the region to make things happen as effectively. Global Atomic and GoviEx should have no concerns.

For the remainder of companies who aren’t so lucky, it seems another fatal incident is imminent. This is not the type of volatility that has an upside.

On a final note, let’s take a look at the UK government’s Foreign and Commonwealth Office travel guidelines for many of the countries in the Sahel region:

SOURCE: https://www.gov.uk/foreign-travel-advice

If the government is advising against all travel in most of the region, you wouldn’t go there. If you wouldn’t go there, you have to consider whether you would send your money there.

You only have to take a look a SEMAFO’s press release after the incident to see the Sahel situation for what it truly is: an utter disaster, ‘Boungou mine site remains secured and our operations are not affected. (5)’ How on earth can SEMAFO claim their operations are unaffected: a number of their workforce have just been brutally murdered! How can they possibly expect future and existing workers to accept working somewhere they are shot at? Workers are not disposable. They need to be more responsible about the danger they are placing employees in, and the potential danger they are dragging your investment into.

It’s time we opened our eyes to some painful facts. There is significant risk inherent in investing in certain companies in this region, so investors should ensure that they have done their research and are comfortable with the true risk / reward return profile of their investments . There are much more stable jurisdictions to invest in after all.

(1) https://www.telegraph.co.uk/global-health/terror-and-security/islamic-state-warning-report-reveals-jihadists-slaughtered-250/

(2) https://www.ft.com/content/eae17a5c-021e-11ea-b7bc-f3fa4e77dd47

(3) https://www.foxnews.com/world/isis-terrorist-attack-niger

(4) https://www.un.org/press/en/2019/sc14027.doc.htm

(5) https://www.semafo.com/English/news-and-media/news-releases/news-releases-details/2019/SEMAFO-Attack-on-the-Road-Between-Fada-and-Boungou-in-Est-Region/default.aspx

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.

Contact Gold – Big Plans. But Will Need Cash Soon to Deliver Growth (Transcript)

A screenshot of the popular 'Gold Miner' game.

Interview with Matthew Lennox-King, President and CEO of Contact Gold Corp. (TSX-V:C)

Contact Gold Corp. is a TSX-listed gold exploration company focussed on making district scale gold discoveries in Nevada. Contact Gold Corp. has extensive land holdings, predominantly on the renowned Carlin Trend, in addition to the Independence and Northern Nevada Rift gold trends, all of which host a ubiquity of gold mines and deposits. Contact Gold claims these areas offer ‘world-class’ access to gold. Contact Gold’s holdings are 217km2 in size. Projects range from early- to-advanced-exploration, and resource definition stage. Contact Gold Corp. is “100% focussed on Nevada and high-grade oxide gold” all at surface.

Contact Gold Corp. started the year with a share price of CAD$0.37. The market performance throughout the year has been poor, falling almost constantly (despite slight rallies in June and August) to just CAD$0.17 today. In such a good year for gold, Explorers and Developers have failed to capture this upside or indeed the imagination of prospective investors or existing shareholders. Contact Gold Corp. has a market cap of CAD$14M.

Lennox-King attended the 121 conference in an attempt to “raise the awareness profile of the company;” after all, Contact Gold Corp. has only been around for 2 years and lacks exposure in Europe. Contact Gold Corp. is at a very early stage in its development cycle. Contact Gold Corp. is looking to capitalise on a “looming lack of supply” in the gold market presumably from mid to large caps looking to building their inferred category.

Lennox-King states the company currently sits on CAD$1.2M, and has capital from institutional investors to push the project forward for the next year. Shareholders will be hoping for some kind of return soon as Contact Gold Corp. builds its knowledge of what it has. Lennox-King states Contact Gold’s USPs are the strength of its assets and the excellence of its team. The assets have a +2km of strike length with multi g/t gold at the surface. Their plan is a tried and tested formula.

There is nothing revolutionary about Contact Gold Corp.; the extensively experienced management team stands out a little from the abundance of gold juniors in Canada and internationally, but there needs to be more before investors can get excited. Lennox-King pushes the favourability and stability of the mining constituency (Nevada) along with particularly prospective geology as a further reason to believe. There is however an exciting fact about Contact Gold. In terms of remuneration, company directors receive zero cash remuneration and instead receive DSUs. This keeps more capital in the company. Management draws a salary, but Lennox-King claims to have effectively paid his own wage, as he put over CAD$1M of his own capital into the company in 2017. Lennox-King has a “way to go” before he gets close to getting his million dollars back. It’s a similar story for the remainder of the management team.

What did you make of Matthew Lennox-King? Is Contact Gold Corp. any different to other juniors? Are you a fan of the remuneration strategy? Comment below, and we may just ask your questions in the near future.

We discuss:

  • UK Investors Interested in Contact Gold
  • Company Overview
  • Business Plan and What They’re Aiming to Achieve: What Have They Been Doing for the Past Two Years?
  • Cash Position: Burn Rate, How Much They Want to Raise, and How Will They Use it?
  • What Makes Contact Gold Different From the Rest? What’s Their Future Like?
  • Team Remuneration
  • Working with the Board Members: How do They Work Together?

CLICK HERE to watch the full interview.

Matthew Gordon: Welcome to Crux Investor, we’re here today with Matthew Lennox King, he is the CEO of Contact Gold. How are you, Matthew?

Matthew Lennox-King: Very well, thank you. How are you?

Matthew Gordon: Two Matthew’s in the room. It’s dangerous. Right, so you’re here for the 121 conference in London. What are you hoping to achieve?

Matthew Lennox-King: Essentially increase the awareness profile of the company. So, we’re still a relatively new business. We have been around for two years. And while we have marketed somewhat in Europe, we’re still relatively unknown. It’s really for the profile.

Matthew Gordon: Have you got investors over here?

Matthew Lennox-King: We do. We do. Rougher, so they’re one of the funds here in the city. They own about 10% of the company.

Matthew Gordon: Very good. And how did that come about?

Matthew Lennox-King: So, I’ve known John Wang, the PM there for quite a long time. And really, he’s followed the team. He’s followed some of the things that we’ve done in the past. And essentially was looking for more Nevada, gold exposure.

Matthew Gordon: Ok. So, he’s back in the jockey. So, why don’t we kick off with a one-minute summary for people new to the story and we’ll take it from there.

Matthew Lennox-King: Sure thing. So, as I just said, Contact is a relatively new company. We were founded in the middle of 2017 based on a relatively large deal with a big mining focused private equity group out of Toronto. So, we brought the team and the capital, they brought the asset. They remain our 38% backer and we’re 100% focused on Nevada and high-grade oxide gold essentially at surface.

Matthew Gordon: Right. OK. So, you’ve been at it two years. What have you managed to achieve?

Matthew Lennox-King: We have managed to make some very high-quality oxide gold discoveries. We’ve been able to consolidate a land position in excess of 100 square kilometres right in the heart of Nevada’s Carlin Trend, to call it ground zero for gold exploration and production in Nevada. We’ve been able to really round out our shareholder base to where we have a number of both private equity and traditional buyside institutions backing us for the longer-term venture.

Matthew Gordon: OK. So, give an understanding of what your plan is. What’s the business plan here? How are you going to deliver it? Because two years, $10MIL market cap. I want to know what’s going to make this thing start moving, start ticking.

Matthew Lennox-King: Absolutely. So really, when we look at the exploration space, when we look at the gold business, we see a looming lack of supply. We see a lack of high-quality advanced projects. We know that with the team and the asset base we have while still exploration stage, that we have the ability to take something that is, yes, relatively early stage, make discoveries, develop those into resources and high-quality ones at that. With the backers or the Partners, we have, be it Waterton or some of the funds and our own capital we have the ability to both finance, which is obviously key, and drive those discoveries and deposits forward.

Matthew Gordon: So, how much cash have you got at the moment?

Matthew Lennox-King:  We’re currently at about $1.2MIL Canadian. Current shareholders equate for roughly 65% or chunky shareholders equate for about 65% of current issue and outstanding.

Matthew Gordon: You expect them to follow their money?

Matthew Lennox-King: We do. Yeah, that’s certainly been the pattern and certainly been their intention.

Matthew Gordon: Again, coming back to this model thing, it’s a fairly conventional plan that you’ve got there. You’re drilling, building out a resource. Hopefully the market reacts to that. Go raise some more money. That’s the model.

Matthew Lennox-King: Simply put. There’s nothing revolutionary there.

Matthew Gordon: Definitely nothing revolutionary there. So, why would people pay attention to your story versus… there are a lot of gold stories following a similar path. So why should people pay attention to you?

Matthew Lennox-King: Sure thing. And it’s a great question. And I’ll preface my answer by saying I agree there are far too many gold companies out there, certainly far too many gold exploration companies and far too many Canadian gold exploration companies.

Matthew Gordon: There are a lot.

Matthew Lennox-King: There are hundreds, nearly thousands. So, for us and why I think someone would be inclined or should invest in Contact Gold, one is the track record of the team. So, a number of us come back from the frontier gold lineage, if you will. So that was the discovery and ultimate sale of the company to Newmont back in 2011. We have George Solomous of Integra Gold Fame now doing an extra exceptional job at Integra Resources. Our chairman is John Doorward, who has a very long track record at Rock’s Gold.

Matthew Gordon: We like that story.

Matthew Lennox-King: It’s a great story. Not only creating value through transactions, but also building a high margin mine that prints cash.

Matthew Gordon: OK. So, you’ve got a good team, and I know that’s point one and you’ll get on to some more in a second, but you don’t always hit it out of the park. So, there must be more to it than that.

Matthew Lennox-King: Sure. And so, part of it’s the team. Part of it’s the assets. So, we’re in Nevada. I know we were just singing the praises of Rock’s Gold, but we’re not in Burkina Faso. We’re not in Mexico. We’re not in Chile, Peru, Argentina. So, there is that really that stability. There is logical, systematic permitting in place and a real understanding, a need for both exploration, but also mining development. So, it’s sort of the cultural aspect is there, the regulatory aspect is there coupled with really perspective geology. So even though gold mining has been taking place in Nevada really for well over a hundred years, they produce well over 200MIL ounces. There are still really meaningful discoveries being made to this day. And that’s not a million ounces. That’s 5, 10, 15MIL ounces. And those are made by seniors and juniors alike.

Matthew Gordon: OK. What else have you got?

Matthew Lennox-King: Well, we’ve already gotten started. So, we have a team. But on those large land positions that we have sort of 100+ square kilometres. We’ve taken our targeting methodology, which is not revolutionary, but is very systematic. It’s very comprehensive to really mitigate the risk upfront. So instead of taking a rock sample and saying we’re going to drill here, we’ve done extensive mapping campaigns, structural campaigns, multiple geophysical campaigns looking so far as age dating ore rocks through fossil analysis. And all the rest so really building up the weights of evidence. And in the cases where we have tested those targets, we’ve had fantastic success. A gram over 90 meters type thing. So, we’ve seen that this is very effective and we’ve advanced the project to the point now where in 2020 we can really be much more aggressive, chasing these targets.

Matthew Gordon: OK. So, I want to come back to the money side of things because for companies of your size, it’s all about the money. So, you’ve got your 65% of people holding a lot of big positions here. You assume they’re going to follow their money, right? So, do you think the things that you’ve just told me are enough to get the rest of the market interested in financing you? Are you quietly confident that come Q1, you can raise your 5, 6MIL bucks?

Matthew Lennox-King: Yes, I am.

Matthew Gordon: And why do you say that?

Matthew Lennox-King: Really through the extensive marketing that we have done, so while we are small, while we are new, myself and the rest of the board management, we do have those deep relationships on the investing side.

Matthew Gordon: Institutional?

Matthew Lennox-King:  Institutional. To run our business, we’re a little bit over a million Canadian per annum since listing fees, auditors and legal fees of all the rest of it. So, it’s quite lean, quite mean, certainly in this day and age. So hypothetically, $6MIL Canadian raised, that equates to roughly 15,000 meters of drilling. The asset level allows us to push through initial resources, allows us to test some of those very large-scale targets as well. Ultimately, that results in discovery.

Matthew Gordon: So, a lot of it’s going back in the ground, at the end of which you have a resource and then you can raise more money. Coming back to this million again, how do you guys remunerate yourselves? How do you pay yourselves? How confident are you that what you’re getting into?

Matthew Lennox-King: Yeah. So, I’ll answer the question a slightly different way. So, our directors get no cash remuneration. So, they get DSU’s.

Matthew Gordon: Fantastic. Explain to people what a DSU is.

Matthew Lennox-King: So, Director Share Unit’s. So, nothing trades hands beyond a piece of paper until the director leaves the company.

Matthew Gordon: Okay. I like that.

Matthew Lennox-King: It’s great. It means more capital stays in the company. As management we draw salary, though arguably I have been paying my own salary for the last two and a half years.

Matthew Gordon: How do you work that out?

Matthew Lennox-King: In our go public round, which was done a dollar per share in mid 2017, I put over a million dollars Canadian of my own capital in at that time.

Matthew Gordon: How much are you paying yourself now?

Matthew Lennox-King: I have a way to go before I draw down that million dollars. Let’s put it that way.

Matthew Gordon: People can look it up.

Matthew Lennox-King: Yeah, exactly, exactly.

Matthew Gordon: And the other directors as well, are they are doing something similar? Have they put money in?

Matthew Lennox-King: Yeah, everyone’s put in. Everyone’s put in. So, we raised our initial capital at a dollar per share in 2017. Everyone on the team put in at that point in time. Earlier this year we raised 6.85 Canadian. And most of us actually played or participated above our pro rata in those financings as well.

Matthew Gordon: Okay. That’s very interesting because I think it’s a topic with shareholders, for junior companies… when it’s going great, no one really cares. But for small companies with small market caps with no revenue, people are very interested in how the directors pay themselves. So, it’s important to be open about that. So, I think you’ve answered that, but maybe I should ask you again. Why should people be looking at you versus all the other thousands of Canadians. I want you to maybe try answer it from a different way. What does the future look like for you that you can give people a surety or confidence over that they’re not seeing at the moment?

Matthew Lennox-King: Not to compare us to the lifestyle companies, perhaps. But if we look at some of the bits of workflow or milestones that we have coming down the pipe for Contact Gold. So, our principal asset is Pony Creek. That’s right on the Carlin trend. It’s next to a company called Gold Centered Ventures that I’m sure a number of both you and the ultimate viewers will be familiar with. So, it’s got a fantastic address. We will within the month have our major exploration permit, which is called a plan of operations. That will ultimately give us 165 acres of what they call disturbance, meaning drill pad building, road-building, which ultimately gives us the ability to get out and test all these targets that we’re very excited about, but also push the boundaries of the deposits that exist on the ground already. We also have a secondary asset called Green Springs, which is relatively new to the company. It has a much higher-grade profile than Pony Creek does. Looking at grades between 1 and 5 grams per ton, oxide gold in the very shallow environment, 0-50 metres depth, over big widths, 20, 30, 40, 50 meters. So, I think one thing that does differentiate us from many other companies, the lifestyle companies, if you will, is that we actually have legitimate assets, large scale high grades and the ability, not the guarantee, but the ability, the potential, to deliver very large and or high-grade deposits.

Matthew Gordon: I’d say, a lot of CEOs would answer that question in the same way whether they have or haven’t. So, it’s difficult to stand out in that white noise environment. So, I do buy the track record as you’ve got some great names there of people who… and I’m particularly taken by John Doorwood, with the marvel that he employed there, because when I compare to people around him have done a different way, very different valuation, very different results. That’s smart. I mean, how much input do [the board] have? I know they’ve on the board, but they’re not active on a daily basis. How do you engage with them?

Matthew Lennox-King: Yeah, absolutely. So those guys, while they are on the board and they’re certainly not active management, they are very much a part of a team. So, rather than being in the granular day to day, it’s what are the overall fanatic’s? What’s our overall strategy? So, how do we take essentially the raw modelling clay that are these exploration assets, ones that we really like, but how do we actually take those and form them into something that’s going to create value down the road?

Matthew Gordon: So, that’s the conversation I’m interested in. What does that sound like when you talk at the end of each month or however often you talk?

Matthew Lennox-King: Well, absolutely. So, I speak to Johnna let’s say once, twice a week, depending on what’s going on. So, we’ve worked together for many years at this point in time. It all comes down to having multiple exit opportunities. Even at an early stage, I think you need to identify at the end of the day, it’s very rare for someone to do what Rock’s Golds done. Take an exploration asset base and drill it out, permit it, develop it, turn it into a high margin mine. That almost never happens. So, what are the other options on the table? One is outright failure.

Matthew Gordon: Start with the positives.

Matthew Lennox-King: So, that’s obviously not an option. And then the other is do you become part of a wider, solidation play. There’s always the interest in Nevada assets from the mid tiers, the majors, even larger exploration groups who are looking to round out a property position. There is the go it alone, The Rock’s Gold model or ultimately there’s an exit like Integra or Frontier experienced where you have the continued sustained success on the ground, which creates both competition in the market but amongst the larger producing company and you go out in a blaze of glory. But it’s do you make the decisions on the project, so that you keep all those options alive? And it’s fluid.

Matthew Gordon: So, how do you keep all those options alive? I know you’re going to get a bit of money and that changes a lot of things. Gives you a bit more optionality here. And it’s too early to talk about other M&A or anything like that, but you must be looking around you and seeing what’s happening there in the marketplace and there’s a lot of juniors struggling to get cash. They can’t get it. There are some good assets which are stranded in a way financially. So, I guess what you’re saying is one of our unique propositions is we feel we can get the cash to allow us to do the things that we’re planning to do.

Matthew Lennox-King: I would say that is a bit of a differentiator, one thing we were very focused on out of the gate with the company was what does shareholder base look like? Rather than targeting X, Y, Z hedge fund out of Toronto or New York, who’s going to come in, do a fancy trade and be gone. We want people who have a multi-year plan, who have a multi-year understanding of exploration, and that it’s not always a linear progression.

Matthew Gordon: Fascinating. And I think that’s a really good introduction to the story. I like it, I like the team, great team there. I want to see how you raise this money and then what you do with it. Stay in touch. Let us know how you get on. Fascinating. And in the right part of the world. So, we wish you well.

Matthew Lennox-King: Thank you very much. Appreciate it.

Company page: http://www.contactgold.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.

Nickel – 5 Things You Need to Know Before Investing (Transcript)

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

Is Nickel the new gasoline?

Selby does a great job in this interview of shining a light on the key drivers for Nickel. And interestingly we discuss financing HPal operations and how to pick Nickel juniors.

After touching on his soon-to-be public project, Canada Nickel Company, Selby delves into the nitty-gritty details of the nickel market. During his nearly 20-year tenure as a nickel market commentator, he has seen a few Super Cycles in the Nickel market. We ask about some of the lessons that investors can learn from. Nickel is a particularly volatile commodity in comparison to other base metals that moves in sweeping super-cycles. Traditionally, this volatility comes from the pricing model of stainless steel, the historical primary driver of nickel use.

Selby discusses issues pertaining to over-supply from low-quality Chinese pig-iron courtesy of rising nickel prices earlier this year. He predicted last month that year year and half of next year to be a tale of two halves. Prices are likely to fall further while the scrap inventory comes into the market, but once it is out of the way, restocking will occur and nickel should rise again.

Selby also touches on the specific geological conditions that nickel necessitates and how Indonesia’s recent halt on exports has affected the market.

He then moves into exploring the exponential nickel potential of the inevitable EV revolution and talks us through the specific structural components a junior nickel company needs to survive in a world of large Nickel producers.

Lastly, Selby moves into the field of mineralogy and gives us an insight into nickel types and classes.

What did you make of Mark Selby? Are you excited by the Nickel thesis? Is talk of the EV revolution cheap or it is going to make you a fortune? Comment below and we may just ask your questions in the near future.

Interview highlights:

  • Overview of Canada Nickel Company
  • Understanding the Nickel Market: Before and Now
  • What are Super Cycles? Where are We Now and What to Expect From Prices
  • What Drives Volatility?
  • Stainless Steel & OPEC Affecting Nickel Prices
  • Geopolitics of Nickel: On Indonesia and China
  • HPLC Projects: Who Can Actually Put Them Together?
  • Influencers of Supply to the Nickel Market
  • Demand: Past and Present
  • Junior Companies: Have They Got Any Chance of Surviving? What Experience do They Need? What Defines a Winner?
  • Nickel Types and Classes: How They Differ and What Investors Should Know

Click here to watch the full interview.


Matthew Gordon: Hi Mark. So why are you in London?

Mark Selby: With Nickel being a metal that’s on investors’ minds, we’re getting lots of attention.

Matthew Gordon: It very much is. And what sort of people are you seeing?

Mark Selby: The full range of high net worth investors, institutional funds. And even corporates who are looking for new projects to invest in.

Matthew Gordon: Please give us an overview of what Canada Nickel is. It’s a relatively new company.

Mark Selby: We are advancing the Crawford Nickel Project. It’s a brand-new discovery. Nickel has very few new discoveries. And it’s very similar to a project called Dumont, which in my previous life at RNC Minerals, we advanced from a Resource, all the way to a fully permitted, full Feasibility Study (FS), construction ready project. And I will be able to take all the learning from Dumont and apply it to this deposit and advance it, we hope quite quickly.

Matthew Gordon: You have quite kindly said you’d give us a bit of time to understand the Nickel market. You’ve been in the Nickel market a long time.

Mark Selby: Yes. I was head of market research at Inco in 2001. And continued to be a commentator on the Nickel market now for nearly 20 years.

Matthew Gordon: We’re starting a series where we’re helping people understand various commodities as they hit certain points in the cycle. Nickel is complicated. So why don’t we talk about some of the background to that prior to 2001. And then we’ll get into some supply demand type conversations.

Mark Selby: I literally joined Inco within a few days of the trough of the Nickel price in October 2001, it hit about $2 a pound or $4,400 per tonne.

Matthew Gordon: The reason I ask is, because people need to understand the cycles to understand how commodities behave. You came in at a particularly interesting time. Was that tough?

Mark Selby: Oh, it was. I knew what I was getting into. I got into mining at that time, because I saw the rise of China and that it was going to transform metals demand and we were going to go through a Super Cycle. I quickly realized when I got in that role how important China was going to be.

Matthew Gordon: You mention a phrase, Super Cycle. It’s a phrase quite commonly associated with Nickel. Can you explain to people what that means and maybe give examples of some of those Super Cycles?

Mark Selby: Nickel is a metal that has always been more volatile than a number of the other base metals. It’s big, but not very big relative to say, copper and aluminium and zinc and so forth. The other part of it is there are some real structural issues in the market that have come to bear over time. If you go back in history, Nickel has gotten to very high prices. In the late 1960s, Nickel got to the equivalent of $50 a lbs in today’s dollars. We went through another Super Cycle in the late 1980s and again in the mid-2000s, so with Electric Vehicles (EV) and everything like that and a decade of under-investment in new supply, we’re on the verge of a new Super Cycle in Nickel, sometime during the early to mid 2020s.

Matthew Gordon: You mentioned another word there, volatility. What has traditionally driven that volatility? And is it something that you see happening going forward? People talk about the EV revolution solving a lot of problems for a lot of companies, apparently? So what is it going to do going forward? Let’s start with where this volatility is going to happen and then why it happened in the past?

Mark Selby: For investors, that’s one thing to pay attention to. We are going to go through some major swings as we go in a sustained upturn. But it’s definitely not going to be a straight line. The things that are specific to Nickel that enhance that volatility, is that historically stainless-steel is the primary demand driver for Nickel. And they have a pricing model that basically builds in the expectation of future price increases. So what happens is you get buying behaviour throughout the chain where people anticipate prices going up, so they stop buying. And then when they think it’s going to roll over, everybody puts their hands in their pockets and wait for the price to come back into the market again. We’ve seen evidence of it already this year. Nickel got to $18,000 a tonne / $8 lbs in September. And as I said when we previously talked, that by the end of the year, it’s going to come off, probably 15% or 20%. And it has.

Matthew Gordon: Explain why.

Mark Selby: Two reasons. As you get a new spike in Nickel prices, two things happen. 1. Nickel Pig Iron (NPI) production. Basically, the Chinese producers have a bunch of ore stockpiles and they turn that into cash at higher Nickel prices. They take advantage of those surge in prices. ‘If I can make money making NPI, I will make NPI’. 2. And the other piece of it is the stainless-steel scrap chain, which is a massive source of feed. Scrap is something that isn’t talked about. But it is a huge factor.

Matthew Gordon: What is scrap?

Mark Selby: Scrap is a big component of stainless-steel production. For most of the stainless-steel producers in the West, more than 2/3rds of their feed is scrap material, Nickel containing materials. Now, it’s not exactly a bunch of stainless-steel knives and forks. It’s actually a blended box of material that scrap makers make to a specific specification.

Matthew Gordon: Literally from scrap yards?

Mark Selby: Literally scrap yards. And then they take 10 of this, 5 of that, 4 of that, 2 of that, 1 of that, put it in a container and that container meets the specifications that have been agreed with that stainless-steel supplier. But what the entire scrap chain does is put a little bit away waiting for high-prices to come and when it hits their number, that scrap comes flooding into the market. So when we hit a price level this past Fall, that we haven’t been to for 4-years. You basically have 4-years’ worth of people putting stuff in a corner that all comes out into the market.

Matthew Gordon: Obviously Nickel has come off the last couple of weeks. That is possibly what the cause could be or is?

Mark Selby: Oh it is, because when lots of scrap become available, then stainless-steel companies don’t need to buy primary Nickel. And so that takes more demand out of the market. And you’ve got more Nickel Pig Iron in the market, as the Chinese producers produce it.

Matthew Gordon: What is the size of each of those markets is? The pig iron and the scrap markets… and how long is it going to remain at the current pricing?

Mark Selby: Next year is going to be a tale of two halves. It’ll probably take us most of the first half of next year to get through that extra amount of scrap that’s come into the market. And that extra amount of Nickel Pig Iron. Prices could go another 10% to 15% lower from here. But, once we work through that scrap, work through those ore stocks, then we come out on the other side and I think the prices start to move higher. Once that inventory is gone, it’s gone. You end up with a big restocking phase that’s happened as people have to come back out and say, ‘OK, well, I don’t have these stockpiles anymore. I need to go buy even more primary material’.

Matthew Gordon: You’ve talked previously about the OPEC of Nickel. What does that mean? Who are the players?

Mark Selby: Robert Friedland at the BMO Conference called Nickel the new gasoline. Which I thought was a great phrase and reflects what is going to be happening as the EV’s move forward. OPEC at its peak controlled about just over 50% of the market. And, we remember all the things that countries and companies did to avoid that supply concentration at that point in time. In the Nickel market, Indonesia, the Philippines and New Caledonia will control a very similar amount of global Nickel supply. Those are 3 countries that have intervened in their mining sector. Those are 3 countries that have financial issues, revenue issues. The temptation for them to put some sort of export duty, some way to capture additional value for the country, is going to be just too tempting. And that will make Nickel assets outside of those areas much more attractive. Was oil outside OPEC a good investment in 1971-1972?; that was a pretty good trade for a good 20yrs or 25yrs. It’s going to create those kinds of opportunities in the Nickel space.

Matthew Gordon: We can’t talk about supply and not mention Indonesia. The big news, 3-4 weeks ago… This Nickel Series is going to be for people of all abilities, a lot of people will know about Indonesia. Some won’t. For people that don’t know much about it tell us about their influence on the marketplace.

Mark Selby: One of the things that’s unique to Nickel is it’s not found in many places across the world. There’re some specific geological conditions that have to occur to have Nickel deposits. So as a result, Nickel supply is relatively concentrated in a few countries. In Indonesia, particularly the island of Sulawesi, and some nearby islands, is basically the Saudi Arabia of Nickel resources. There’s a substantial Nickel resource base that was tapped in the mid 2000s as they mined the ore, shipped it to China to make Nickel Pig Iron. And now what the Chinese producers are doing is building stainless-steel plants on top of the ore body, because that’s the cheapest way to make stainless-steel. And, we’ve seen a massive increase in capacity during that timeframe. And we will need more capacity to come. That’s one of the only places in the world where there’s substantial resource reserve available to be developed.

Matthew Gordon: But they also announced that they are halting exports. That’s had a big impact. Sent shockwaves. Why did they do that? What is the impact of that’s going to be short-term and medium-term?

Mark Selby: They first started banning ore exports about 4-years ago.

Matthew Gordon: They’ve been stop-starting?

Mark Selby: Yes, it’s come and gone into the market a few times. One of the reasons why Nickel has been a difficult metal to invest in is because of some of these dynamics. What is Indonesia going to do or not do as we move forward? In 2014-2015, they put a ban in place, because when you look at the price of ore, as a percentage of the contained Nickel value versus the price of Nickel, when you ship it in ore form, the country is only capturing 15%-20% of the value. Indonesia has a finite amount of Resources. They wanted to see as much value-add happen in Indonesia. So by putting the ban in place, it was forcing Chinese companies to build their plants in Indonesia, as opposed to China. And that plan worked very successfully. Indonesia has seen tens of billions of dollars of investment in capacity. They then changed their mind, and allowed some more exports to continue, partly because the local producers, including a state-run company, PT Aneka Tambang (AnTam), was mining to provide high-grade ore to the local Chinese plants. But they were also… you can’t just mine the high-grade ore, you have to take some lower-grade with it. They were facing mountains of unsold ore that they couldn’t do anything with. Indonesia then allowed exports for a period of time. And this was supposed to continue until 2022. And what the big announcement said ‘we’re going to bring that forward’. It got brought forward to 1st January 2021. And then in the past month or so, there’s been talk of banning, but they’ve actually now allowed some exports.

Matthew Gordon: This driven by what? There’s politics involved. You’ve talked about Chinese companies building plants in Indonesia. They must hold some sway, because of employment, building roads… What are the dynamics?

Mark Selby: It does come down to local stakeholders who are mining ore, and want to continue to sell ore to China and make money that way. And now you’re going to lose that ability and that revenue stream. It comes down to balancing off those local interests versus some of the larger Chinese companies that are there, and trying to find that balance. When they banned it the last time, it was hard fast rule. There is no leakage. And by 1st January of 2020, it will be enforced. And we don’t expect any leakage going forward, because they want encourage that next wave of investment. In terms of HPL plants as well and stainless-steel plants.

Matthew Gordon: And that’s going to come from China?

Mark Selby: Yes.

Matthew Gordon: HPal is not cheap?

Mark Selby: Not cheap at all. You’re looking at $30,000 – $35,000 per ton of capacity that you want, at best. HPL plants built in other parts of the world have faced massive overruns, and have ran up $60,000 – $100,000 per ton of capacity that’s in place.

Matthew Gordon: What does that mean, as a number? If you are looking at the CapEx for a HPal plant, what number are you asking me for typically?

Mark Selby: So if there’s a $30,000 tonne plant, the best example that has been done, is by Sumitomo Metal Mining. They spent about USD$1.4Bn.

Matthew Gordon: These are big CapEx numbers upfront. There are very few people can do that. Not only fund it, but very few people can put that consortium together. The Chinese influence, or the China building plants locally and funding them. How have they structured that? Is it build and operate model?

Mark Selby: It’s different between the NPI and stainless-steel. What they’re doing with the HPL. So the NPI and stainless-steel, you have several large producers and some smaller ones in China, who take the same technology that they put in place in China. Clearly building a carbon copy of that plant in Indonesia. Cut and paste. There you’re looking at $10,000-$20,000 tonne of installed capacity. All the way through to making stainless-steel in Indonesia. So they have expertise in that particular area when it comes to HPL, that’s Hydro Met technology. If you’re making stainless-steel there is no hydro metallurgy involved. What we’ve seen in terms of the HPal plants that are being built in Indonesia today is they are joint ventures between several different Chinese partners, some of whom bring that hydro met technology, people who bring the resources. And then people were able to bring the scope and scale of their existing business to help deliver some capital in there to build the HPL plant. None of them are operational yet. There’s going to be a big TBD to see how quickly they ramp up relative to some of the other plants that have not done so well. Typically, HPal has taken longer and costs more.

Matthew Gordon: We have talked to a few Nickel companies along the way and they drop in very casually that the HPal bomb, the conversations without comprehending. Are there many people in world who can put a HPal project together, not just financially, but technically?

Mark Selby: Sumitomo Metal Mining is the only company that has really done it successfully, that delivered projects that have ramped up relatively quickly and were delivered close to budget.

Matthew Gordon: So that’s important. Because all this is for the benefit of retail. High net worth office investors. These are little red flags, which I’m interested in getting and getting out of those conversations. Sumitomo. Noted. On the Supply side of things, who are the other influences? Who are the other players in the market?

Mark Selby: If you look at the supply today, you’ve got a handful of groups that really control the biggest bulk of supply. You’ve got Indonesian production that we’ve talked about in terms of NPI and to integrated stainless. You have the Chinese Nickel Pig Iron producers that have been taking ore from Indonesia. But we’ll have to get it from the Philippines and a few other countries to continue to produce Nickel Pig Iron in China. You’ve got the larger integrated historical producers. Vale, Inco from the past, Glencore with Falcon Bridge from the past. And then the Russian producer, Norilsk. Each of those are large integrated Nickel producers. AuraMet is a smaller integrated producer and has again been around a long time. And then obviously BHP has their operations in Western Australia. So that large base of integrated, multi-asset producers who Nickel has just one of their commodities, is other important big chunk of supply.

Matthew Gordon: The thing that those guys all have in common is they are vast. Big companies with access to finance. Because Nickel not cheap to put together.

Mark Selby: Yes, it is not.

Matthew Gordon: From investors point of view. You need to so understand when you’re looking at companies you need to understand where they fit in the cycle. I think we will get to the end of this conversation. But in terms of picking winners, it’s good to understand that the thesis behind Nickel. And how companies can actually monetize what they’ve got. So on the supply side, just as a first conversation, thank you very much. Demand. It comes back to our lovely Super Cycles. Demand at the moments is what sorts of levels?

Mark Selby: Demand has continued to be quite robust. That’s one thing people underestimate about Nickel. Nickel demand is grown at an average of almost 5% a year over the last decade. For things like copper and zinc, the comparable number would be 2-3%.

Matthew Gordon: What’s that been driven by?

Mark Selby: Stainless-steel growth. Batteries are just 2% of the market today. It’s a very small amount and is going to grow very quickly and very to a very large number. All of that historical growth has really been driven by stainless-steel and to another extent, alloys and Alloy steel. And the reason it’s able to grow and will continue to grow is stainless-steel is a very small fraction of the overall steel market. So stainless-steel has a lot of properties in terms of long-life, highly recyclable, which are becoming more valuable in today’s economy. Stainless steel continues to steal share from other types of steels. We don’t expect any slowdown in stainless-steel demand growth going forward.

Matthew Gordon: Is that coming out of China as well?

Mark Selby:  Yes, China has been the massive source of demand growth, but it continues to grow in a lot of a lot of other countries.

Matthew Gordon: What are the other common demand drivers for Nickel at the moment?

Mark Selby: The other big one is high Nickel alloys. That’s one of the things with China is that it moves up its economic development curve. You start with carbon steels, you move to stainless-steels. And then when you get into other sectors of your economy that become more important, you start to use Nickel as Nickel, and things like high Nickel alloys that, are used in jet engines, gas turbines. Nuclear power plant alloys. There’s another big chunk of about 15% to 20% of Nickel demand that goes into those types of applications. And every time you’re sitting on a plane, if you look out a window, there’s several tons of Nickel in every one of those jet engines. So as tourism becomes a big part of the Chinese economy, and Chinese tourists start to fly everywhere, they’re ordering thousands and thousands of planes. That’s helping drive Nickel demand globally for those airframe manufacturers.

Matthew Gordon: So you going to stick with the Super ~Cycle because it sounds terrifying and exciting at the same time to me. Where do you think we are in relation to the next Super Cycle? We know the price is today. Where do you think it’s going to get to?

Mark Selby: I think we’ve completed leg one. It’ll be three or four legs. You have a set of conditions that sort of have to unfold over a period of time. What set the stage for Super Cycle today is and when what historically has happened the past is, you end up in periods of underinvestment. To your point on supply, in supply you’ve got a lot of large companies. Well, they chose not to allocate capital to non-Nickel projects over the last decade or so. So most of the existing production has shrunk over the last decade. The existing mines are deep underground mines, or larger scale processing plants. Those are things that you can’t, add something and 12-months and be in production. It takes multiple years to do it. 2 underground projects. Vale finally approved the Voises Bay underground project a couple years ago, but that was announced in 2017 – 2018. First Nickel is not till 2021, and it doesn’t ramp up until 2023. 5-years from announcement to full production. Glencore and Sudbury again new mine in Sudbury called Onaping Depth. The first production won’t be for 3-years, because they’re sinking a several thousand metre shaft, and then it won’t ramp up fully for another few years after that. So with that under-investment, supply can’t be flipped on quickly again. So that’s starts the set the basis for it. And then there’s, a demand surge that comes out of somewhere. So, in the late in the 1960s, when we had the big spike, it was Japan that was growing very quickly. And there had been some underinvestment in Nickel, and they couldn’t catch up quickly enough. They then overbuilt in the 1970s. And in the 1980s, you had Korea and Taiwan industrializing. And so that was driving a significant amount of new growth. And we’d come off 10yr or 15yr of low Nickel prices under-investment as people were rationalizing vastly. That was overbuilt in the early 1970s in response to the big spike in the 60s. And in the 2000s, through the 1990s, Nickel had to absorb the collapse of the Soviet Union. So that was a big Nickel producer and consumer and their consumption of Nickel dropped by 80%-90%. And you had this huge amount of new supply introduced into the market and huge amount of scrap that came into the market, as basically the Russian economy got torn down and sent its scrap to the West. That time period leading up to the early 2000s had seen a significant under-investment in Nickel capacity, and then China came along and set the spike. So in this case, we’re coming off a decade of under-investment in other capacity outside of Indonesia. And we see now electric vehicles on the horizon. Then a big lump of demand that’s coming from the EV story.

Matthew Gordon: It’s fascinating because you’ve seen the replications and so therefore there are patterns, with these emerging economies, as they grow, get ever more demanding consumers. China at the moment is. Where are they in the phase of development? Because if you look at some of the cities and its hugely sophisticated. 1.3Bn people. They don’t all live in the cities.

Mark Selby: And that’s it. The thing that’s important about China is it’s not just one country. You’ve got several different areas that are going through a different stage of industrialization. So the Eastern coastal cities are probably all very up the curve. And then as you moved into the Western Centre of the country, you get less and less developed. So there’s, other parts of the regions that are moving up the curve. And then China’s got its Belt and Road policy. They’re extending that infrastructure build out into their neighbouring countries.

Matthew Gordon: We were there last year, Chengdu, Sichuan… And it’s exciting. There is a notable difference. But it’s coming. That wave is still there. They still have a way to go. This is so much of it. So the demand side of things for China is still encouraging for Nickel suppliers. And that’s not just the EV.

Mark Selby: That’s just 5% demand growth that we’ve seen in Nickel and will continue to see for long time. We don’t see that slowing down anytime soon.

Matthew Gordon: How do companies work out where they fit in to the mix? So you’re looking at these Super Cycles happening and these growth patterns. And, all the numbers point up, the pricing points up, but it takes a while to get into production. It also takes a lot of money to get into production. But before you get anywhere near production… how does a junior company establish itself in a world of giants? You mentioned super huge companies with big balance sheets and access to cash. How does a small company get into the market and establish itself?

Mark Selby: So one of the opportunities and this is actually going to be a fundamental shift, that’s going to happen over the next 3-4yrs. Nickel processing, historically was an oligopoly controlled by Falconbridge, Vale. Norlisk. Glencore. The problem for small miners was, you could build your mine, but then you had to sell your concentrate to somebody. And unlike, copper and zinc, where there’s benchmark terms, they’re negotiated very competitively every year. There was, some fairly, take it or leave it pricing, which transferred a significant amount of that value to the smelter refiner, and away from the miner. Mining is hard. But when you end up having to give up a fairly significant share of that value to the smelter. What’s now going to be changing in the Nickel space? It’s we’re not there now, but over the next 2-3yrs is the Chinese and every other semi-finished, semi-processed material goes ahead and builds way too much capacity to meet the market demand. And then they bid up the price of the feed to a break-even number. With Nickel sulphate for EVs, a massive amount of capacity is required in Asia. They will build capacity to take various Nickel intermediates and then process them into the products that the EV market is going to need. So it’s opening up the door now for smaller sulphide mines to be able to come into production and have competitive pricing for their product in 2-4yrs. It will create the opportunity for some smaller producers to more easily come to market. In terms of laterite ore suppliers, China is going to need ore supplies, because Indonesia is now not going to be supplying it. There’s not a lot of places where you find laterite ore in coastal deposits that you can ship out of the country. But there are some places.

Matthew Gordon: Can you explain the difference between those types of ores.

Mark Selby: Yes. There are two primary types of Nickel deposits. Sulphide is what you think of in Sudbury and so forth. And so that the issue there is generally the mining is expensive. You have to build a deep open pit. Now there tend to be deeper underground mines or bigger open pit operations, processing low-grade Nickel. Once you make a concentrate, because you upgrade it from anywhere from 0.3% to 3% Nickel, up to something that’s 10%-15% Nickel. The processing of it from there is relatively uncomplicated, smelter refiner and it gets them. The tricky part for a laterite project is it is much easier mine. It’s basically a rock that’s been converted to dirt, over time. And in that process, the Nickel and Cobalt gets concentrated in the soil. You literally are just digging dirt. These mines in Indonesia, that ship ore to China, literally just dig it up, put it on a boat. The mining part of its quite simple and cheap, and the processing the mineral that’s the Nickel is in is a very complicated minerals so you have to use a lot of energy either through electricity to melt it all. And that’s how Nickel Pig Iron works. You take all that soggy dirt, dump it in a furnace and melt it and make Nickel Pig Iron ore. You have to use energy in the form of acid to break the bonds, to liberate the Nickel and Cobalt. That’s the HPL process. Those are big, complicated, expensive plants to do that. So one’s easy to mine. One is harder to mine. One’s much easier process, one’s much harder to process.

Matthew Gordon: And while you’re explaining the technical detail, cause there’s lots of talk in the market about Class 1 and Class 2 Nickel. For the audience can you explain what the difference is.

Mark Selby: There’s been a massive amount of airtime about this particular discussion. And the issue is more should be more about how many total Nickel units we have. At the end of the day, you can take a sulphite intermediate and you can make a range of products with it. You can make Nickel Pig Iron, Ferro Nickel via the roasting approach that we had a Dumont. You can take that to a smelter and to make finished Nickel products, and the same thing through the laterite source-based material. Most of that does go to make NPI today, but there’s no reason…there are producers, PT Inco, AuraMet that have produced for a long time that make a product that does go to a Nickel refinery that gets converted into finished Nickel and cobalt products that can be used for the battery sector. I think it’s very important for investors to not get caught up in that particular discussion. The Chinese are going to build lots of processing capacity to process intermediate’s junior mining companies, having processing plants at a location to make a product. That specification as we go to have more Nickel in batteries that the specification for that sulphate gets stricter and stricter and stricter. Are you going to build a sulphate plant and then continue to improve that plant to be able to make that product? You should just focus on making high quality intermediate and then you will have a market to sell that into in the future.

Matthew Gordon: You are saying Class 1 & Class 2 is a distraction for investors, because the market will resolve the economics around that.

Mark Selby: Exactly. There will be short-term dislocations. So, don’t say, today the premiums X, but Nickel sulphate premiums were $2,000 two years ago They’re down to zero today.

Matthew Gordon: So back to our small company. You think it’s going to be easier for junior Nickel miners to actually get into market, be able to, not just find Nickel, dig it out the ground, but actually get it processed in market.

Mark Selby: At a competitive price.

Matthew Gordon: It’s got to be economic. Do you think mining Nickel in the past is advantageous, or do you think Nickel is a relatively easy type of commodity to mine?

Mark Selby: Generally mining is. The bottom line, the technologies, processes that are used are similar. If you’ve run a copper mine, you should be able to run an underground copper mine; should be able to run an underground Nickel operation because.

Matthew Gordon: We’ve talked to some CEOs of commodities and who have not mined in this space, who say you don’t know what you don’t know.

Mark Selby: I would say it’s consistent with the other base metals. Each metal does have its specifics. But you can find the expertise and put it in the place.

Matthew Gordon: I said earlier in the conversation, we’re going to try and work out how we can spot winners. So on a no names. I don’t want to pick any companies out. I want to understand the profile a little a little bit. There are bulk plays. And slightly higher grades. And they each have different challenges. So bulk for me is a little bit below 1%.

Mark Selby: No, it would be below 0.5%.

Matthew Gordon: What are the higher-grades?

Mark Selby: Higher-grades would be 3-4% Nickel. You get some massive sulphide Nickel, smaller players in Western Australia, and then you get another sort of bucket sort of between 1-3% that you could mine underground on a larger scale. Again, the biggest challenge with Nickel, is there’s not many new Nickel discoveries. If you look at the project pipeline of most metals, there’s literally hundreds of gold projects. There are dozens and dozens of copper projects. In the Nickel space there really are a very limited number of projects. And, there’s been a very limited number of new discoveries. When investors start to look at it, there isn’t a big universe of Nickel opportunities with which to invest in.

Matthew Gordon: And we have the pleasure meeting a few people with large-scale . This is a bottom up in terms of resource. But they’re all struggling at the moment, because the money’s just not there for them. But if you talk to institutions or banks, what are they feeling about this? But given the Super Cycle component, how does a financier put together a package based on what they’ve seen go on in the past? Or does it not matter to them?

Mark Selby: Dumont for the first 7-years, Nickel was an out-of-favour metal. There were concerns over the long-term price. It was very hard for people to get their head around building a big $1Bn Nickel project at that point in time. But with the shift over the last 2-years, the thing that’s been fascinating with the EV sector is they want the Nickel now. And they keep asking when can we, how quickly can you double it? Can you double it a second time? They have such massive growth requirements that discussion is starting to change. And I think one of the things, that’s to me is fascinating is you’re seeing literally tens of billions of dollars of investment in battery capacity. But they haven’t necessarily done that for the metal that they’re going to need yet. They’re going to wake up to that reality soon, that if you’re not also building the capacity to provide the raw materials that you’re going to need. It’s going to make it more challenging to make the battery if you don’t have this stuff, to make the battery out of this.

Matthew Gordon: It’s quite confusing for investors, because almost every company that we speak to is pitching the EV revolution …’that’s going to change our fortunes’ and therefore invest in us. Whatever the pitch is, some are more believable than others. We’ve had people talk about the timing of all of these things. The reality is a couple of years away. And realistically not going to be impacted by the EV revolution or price in the market, etc.. Demand in the market at the moment. But the what they what they will say is. ‘Get in cheap, our stock is cheap today. Get in ahead of the crowd’. How do you pick winners? What should we be looking for specific to market? What sorts of what are the sorts of things that should be avoided?

Mark Selby: The things to focus on are… because most projects are expensive. Vale’s new underground mine Voises Bay $1.5 billion. Glencore’s new mine $1Bn. Most Nickel projects are going to require $1Bn or so of CapEx To be able to fund that kind of investment, you need large companies to be interested. I think that’s one of the one of the things to look at is, is the scale of the resource that this company has got going to be attractive to one of the majors who say, ‘I want to grow in the battery material space and I can do that through Nickel’. If in attracting investment from the EV companies, they’re not going to fund 62 little mines to come into production. No, they want larger, long-life, large scale assets that can hopefully grow with them as they grow their businesses.

Matthew Gordon: So what is large scale?

Mark Selby: Nickel is a 2.4Mt market. And if you can produce, 20,000 to 30,000 tonnes a day. That’s a decent size mining operation. So roughly 1% of global supply.

Matthew Gordon: And if you can’t?

Mark Selby: I’d say that’s one class of investment. I think the other opportunity again would be smaller scale, that is produce a concentrate. Just make sure that, they’re using realistic operating cost assumptions and realistic capital cost assumptions, in terms of if they’re restarting a small scale mine. There are some of those opportunities out there today. Some of them are good, and are at a good price. They’ll be able to come to market relatively quickly and participate in the cycle as the Nickel market rebounds. When we were at RNC, we did the joint venture with Waterton. The cash-pool that we did was to sell down part of Dumont to be able to pick up some of these smaller scale restart opportunities. So you could participate in the cycle more quickly. As opposed to having to build a big project for 2-years. I would say that it’s the world scale asset, the sort of small-scale restart or small-scale resource that you can bring into production relatively quickly and cheaply. But again, make sure they’ve got realistic operating capital cost numbers.

Matthew Gordon: You talked about Sumito and HPal earlier. If someone’s pitching to the market, they can build a HPal operation for less than $1Bn. You’ve got to ask does that makes sense to me.

Mark Selby: There’s been one successful person, and that’s the cheapest. They’ve built multiple plants. They built it in the Philippines, which is a very low-cost place to operate. If you use that as a benchmark. And then scale it up from there. If you’re in a higher cost country than the Philippines, then that cost should go up. They only made an intermediate, they shipped an intermediate product that went to their existing refinery in Japan. If someone’s going downstream and going to a final product, that should be another chunk of higher cost. Because some of the less successful plants, if you look at some of the CapEx numbers, they ballooned to $7Bn-$10Bn before they started to work even close to properly. So that’s the upper end.

Matthew Gordon: So the answer is, you would be suspicious of someone saying HPal operate, if you’re spending less than $1Bn, that would be a red flag. Thank you for that.

Mark Selby: I would say justify to me why you think you can build a better than Sumitomo Metal Mining.

Matthew Gordon: Coming back to small companies. They are going to have to find strategic investors. Because with the balance sheet to be able raise the money to be able to invest in a Nickel project. How should companies structure those relationships? Obviously, you don’t want them coming into Pubco, because there’s going to be nothing left of the company. They tend to come in at asset level typically. What do those relationships look like?

Mark Selby: The Nickel projects that will get advanced this cycle are similar deals to what you saw in the copper space. You have an Asian either off-taker or a strategic who wants access to that material? And do they come in on a joint venture basis. They provide a big chunk of the equity capital that’s required and provide the balance of the financing to get that in place, we just haven’t seen it in Nickel yet. But it will be coming.

Matthew Gordon: I’m going to just to thank you because it is. Mark, thanks very much for your time today. Really enjoyed that. I learned a lot. I hope everyone else does too. We’re going to talk about your Canada Nickel company maybe when you when you’re back in Canada. So after that would make you look forward to hearing about that. But thank you very much for helping us learn a little bit more about the Nickel market. If we can talk to you again, some future date with some questions which do come in from a lot of the viewers and subscribers and followers.

Mark Selby: Oh, very much glad to do it. I think this is a metal that people haven’t had a chance to invest in very in very many ways. So, the more educated investors are, the better decisions are going to make.


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.

Palladium One Mining – Use Your Cranium: Invest In Palladium? (Transcript)

A photo of 6 blocks of Russian palladium.

Interview with Derrick Weyrauch, President and CEO of Palladium One Mining (TSX.V: PDM).

Palladium One Mining Inc. is a TSX-listed PGE and Nickel-Copper exploration and development company. It possesses several assets: the flagship Läntinen Koillismaa PGE-Nickel-Copper Project in north-central Finland and the Tyko Nickel-Copper, PGE Property near Marathon, Ontario, Canada.

The key theme at play is strong fundamentals. Palladium One published their first Resource for the company in September: 1.2Moz of palladium equivalent (split 50/50 between indicated and inferred). Palladium has a strong foundation of demand and limited supply says Weyrauch.

Palladium is an industrial metal: 86% of it is consumed in auto-catalysts, and it is predominantly used in gas engines. Using Palladium allows for cleaner air, making palladium a modern, green solution to transportation headaches is the marketing spin. The slow decline of the diesel engine is resulting in greater future demand.

There has been a structural deficit of Palladium in the market in recent years, and Palladium One is hoping to fill that gap. The market is small at around 10Moz. There are additional applications of Palladium in dentistry and jewelry, but are much smaller markets.

Palladium One is in the process of closing a non-brokered private placement for $3.8m dollars. Renowned Canadian mining investor Eric Sprott is investing $1.2m, giving him a 19.9% ownership of Palladium One. This is only option money for Sprott as Palladium is not large market, nor a key focus for him, but it is interesting to us that he has selected this Palladium asset.

Weyrauch explains another ace up Palladium One’s sleeve: Finland is an excellent jurisdiction with “first-world geological data sets.” This area has been heavily researched and the information is publically available.

Palladium One has a brand new management team and board as of 2019. Dr. Peter C. Lightfoot, a 20-year nickel exploration veteran at Inco and Vale, clambered aboard in September. A real plus, not sure if this is his only focus though. Neil Pettigrew, a geologist with 20-years of mineral exploration experience, serves as Palladium One’s Vice President – Exploration. Weyrauch’s primary experience comes in the world of finance where his experience has been restructuring mining companies and experiencing success.

Weyrauch claims the main obstacle for Palladium One is the same as for every other junior: raising capital. Weyrauch has used the accurate historical data, obtained in Finland, to successfully push the Palladium One story. He claims the reason behind the lack of exploration under previous stewardship at the property comes from economic downturns of Palladium rather than a lack of promise. We shall see.

Palladium One’s strength comes from the fundamental promise of their flagship asset, and the fundamentally robust level of palladium demand.

Palladium One has a market cap of CA$2.94M. It started the year with a share price of just $0.04CAD, rising to a peak of $0.14CAD in April, before falling back to its current value of $0.075CAD.

A concern is the available capital to do what they need to do and getting to a point where the company understand the economics for this project. There will be questions marks around the management team’s experience in this particular field, and the commodity itself. The palladium market is small, and with the impending EV revolution, battery metals would demonstrate enormously greater growth potential in the automotive sector. By the time Palladium One would be ready to mine, would EV be taking hold?

It is a question of whether investors buy into the macro story of palladium, and can trust the team at Palladium One to deliver on an asset that has failed to be mined under several previous companies.

What did you make of Derrick Weyrauch? Is palladium worth your time, attention and money? Do you have any idea what the palladium market looks like? Comment below and we may just ask your questions in the near future.

Interview highlights:

  • Company Overview
  • Palladium: What is it, What’s it Used For and What’s the Size of the Market?
  • Company Financials and Cash Position: How Will They Finance Their Projects?
  • Finland: Is it a Mining-Friendly Jurisdiction?
  • Team Experience
  • Business Plan and Focus: What is the Plan and When Do People See Things Move?
  • Current Constraints: What is Preventing Them from Moving Forward and How are They Dealing With it?
  • What Did E. Sprott Buy Into and Why Should You Invest?

Click here to watch the full interview.


Matthew Gordon:  You’re over here for the 121 meeting a bunch of investors, I guess, and telling your story.

Derrick Weyrauch: Speed dating at its best.

Matthew Gordon: Why don’t we just start with one-minute summary for people new to the story?

Derrick Weyrauch: Okay. Well Palladium One is basically a brand-new story exploration development company and its flagship asset is the LK Project in Finland. It’s a Palladium dominant poly metallic deposit. And we just published our first resource for the company in September. 1.2MILoz of palladium equivalent in all categories split roughly 50/50 between indicated and inferred, indicated 1.8 grams Palladium equivalent and 1.5grams for the inferred, weighted average about 1.65grams. And we’ve got a 38KM favorable basal contact. And this is just covering 1.1KM of that contact. So, a lot of a lot of territory to still hit.

Matthew Gordon: Let’s start off with the obvious question: palladium, what’s it used for?

Derrick Weyrauch: Palladium is really, in my view, an industrial metal. 86% of it is consumed in the auto catalyst. It’s really a metal for providing clean air. Predominantly it’s used on the gas engine. So, you’d see it in the catalyst and basically scrubs the nitrous oxide and carbon monoxide and with increasing environmental standards for air quality, there’s more and more palladium loading and going into the auto catalysts. It’s feeding the demand. The other aspect with the Palladium is that with the demise of diesel that we see going on since the Volkswagen gate, if you want to call that or diesel gate, consumers are transitioning away from the diesel engine into the gas engine. And there’s more demand as a result of that for palladium. And there’s been a structural deficit in supply for a number of years.

Matthew Gordon: What is the size of the market?

Derrick Weyrauch: The global mine productions is about 6.9MILoz, so fairly small. There’s another 3MILoz that come from recycling. That’s roughly 10MILoz market, 6% of which goes into the auto catalyst. There are other applications for jewellery and dentistry and things like that. But it’s for the most part I consider it industrial metal and not so much on the investment side.

Matthew Gordon: You’re a relatively new story.

Derrick Weyrauch: Absolutely. People haven’t really heard of it.

Matthew Gordon: You’ve got a 3, 4MIL market cap. How much cash have you got?

Derrick Weyrauch: We’re just in the process of closing a financing of $3.8MIL so that should close in the very near future. The lead order on that was with Eric Sprott. So, he’s taking about $1.2MIL of that financing, which will give him about 19.9% ownership interest on non-dilutive basis in the company.

Matthew Gordon: You’re in Finland.

Derrick Weyrauch: North Central Finland.

Matthew Gordon: What’s that like to operate in?

Derrick Weyrauch: Finland is absolutely a fantastic jurisdiction. It’s really only been open to private mining investments since the 1990’s. Previously was pretty much state run. And what we like to tell people is Finland has first world geological data sets. The information is fantastic, lots of high-quality mapping, reconnaissance, drilling and whatnot and all that information is publicly available even the assays or rather the core, this is available as well, but because it’s only been open for exploration for 20 odd years, it’s underexplored. There’s a lot of low hanging fruit and we see that in our project, which if this data was available, let’s say in a North American context, it would have been followed up. We have our Murtolampi target, for example. We’ve got a nice 200 meter fence with the number of holes in it going down about 40 meters. All the mineralized holes, for the most part, ending in mineralization. It’s been sitting there for 20 years. Nobody’s ever poked a hole around there or done any follow up work. So, that’s just low-hanging fruit and gives us an obvious target to go after.

Matthew Gordon: Who here has exited, made money for shareholders, built companies…

Derrick Weyrauch: Well, the company’s been completely changed over the course of 2019. So brand new management, brand new board.

Matthew Gordon: Who’s delivered before?

Derrick Weyrauch: So, Peter Litefoot for example, we brought him on the board in September. He used to be the head of Project Generation Nickel Base Sulphides for Inco Valle.

Matthew Gordon: Who’s done it in an exploration company? It’s different.

Derrick Weyrauch: Well, they’re also finding some fairly large deposits in those big boy companies as well. And so, he’s one individual. Neil Pettigrew’s, another individual. He is our vice President of exploration. Also, on the board, he’s actually based in Thunder Bay. And what brought him to Thunder Bay a number of years ago was the Palladium Boom, a couple decades ago that North American Palladium.

Matthew Gordon: And what about you?

Derrick Weyrauch: Well, I’m finance guy by background. 30 years in the capital markets. And most recently, I was the CFO for Jaguar Mining. Did the restructuring there a few years ago and prior to that also was with Andina Minerals, which we sold to Rothschild Mining back in early 2013.

Matthew Gordon: Can you just tell us what the plan is, how you can do it? Who’s going to do it? How are you going to fund it?

Derrick Weyrauch: Well, really, what we’re going to do is leverage off of the data set that’s already available for the project. We have 38KM worth.

Matthew Gordon: What type of company are you going to build?

Derrick Weyrauch: We’re growing a resource base.

Matthew Gordon: That’s the model?

Derrick Weyrauch: Absolutely. To get to that critical mass where you may want to put it into operation or perhaps somebody takes a shine for the asset and decides they’d like to have it.

Matthew Gordon: Hopefully that’s attractive to someone who will take it to the next stage. That’s the model.

Derrick Weyrauch: We’re not currently configured for a development scenario, so we’re not going to fool ourselves.

Matthew Gordon: How do you finance this thing? You’re raising a little bit of money now, and that’s for presumably this seasons’ drilling?

Derrick Weyrauch: It’s predominately for the LK project in Finland. We do have another project in Ontario, a nickel sulphide asset. But the money is really earmarked for exploration in Finland conducting geophysics programs. So, IP as well is a diamond drilling program that we hope to initiate this winter. It’ll be 4-5 meters of drilling. So hopefully we have some very consistent news flow.

Matthew Gordon: Is it seasonal there? Can you drill twelve months of the year?

Derrick Weyrauch: You can drill twelve months a year. As a matter of fact, it’s a preference to drill in the winter. It’s easier to get around. You know, if you if you have a moisture in the soil, not just track right over.

Matthew Gordon: Where are you based?

Derrick Weyrauch: I’m based in Toronto.

Matthew Gordon: You’ve got a local team there?

Derrick Weyrauch: Yeah exactly. But for the most part of the stage, we’re still relying on consultants. We’re early days for us, we’ve only been configured like this for about six months with this management team and board. So, we’re still building it.

Matthew Gordon: When do you get boots on the ground?

Derrick Weyrauch: Well, we’ve had boots on the ground this summer already. So, we have people there working for us, but in a consulting capacity.

Matthew Gordon: When do people start seeing things moved? What do you think people are going to be interested in hearing next?

Derrick Weyrauch: Well, yeah. The key message is that we’ve got a very interesting property package, which is at 38km of basel contact, less than 4km of it has had systematic drilling. Based on the historical data set we get from auto compo and others, we have seen tremendous amounts of reconnaissance, drilling and sampling that’s happened along the contact. So, we know it’s generally mineralised and we know where to go. So, there’s a very good targeting that’s already taken place with only four kilometres of the thirty 38KM trend, having had systematic drilling, our job is really to expand out and grow the resources more. The Kaukua deposit where we announced the resource in September, it’s only 1KM of that 4 where you have got those ounces and that resource. So, our job is to do the geophysics, target into the higher sulphide areas along that contact and drill those out. And we envision having a situation where we have multiple resources, perhaps multiple open pit environments. We’re not really looking at an underground scenario at this point. Our resources are pit constrained, and the pit only goes down to about 275 meters. So, fairly shallow.

Matthew Gordon: How do you manage all of this? How do you watch the pennies? What are the things that are constraining you now?

Derrick Weyrauch: Well, capital is always a constraint when you’re pre-revenue. So, you know, that’s the big issue for any junior explorers. So, you have to have sufficient reason and justification to be able to raise the next chunk of money. So, what we did is we spent the summer validating all the historical information, putting a very robust resource together, pit constrained. We tripled the cut off grade from what had been done by previous operators. And, demonstrating that this is real. It’s not an aggressive estimate by any means. We only used the price assumption of $1100 for Palladium as an example, whereas the market right now is over $1700 per ounce. So, we’ve got that, we show the historical information that we have on the property and then it’s a matter of just systematically working that property. One of the luxuries that we have in this particular situation is we don’t have to come up with any black box magic and new geological theory that’s maybe a little bit out there because this project’s been looked at time and time again. This is more taking a systematic, proven approach and working your way through the process.

Matthew Gordon: Why hasn’t anyone done this before on your property?

Derrick Weyrauch: Well, the property was released by Autocompo’s. They released lots of properties and was sitting in inventory, so to speak. It was picked up by a prospector in 2006, was flipped into a Vancouver junior. They did one program of exploration at the Kaukua area, and they got caught with the downturn in 2008, 2009 and weren’t able to really survive that. The asset, then moved and some additional properties or claims were added to it by another junior out of Vancouver that were able to do one program in 2012. But they had challenges of the 2012/2013 downturn. Nothing’s happened to the project since. It’s just been sitting there and ultimately moved into Palladium One. So, there’s no market awareness, only two real programs and nobody’s followed up on the prior program.

Matthew Gordon: How do you ensure this company isn’t another statistic on the side of the road? What are the things that you need to deliver, stage by stage, to ensure that we’re still having this conversation a couple of years’ time?

Derrick Weyrauch: Well, we need to grow the resource in a prudent way and target the low hanging fruit.

Matthew Gordon: What does that mean?

Derrick Weyrauch: So, we’ve defined a resource right now. Our immediate target is to double that. And we believe we have a path to double that in fairly short order. I’m going to say it’s going to happen in the next program. That might be a little bit aggressive. But, I think in the next year, we would have a good shot of doing that with sufficient amount of drilling. We’ve got a budget now for a drilling program. We’re going to be doing 4-5000 meters of drilling. The reality is that we have to do a little bit of a balancing act. So, there’s a little bit about upgrading the historical information to be able to bring another zone into resource. But then there’s also the aspect of how much more discovery you want to get.

Matthew Gordon: Is that what you sold to Eric Sprott, 19%? But this is really option money for someone like that. But that’s the story he bought.

Derrick Weyrauch: Basically. There’s a resource growth opportunity here that’s not high risk. There’re very limited investment alternatives for Palladium. The fundamentals for Palladium are fantastic. You know, 80% of production comes from South Africa and from Russia. 90% of production is a by-product of other mining operations, whether it be nickel or platinum. As a result of that, producers have little capacity to increase palladium production to meet the demand. The commodities have been in deficit position for eight years and is forecasted to continue. The forecast for 2019 is about 800,000onz deficit in a market that’s only producing 7MILoz. It’s a big problem. And what’s also interesting is the two primary palladium producers globally, Still Water and The North American Palladium, they’ve both been acquired by South Africans taking the money and investing in other jurisdictions, whether it be in Montana or Ontario. So, it’s a market where there’s limited capacity to increase supply from the existing producers. And we think we’ve got a project that’s fairly straightforward. It’s open pit. It’s not very deep. We believe it’s going to grow a few multiples of where it is now on a systematic approach without applying huge amount of risk.

Matthew Gordon: Why should anyone look at your company versus the multitude of other junior miners or early stage companies? Why should they trust you to help them make money?

Derrick Weyrauch: It’s a great question. I think it starts off with the commodity, right? There’s fundamental demand it makes sense for the commodity. Secondly, the asset, there’s limited investment alternatives. If you’re looking for exposure to palladium, Stillwater’s gone, North American Palladium is gone. Where else are you going to invest? You’ve got a systematic, simple approach to increasing the resource so it’s not high risk. On top of that, we’re in a Tier 1 jurisdiction. Finland is a fantastic place to work. Rule of law and systems that’s mining friendly. There’re smelters locally. We’ve got power on the property. We’ve got roads to the property. It’s just a nice jurisdiction to be in.

Matthew Gordon: Ok. Well, we look forward to seeing how this story develops. Stay in touch. Let us know how things are getting on and we will see you hopefully in London soon. Appreciate that. Thanks very much.


Company page: https://www.palladiumoneinc.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.

RNC Minerals – Has The Scale & Returns That Strategic Partners Need (Transcript)

A group of four mining workers stand proudly in front of a huge hunk of gold ore.

Interview with Johnna Muinonen, President of Dumont Nickel (TSX:RNX).

Production-ready, shovel ready, development-ready. Dumont Nickel has been positioned as a free ride for shareholders, but the reality is that Dumont may hit the market at just the right point in this cycle for RNC Minerals shareholders. Completing their upgrade of the PFS means that strategic partners will look at Dumont as a shovel ready project which is fully optimised say Muinonen.

We ask what the brief is from the board. What is the timing? What do you think about what you heard? We also discuss the timing and nickel market forecasts. How relevant is the EV revolution to estimates and at what point Dumont and RNC makes decisions about the timing as to when the company monetises this asset for RNC Minerals shareholders.

Let us know what you think about Johnna Muinonen. Does she make you confident? Does RNC Minerals know what it is doing?

Interview highlights:

  • RNC & Dumont: What is the Situation? Best Way Forwards: How Much Control Have They Got Only Owning 28%, What Will They be Able to do?
  • Analysing Dumont: What is There and How Expensive Will it be?
  • Market Dynamics, Nickel and Gold Cycles: How Does One Affect the Other?
  • Opinions on EV’s
  • Value Creation for Shareholders and Dumont Potential
  • What Can They Do in This Cycle and How Will it Affect RNC Shareholders? Financing Talks: Why Invest Now and Why are People Hesitant?
  • Production Values and Cash Generation Potential

Click here to watch the full interview.


Matthew Gordon: Hi Johnna. You are here in London.

Johnna Muinonen: Yes, for LME week.

Matthew Gordon: A lot of Nickel people here for that?

Johnna Muinonen: A lot of nickel people here for that. So, it’s always a good week to come to London because everybody’s here so you get to meet everybody.

Matthew Gordon: RNC is moving to be a gold focus business, but it has this very large nickel play in the shape of Dumont. So, how’s that panning out? Because if I look at some of your presentations from June, you have about 15-20 pages on Dumont. But if you look at the presentation today, 4. What’s happening?

Johnna Muinonen: With Paul coming in as CEO we are really a gold focus company. No question about it. However, what I’d like to talk to you about today is that we own 28% of one of the largest undeveloped sulphide projects in the world. And we feel that we can add value to RNC shareholders by looking at various options for Dumont moving forward.

Matthew Gordon: That’s 28%. Waterton own the balance. What do they do?

Johnna Muinonen: In 2017, we sold 50% of Dumont to Waterton. They’re a private equity firm. They are now our partners and Dumont. Dumont is fully 100% owned within the JV. We are now 28% and Waterton is 72%. RNC remains the operator and manager of the JV. We do all the technical work for Dumont as well and then work with Waterton in terms of looking at strategically moving the project forward. Financing and marketing.

Matthew Gordon: What does that actually equate to? You mentioned a phrase ‘for shareholder value creation’, as directive from Paul. Is there a time line on that? What are the options on the table? What are you thinking about doing here? You’re only 28% shareholder.

Johnna Muinonen: We’re not getting a lot of value for Dumont in our share price. We do feel that we want to make sure that we maximize that value for our shareholders. We are looking at strategic options. That was my directive from Paul on the board when I took on the role as president Dumont Nickel that we need to look at, what could we possibly do to actually get some value for Dumont to our shareholders, to RNC. And that could really involve several different things. We’re looking at options around spin outs, potentially a sale, potentially we hold it until nickel prices come up a little bit. So, everything’s on the table.

Matthew Gordon: The G&A is quite low. Not a lot of overhead associated with it right now.

Johnna Muinonen: So, let me explain a little bit the way the JV is funded. When we got into the JV with Waterton, Waterton funded our portion of the holding costs for 5-years. So, they funded a portion of the costs. Currently, all the work that we have planned that we’ve done to date, we pay 28% from within that funding. So, currently the work that we have planned for the next, say 18 months to 2-years is currently fully funded within the JV. So, it is a bit of a free carry for RNC right now.

Matthew Gordon: Waterton is dependent on you to inform them as to what to do. They’re a private equity firm, they’re not miners. They’ve stumbled across mining assets or they’ve funded mining assets, but they’re not by any means experts. How does that relationship work?

Johnna Muinonen: It’s been a bit interesting and we’ve been doing it for almost 3-years now. We’re getting pretty good at it. What it really works is the JV is structured, it has a board. Waterton has two seats on the board, RNC has two seats on the board. We have a technical committee below the board, which is made up of, again, two people from Waterton and two people from RNC. Essentially, the way it works is we look at the work that we believe needs to be done. And generally, this is in concert with Waterton. We don’t show up one day and say, hey, we need this amount of work. We do talk through and we meet regularly to talk through what work do we think would be value added? The feasibility was one of them, about probably close to a year and a half ago, we started talking about, OK, we have a feasibility study from 2012. It’s getting a bit stale. Costs are getting a bit old. We all believe in the nickel market eventually starting to rise and we wanted to get ready for it. And so, between them and us, we discuss what would the scope of it be? How would we run it? Who would be the engineer? And then once we sort of decide that the budget and the scope and get that approved through both the technical committee and then into the board, we then go off and execute.

Matthew Gordon: That’s the dynamic between you and Waterton. What about Paul Huet, the CEO of RNC. He’s a gold guy. You guys have also got to agree about the best way forward. So, it’s great giving you a directive saying maximize shareholder value. But, as you say, this is dependent on price of nickel now, when you believe the next cycle is and what you can do in this cycle, right?

Johnna Muinonen: There’s a lot of moving parts. And right now, we’re just starting to work through that, because the reality is there isn’t a lot of benchmarks out there about value for development nickel projects, because the reality is there aren’t a lot of development nickel projects out there. it’s not like copper or gold where you can go out and benchmark a whole pile of sales purchases. So, it does become a bit more difficult to sort of really quantify Dumont’s value.

Matthew Gordon: We know it’s a big project. It’s going to require a lot of money. You’ve got to bring in strategic partners. They’ve got to bring a lot of money, maybe technical knowhow, but maybe you guys got that covered. Give us an overview.

Johnna Muinonen: Dumont is a very large scale, low cost, long life asset. It’s a billion-ton reserve. It is going to produce in the first phase, which is seven years above 33,000 tons of nickel annually, expanding in year seven to 50,000 tons of nickel annually and over the 30-year life will produce 39,000 tons of nickel annually. We are located in the Abitibi region of Quebec in a very active mining region. We have lots of local support. So, we have all of the pieces in place to be ready for the next boom. If we look at what work needs to be done to get us into production, we’re talking about a 30-months to 33-months, both engineering and construction. So, from financing, the reality is that’s the lead time. But if you look around the world and you look within sort of low risk jurisdictions, there isn’t a lot out there of scale. There’s lots of smaller operations that will produce sort of say 10,000-15,000 tonnes of nickel a year in Australia, in Brazil, in smaller mines in Canada, in Europe. However, there’s really when you look at sort of the world landscape of sulphide deposits, there really isn’t anything or a lot that’s out there in a development ready, production ready, shovel ready type build like Dumont, which is what I find exciting about it.

Matthew Gordon: Dumont’s got that. There aren’t too many others, or if there are you can count them on one hand. What are the numbers involved? Because large scale means large cost.

Johnna Muinonen: We are looking at building a 50,000-ton concentrator which is large, but it is well within the scale of operation in the area. So, we are right located just outside of Amos Quebec. We’re on an all-weather highway and we have a powerline that runs 5km north of the project. And within 10km, there’s two other large open pit mines of similar scale. So, there’s lots of experience in the region on that sort of scale of operation. But it is a large project. It is $1Bn initial capital.

Matthew Gordon: That’s a lot of money.

Johnna Muinonen: Absolutely it is.

Matthew Gordon: Is it a normal number?

Johnna Muinonen: It is a normal number. When you’re looking at building a 50,000 tons per day mine and mill, you’re looking at $1Bn.

Matthew Gordon: So, that must restrict or give you a very good sense of who you can go and talk to?

Johnna Muinonen: Oh absolutely.

Matthew Gordon: And what are they thinking? Because they’re looking at ‘can we do something this cycle?’ Are you guys ready? Or is it next cycle, in which case, when’s that?

Johnna Muinonen: If you had asked me the same question 10 months ago, people would’ve been like ‘$4 nickel, $5 nickel’, not so sure. I think over the last sort of 3 or 4 months of interest we’re getting more calls. We’re getting more calls, getting more inbound interest by various people who do want to talk. And they’re not small players. They’re people that want to talk about when does it fit? When are you ready? What does it look like? And the $1Bn is a big price tag. But when you start to break it down into pieces, you look at there will be a senior debt facility in that probably to the tune of about $500M. There’ll be some equipment financing. The equity cheque at the end of the day to pull it off, take a loan as part of that, maybe a small stream of the precious metals, potentially. The equity portion of that is probably in the $300M range. So, when you start to break it down like that, it’s not we’re going to go out and build $1Bn… We’ve got to go raise that.

Matthew Gordon: And you’re 28% of that?

Johnna Muinonen:  And we’re 28% of that. Exactly.

Matthew Gordon: And so, again, it depends on what’s happening in the rest of RNC that will determine what the cost of that money is and where indeed where you put it in, project level, presumably. How do you go about having those discussions with people about the cost of that money and how do you retain as much as possible, because your brief is’ shareholder value’, right?

Johnna Muinonen: Yeah, absolutely. Absolutely.

Matthew Gordon: You’re 28%, so you’ve got to create some shareholder value, more than it is today.

Johnna Muinonen: Which is arguably not much, I’ll admit that.

Matthew Gordon: I certainly think you’re not getting much credit for it and I think it’s partly the company has said, ‘Oh, and you get Dumont for free’, that kind of strapline, which is a little bit disingenuous’.

Johnna Muinonen: Yeah. No, no, I mean it really is. I have heard that said ‘oh and you get Dumont for free’. Well I mean if you look at it, if we look at even the two commodities, I realize we are a gold focused company, and our real focus is on the gold assets in Australia. No question about that. But in a rising nickel price environment, where you’re starting to get interest and excitement around people realizing the world’s going to need a lot of nickel in about five years’ time. Where are we getting that from? Dumont has the real potential to add value to RNC.

Matthew Gordon: Is that part of your equation then? It’s like maybe we’re be better waiting for five years?

Johnna Muinonen: We’ve talked about it. Absolutely. Because Dumont is funded within the JV. And I think that’s where we get that whole ‘oh, we get it for free’. You know, the fact is, is that we are funded for several years within the JV. And so, it is a bit of a free carry. So, it is a bit of nickel exposure, future opportunity. However, in the short-term, looking at our shareholders, looking at the focus of the company, we may want to do something sooner rather than later. And like I said, we’re not about to put up for file, so we’re not in a rush. We have cash in the bank.

Matthew Gordon: You’ve got cash in the bank. The costs of running this thing for another 5-years is negligible in the scheme of things. Not negligible in terms of dollars. You’ve got salaries, permits to maintain all of that kind of thing. But you’ll do the math and work out whether you just deal with it now, focus on gold or you wait 5-years because the upside could be because of demand story. It’s going to be better for shareholders.

Johnna Muinonen: And it’s hard because you can’t predict the future. And so, if you look at today and you say, well, maybe the best option for shareholders, do something now, to clarify the structure, be a pure gold company. Maybe that has more value now than having two assets. And being, personally, I know people say it’s confusing. Are we gold or are we nickel? What are we? So, maybe there is value, but it is a bit of a…nobody has a crystal ball. So, you can’t really say, well, in 5-years’ time…

Matthew Gordon: It’s not distracting you financially or otherwise?

Johnna Muinonen: We have a team in Australia that’s fully dedicated to the gold. That is their focus. We have a smaller team within Canada that works on the Dumont story.

Matthew Gordon: How does RNC make the decision about timing? Because obviously the gold part of the business is moving along. It’s normalizing relationships in the marketplace as people understand the business plan. Is there any pressure from what’s happening in the gold side business, which affects your decision making on the nickel side?

Johnna Muinonen: I think the gold side is ramping up. We’re coming along there, the gold side. Like you say, it’s normalizing. We’ve seen a lot of success recently. We’ve hit a couple more pockets of the higher-grade gold. So, that is moving forward. And really, with Graham in Australia and Paul, they really have that managed. Because Dumont is funded within the JV for RNC’s portion, there’s no real immediate need for us to take cash from profits in Australia and funnel it towards the nickel. So, at the moment we are under no immediate pressure to do anything about it. However, we are in an interesting nickel market right now, very much more so than when we completed. So, when completed the fees back in June, nickel was $5.50 a pound. Nickel is now hovering between 7.50 and 8 dollars a pound. The stocks on the LME are almost at an all-time low. So, we’re in a very different place. So, we want to make sure that we do look right now at taking advantage of this current nickel price to see if there’s that appetite. But at the end of the day, we’re not going to fire sale Dumont.

Matthew Gordon: Sure. But neither are you going to decide rashly, because nickel is famously volatile, right? You’ve been through various super cycles of nickel and they last a long time. And I think we talked about it, bits of scrap metal getting to the market if the prices stay high for long enough. And that’s going to again, give us a false impression of supply for a while.

Johnna Muinonen: Absolutely. I agree. If we look at right now, this recent price action is really somewhat artificially generated by Indonesia exclusively. Where Indonesia has restricted the export of ore into China to make NPI. So, originally, they had restricted as of the end of the year, but then people were starting to massively export ore above and beyond their current permits. So as of Monday, they announced that it was shut down completely. Whether or not that’s going to be permanent or going to be for a few weeks until they figure out what’s going on, we don’t know. However, it’s definitely a supply control versus demand. With this rising nickel price environment, it is going to draw out stockpiles of stainless-steel scrap of ferro nickel that has been sitting in people’s backyards waiting for nickel to go above five or six dollars.

Matthew Gordon: I think we know which backyards.

Johnna Muinonen: Yes, we do. So, we will need to chew through that as an industry.

Matthew Gordon: How long?

Johnna Muinonen: Probably, next year into Q1, Q2. It’s not a huge amount. However, there is some. And stainless is still pretty soft in terms of the demand side of things.

[17:39] Matthew Gordon: And that’s going to affect prices?

Johnna Muinonen:  It will. Absolutely.

Matthew Gordon: But it will bounce back up?

Johnna Muinonen: I mean long term, we have seen year on year deficits in nickel production into the industry. We’re on our third year of deficits. I believe next year the International Study Group is predicting another small deficit. We are seeing these deficits. We do need new nickel to come online at some point in time. And that’s really just the stainless-steel story, you start to overlap the EV’s story on top of that. I think the challenge with EV’s is nobody’s quite sure how fast, how much and when. But it is definitely out there. EV’s especially within China, within Europe, all of the large major auto companies are now announcing major plans for EV cars to come out, various models. But it’s a bit uncertain about timing. And I 100% believe it’s coming. I personally drive an EV. I think that once you drive them you realize exactly why people love their EVs. But it is coming. I do think it will probably be slower and I think if you really look at the industry on the OEM side of things, specially within the historical the OEMs, they have so much infrastructure built into building internal combustion engine cars. That is going to be a very hard tide to change quickly. They have billions of dollars invested in plants and invested in manufacturing lines. Plus, you just need to ramp up the battery and cathode supply side. There’s a huge amount of capital that will need to be spent to actually make all these batteries. It’s not just tomorrow. So, when we look at Dumont, the one thing I’m very excited about is if you look at the world of nickel and you look at nickel sulphide deposits the reality is there just aren’t that many or any nickel sulphide deposits that are currently permitted in a low risk jurisdiction that can produce something in the order of 30,000 to 50,000 tons of nickel annually for 30 years. And that’s where I think Dumont’s value really is.

Matthew Gordon: How long did the last cycle last?

Johnna Muinonen: Oh, I mean, the down cycle, the reality is that we haven’t seen a true nickel bull market since 2007/2008 really. I mean, there was a bit of a bull market 2010 when RNC first IPO’d. We sort of lucked into a window there back in 2010, but otherwise it ran up a little bit 2013. But we haven’t been in a true bull market for a while.

Matthew Gordon: We’ve seen some pretty big numbers forecast. What are the conversations internally with Waterton.

Johnna Muinonen: There’s sort of two conversations. One is how do we maximize value for RNC shareholders? And then how do we maximize value for Dumont within the JV? And what does the structure of the JV… It’s a JV between two partners.  

Matthew Gordon: Why are those two separate things?

Johnna Muinonen: Not necessarily. Maybe they get cleared up in one step. Well, in terms of ownership, in terms of how Dumont is owned. And maybe there’s options around things like potentially… to get to your point of you can’t predict the future, looking at an alternative for Dumont that separates it in some form from RNC, but potentially RNC retains an interest of some sort of upside potential. I don’t know exactly what that looks like. But maybe there’s something there where you kind of look at doing the best of both worlds. You create a clean gold company, a clean nickel company but RNC at some level retains some sort of upside interests. We are talking about that, looking at that, what does it look like? Adding a new NSR onto Dumont’s probably not doable but revamping something around that or something. But there are options that we’re looking at because that really for RNC shareholders, that would start to reduce some of these short-term risks of just selling it. It removes the management in Operation and Distraction.

Matthew Gordon: So, these are not unusual considerations in the mining space and those conversations have happened before. But if I’m a long-time, long-suffering shareholder, I am asking the question, ‘how long do you guys need to monetize this?’

Johnna Muinonen: I’ve been there almost 10 years now.

Matthew Gordon: 10 years. Mines can take 10 years to get into operation. So, this has had, because of the nature of the nickel market… I must explain here. It’s not like gold. It’s not like copper. So, you can go in fits and bursts, but people are saying, ‘just get it over and done with. I need to see something now’. What do you think it could do for RNC if you did do something this cycle?

Johnna Muinonen: If we did do something this cycle, first of all, in the short-term, there might be a potential to offer RNC some sort of initial consideration. RNC has some debt outstanding. There’re opportunities for capital spend in Australia as well, potentially. If we could monetize Dumont in some way, some short-term value. I think longer term having or retaining some sort of upside consideration is really where that’s where you get exposure to the nickel prices. The last time nickel ran, we went from $1.98 up to $25 a 1lbs. Nickel is the most volatile of the base metals, it goes the highest and it goes the lowest and it dives the lowest. So, having some exposure to that long-term, I think that that’s how we go about adding value.

Matthew Gordon: What do you think you need to deliver for this cycle to be able to put you in the position, to give you the opportunity to have those conversations?

Johnna Muinonen: We’re completing the updated feasibility study. We had to do that just because if we had not done that, we would be trying to market Dumont with an outdated study. So, that was done. The next stages: one is off the back of that study. We need to make sure that our stakeholders, which include the government, including the local communities, are all updated on the study, as well as updating things like closure plans, updating looking at our CFA’s, making sure that we don’t need to do anything there or if we do, start to take care of that. Because what we want to make sure is we build Dumont as a shovel ready project, which essentially means what is shovel ready? Shovel ready means that you have your permits in place. You have your land ownership. You have your surface options. You have your mining lease. You have your closure plans. You have your technical study up to date. So, making sure all of those things are maintained because updating your Feasibility Study. That Feasibility Study forms the basis for all of those sorts of feed forward information flow to the government as well. So, the next in the short-term, making sure that we have all of that, maintaining our shovel ready status, that is very important. A couple of things, some of the more optional ones, are really around looking at some of the value-added opportunities that we saw come out of Feasibility Study. So, in the feasibility study, we saw some opportunities around automation, truck automation, just like the EV story, just like all of the things, haul truck automation is coming along faster than… so, by the time Dumont gets into production trucks of that scale will almost all be automated. So, we want to look at that because that adds significant value. We want to look at potentially magnetite off-take. We want to look at some technical equipment choices. So, there are a few things we’d like to look at over the next sort of 6-months to look at how is there an opportunity to add more value to Dumont? Because that really speaks to investors who want to come in to say, what are my upsides? Here’s the project, what else could I get?

Matthew Gordon: But you can have these conversations now because you’ve got to leave something on the table for them because they can go, well, maybe we automate this. There’s an opportunity margin for them, right? Are you having conversations now?

Johnna Muinonen: We’ve had ongoing conversations with people over the last three to four years.

Matthew Gordon: Who?

Johnna Muinonen: The major mining companies, nickel companies. We’re talking with downstream OEMs. Battery companies, as well as trading firms.

Matthew Gordon: But some of those are more realistic like those OEMs, EV revolution, a couple years out, mining companies, they know who you are and you’re one of a handful of big, large scale operations for nickel. So, why aren’t they knocking at your door now?

Johnna Muinonen: I think they’re keeping they’re in a bit of a wait and see approach right now.

Matthew Gordon: What are they waiting for?

Johnna Muinonen: I think they’re waiting for a couple of things. I think that they’re waiting for the nickel demand side of the story to become much stronger.

Matthew Gordon: They’ve got to have a view on this, because they must be looking at nickel, reading the same reports I’m reading going, it’s all good, right? So, why not come in now? What’s stopping them?

Johnna Muinonen: A history of greenfield nickel projects that have not been successful. Now they’re much more complicated than ours. They’re very much higher risk jurisdictions, much more complicated flow sheets. Dumont is a very standard mine and mill, as opposed to some of the very complicated HPALs or a laterite projects that have been blown out the water.

Matthew Gordon: By complicated, do you mean more expensive?

Johnna Muinonen: Technically complicated, which then leads to more expensive, significantly more expensive. We are a mine and a mill. On a scale of simple, people know how to build mines and mills.

Matthew Gordon: People should be attracted to that. You’re saying people still just aren’t committing because the nickel price is doing what they think it should be doing.

Johnna Muinonen: I think that they’re still in a wait and see mode. Absolutely they have forecasts. I mean, absolutely. They think that the future of nickel is, ‘we are about to enter a bull market over the next 12-months to 18-months’. They’re keeping in touch. They’re making sure, knowing what’s up, knowing what’s happening. But I think people are waiting to see the demand side start to get a little bit stronger. I just think that with the supply restraint in Indonesia…We were at $5 a pound 3-months ago. I just think most people haven’t quite caught up and there’s still there’s a bit of a disbelief that now we’re between $7.50 and $8, let’s just have a wait and see for a bit.

Matthew Gordon: They want some consistency.

Johnna Muinonen:  Do we make it through this next quarter? Do we see the price fall back? And if so, how much does it fall back? How much scrap is really out there that’s going to come into the market?

Matthew Gordon: That’s a question of pricing. How much they are going to pay. Not a question of if, it’s a question of what’s the optimal timing for us to work out how much this is going to cost us? Is that what you’re saying?

Johnna Muinonen: I think in some ways. I do think that whole EV story… I do believe in the EV story. But I do think the question on speed that it’s going to advance and the timing. I think that most people are still somewhat bearish on some of those estimates. And so, people are still taking that wait and see. Everybody believes that the EVs are coming and that batteries are going to be a significant consumer of nickel moving forward. But timing! Is it really 2023 or is it 2025? What are we really going to need this nickel to come on board? And then with the run up that’s been so sudden and somewhat unexpected, I think people are just sort of wait and see. So, keeping in touch and making sure they know what the updates are, what’s happening.

Matthew Gordon: If someone puts a $1Bn, gets this thing built out for you. What do they expect to make?

Johnna Muinonen: If you look at the free cash flow of the project over the life of the deposit, somewhere, EBITDA $200M annually. It’s a large cash generating project. It is a low cost. Overall our C1 cash costs over the life of mine (LOM) are just over $3 – $3.22 are all in sustaining cash (AISC) per pound on a U.S. dollar basis is just under $4 at about $3.90. So, when you’re looking at projects to invest, because the thing about nickel, I talked about it before, nickel is the most volatile of the base metals, it jumps the highest and it falls the lowest. If you’re going to invest $1Bn in the project, you need to make sure that that $1Bn is going to be paid back. You have to make money.

Matthew Gordon: And there’s a cost to it.

Johnna Muinonen: And there’s a cost to it. There’s interest there. There’s a cost to that to everybody. The reason why I believe in Dumont, one of the reasons, is just because of its scale. So, we have a 30-year life project. That 30-year life allows you to take advantage of those peaks and valleys of the nickel cycle. And because it’s such a large scale, low-cost project, you are profitable along that that entire time. Any investor that comes in has that time on their side to be able to get back their investment. Because nickel, unlike copper, it does really go up and down. When you look at some other projects that are $300M – $500M to invest, but only are 10-years, you can really easily miss the price cycle.

Matthew Gordon: The cost of building the plant, aggregated at over 10 years versus 30 years. We understand that. Johnna thanks very much for coming in. Brilliant to catch up with you. We understand your brief. Monetise this for shareholders. That’s what they want to hear from you in the next few months. How you going to do it, what are those discussions are developing and what it’s going to mean for them.

Johnna Muinonen: Our focus is shareholder value. And the board and Paul have given me very clear direction around looking at what we can do with Dumont to maximise shareholder value.


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

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Aldebaran Resources – Copper Gold bought cheap with Regional Scale (Transcript)

A wide photo of the Altar copper-gold project in San Juan Province, Argentina.

Interview with John Black, CEO of Aldebaran Resources (TSX-V: ALDE).

The third company from Regulus Resources’ management team, Aldebaran Resources is an “exciting” copper-gold play based in San Juan Province, Argentina.

Their flagship project, Altar, is a large copper-cold site obtained for a discounted value from a different mining company. Aldebaran, in conjunction with precious metals mining company, Sibanye Stilwater, are currently in the process of re-evaluating the project. Drilling began in January 2019, but time must be taken for exploration and the conduction of a logging program.

While the well-established track records of the Regulus Management team will instill confidence in many a prospective investor, the financials are slightly concerning. Share price has been as high as 90, but this year it’s plummeted down to 35. The company is also sitting on significantly less cash than it was in February, which begs the question: if the value of shares has gone down, how has Regulus used its cash reserves to add value?

Another concern will be the priorities of the management team. With so much already on their plates with Regulus, is Aldebaran a fledgling project that will find itself neglected? John Black offers some reassurance; a drill program on another Aldebaran project has begun in Aguas Calientes, and the primary asset, Altar, demonstrates immense potential, with over 2.5 billion tonnes of low-grade copper-gold mineralisation, and the promise of significant zones with a much higher grade.

The Route 1 group are significant shareholders with nearly 50% ownership of Aldebaran. This can provide long-term stability but for retail investors, there will be concerns regarding such high ownership levels from a single group. Will Route 1’s priorities align with the remainder of Aldebaran’s shareholders?

What did you make of John Black? Is Aldebaran Resources a promising prospect, or is it more of a pipe dream? Comment below.

Interview highlights:

  • Company Overview
  • Company Financials and the Share Price Drop of 2/3: What Happened?
  • Getting the Share Price Up: Will it be Possible?
  • Challenges and Opportunities for Raising Money
  • History of Aldebaran and its Potential

Click here to watch the full interview.


Matthew Gordon: We recently spoke about Regulus. Want to talk about the spin out which is Aldebaran. Could you give a one-minute summary for people new to this story, please?

John Black: Aldebaran is the third company from our same management team. Our first company, Antares Minerals, was sold to First Quantum in 2010 for about $650MIL. From that, we formed Regulus, which has the exciting Anta Kori Copper Gold project in northern Peru. And then we recently identified the opportunity for another exciting copper gold project called Altar, which is in San Juan Province in Argentina. And that forms the flagship project for Aldebaran. And it’s a large copper gold project. It’s one that was drilled out and previously purchased by a mining company. It was not a good fit with that company. And we identified an opportunity to pick it up for pennies on the dollar. We’ve captured that. We’re in the process right now of re-evaluating the project ourselves. And in the very near term, you’ll begin to see us demonstrating the full potential of this project.

Matthew Gordon: Beautiful. Thanks, John. Let’s start with the money side of things. So, you’re sitting on quite a bit of cash at the moment to develop the Aldebaran project, somewhere in the region of 11-12MIL bucks, is that right?

John Black: Oh, no. We’re actually at about $5MIL on the project right now.

Matthew Gordon: OK sorry. You’re right, that’s from February 2019. Good. Just sticking with the financials, share price, it’s been as high as 90, this year’s down at around 35 at the moment. What do you put that down to?

John Black: Well, when we captured this project, what we did is we had projects in Argentina as part of Regulus Resources that we had parked while we focused on the Anta Kori project. But we realized we had value in those. But we needed a little bit more to form a solid package of projects: a solid portfolio projects in Argentina. So, when we saw the opportunity to acquire Altar, we saw the opportunity to spin out and form a new company in Aldebaran. And we spun that out at a set price that was based on what our principal investors were willing to put in to get that setup at. And then the market settled that price down into where the market saw that, at that time. It’s a new project or a project that hasn’t been seen for some time on this. It’s in Argentina, which is a little bit less of a mining country. And so, we’ve seen a natural drift off on this as many of the investors that received Antares shares as spin offs, decided that they wanted to cash those shares out and put the money to work on projects that maybe had a more immediate opportunity to. And so, we’re now in the in the phase where we’re quietly putting together the Altar project and we’ll begin to reveal that value on the project over the course of the next year or two. And we’ve also just set up to begin to drill on our Aguas Caliente phase. So, a lot of the drift off has just been it’s a new company. There are projects that have not really seen much news on, as we’ve set it up in the years, it’s kind of in that initial stage where we’re consolidating and putting everything together, but we’re now in a position to begin to put out new drill results with the Aguas Caliente drilling. Aguas Caliente is a high-grade cup or high-grade gold silver opportunity that we see in Argentina, that drilling will start on in the next few weeks and we’ll soon be able to reveal how we see the Altar project and what the potential value is. And so, it’s a great time to get into a quiet story that’s just not really noticed by the market.

Matthew Gordon: Okay. I think as denoted by me getting the cash position wrong, your PowerPoint is from March 2019. You talked about starting to tell the story and I know you’ve got a PR presence, foreign personnel on board to start doing this. And you spent clearly 6-7MIL bucks since we last spoke. So, what are you going to be able to tell people about what’s happened to date?

John Black: We’ve recently just come out with the drill results from the field campaign earlier this year at the Altar project. And so, we drilled four long holes into the system, discovered a brand-new zone on the system, and have announced some very long consistently mineralized intervals. We’re talking about intervals of 800-1000-meter intervals of a +.5% copper equivalent with higher grade zones within those. So, that drilling was done to help us understand better the geometry of the mineralization in the system. We’re currently relogging the existing 115,000 meters of drilling that had been completed previously on the project, and with the new drilling and our re-evaluation of the old drilling on this, we’ll be able to present to the market over the next several months how we see this project really looking. It’s known as a very large but low-grade deposit and we view that that is what it is. But within that, there are distinctly higher-grade zones. And we want to reveal the importance, the economic importance of those higher-grade zones within the deposit. So, there’s a lot of geologic work we have to do in the background on this. We have put some of those results out quite recently. And they’re there for those that want to look for a good opportunity like this. But we’ll be able to show that in better ways in terms of how those higher-grade zones look in the in the course of the next few months.

Matthew Gordon: Right. So, it is interesting bit for me as a shareholder, I make money by share price going up. The share price has been hit, there’s been some resetting, I think you’ve called it, also maybe some market conditions, market nervousness around trade wars. And as we spoke with Regulus, you spent 6-7MILbucks within the last six months. You’ve no sense of whether you’ve got a dollar for dollar return there or not because the share price is down. What do you think you’re going to be able to do with the next 5MILbucks, which is going to drive to share price back up, or is that just not going to be possible for you?

John Black: We wouldn’t be spending this money if we didn’t think it was a good investment. We think of this money as our own money. We’re heavy investors. And keep in mind that as management we own nearly 18% of Aldebaran. And so, we think very carefully when we put this money in. Our business model is predicated on us identifying opportunities that we can capture at a bottom in the market, either due to lower prices in the market or in the case of Altar it was a project that was held by a company where it didn’t fit, and they were willing to part with that project. So, we captured this project for much less than it would cost to drill out, what’s known on it right now. And then it takes us many times a number of years for us to either drill the project out or in this case, to partially drill it out, but partially re-evaluate and identify clearly more economically viable portions of the project. So, this project is one of the larger copper resources that’s out there in the hands of a junior, potentially available for a major mining company to acquire. Major mining companies are not finding these projects themselves. And many of them are very optimistic that there will be a necessity for a lot more copper in the future as we see further electrification of vehicles and other things that drive copper price on this. And so there will be, I believe, in the next few years be an increased demand for these large copper projects. And we’ve put our hands on a great one right now. And a lot of times when we do that, when we initially acquire, this is not the first time we’ve done this. With the Hickory project we suffered through a couple of years when our market valuations were really low, even though geologically we knew we were on a great project. The same thing happened with Anta Kori and Regulus. And now we’re beginning to reveal the value on this one. I just view with Aldebaran right now, we’re in that early stage where we’ve put our hands on something at a great acquisition opportunity on this. We’re beginning to invest the money into it to reveal, but sometimes the full reveal of that value doesn’t come until just a little bit later on in the project. But there’s not an instant X number of dollars increase in price of our business. A lot of times you’re putting that money in. You’re working on showing the full potential of a project and then that potential gets revealed when we can show the project in its full potential on that. And that just takes us a little while to set up.

Matthew Gordon: Sure. So, you’ve got 5MIL bucks on the current run rate. That suggests another five months burn, right? Is that about right?

John Black: No, it’s very lumpy in this company right now because that’s very dependent on when we’re drilling on this. And so, what our plans are right now is, is that we will be drilling the Aguas Calientes and Aldebaran, we have the Altar project, which is our flagship project, the large copper gold play opportunity. But we also have a series of other projects at earlier stages and one in particular has caught our eye called Aguas Calientes. We have very encouraging high-grade copper or high-grade gold silver material on the surface and we’ll be drilling this for a high-grade gold silver epithermal vain opportunity in the course of the next few weeks. So that’s a relatively small drill program. We’ll spend about a $1MIL Canadian on that, which will result in the potential for a new discovery on this and results to come out soon on that. And then in the background, we’re putting everything together to be able to define what the next stage at Altar project is. Probably the first stage of that is to reveal the full potential of it. So, people can begin to see what that opportunity is. And that will determine how much drilling we’d need to do. We have a lot of drilling in Altar already. We have a lot of data there. So, it may be simply having us reveal what’s there by being able to better present in a different light the information that we already have.

Matthew Gordon: So, here’s the question. You’ve got 5MIL bucks left. You outlined some of the ways you can spend the money and I guess you’ll prioritize that in the way that your experience tells you to prioritize that. You expect some of those things to have an effect on share price. If they don’t, your market cap stays the way it is. You’re going to need to raise some capital. It’s going to cost you what it’s going to cost you. How are you going to approach that? I know you’re going to tell us story in the market. Really, really well. You’ve said you’re going to start telling the market really well. How do you approach the fund raise when you’ve done these things deliverables on your three projects and the market doesn’t appreciate it yet? They’re not listening to you. Just go ahead and raise small amounts or do you try and say I need to raise 12 months’ worth. What’s your thinking?

John Black: Well, our thinking really on this we’re just as I mentioned, we’re just kicking off a drill program in Aguas Calientes, so we’d like to see what those results are. They have the potential to dramatically change the situation on the project. We will be able to better reveal the full potential of the Altar project as we complete our relogging program and can present that in a little different light. I think what you’ll see us showing is the higher-grade portions of the deposit, which are still extremely large. The current resource is over 2.5BIL tonnes of low-grade copper gold mineralization. On this we view that within that 2.5BIL tonnes there are significant zones of much higher grade that form a deposit by themselves, if you will. And so, we’re in the process of being able to put that together to reveal that. When we show the results from the program at Aguas Calientes we will show our full thoughts on where we’re going with the Altar project. We believe that will warrant an adjustment in the share price on this, which would allow us to raise capital with less dilution. But the important thing is that we move projects forward on that. So, we do have the capability of raising capital somewhat independent of the share price on this. It’s just always best for ourselves as current shareholders and all of our other shareholders to do it at increasingly higher prices.

Matthew Gordon: What does that mean? What do you mean we can raise this independent of share price?

John Black: Well, we have some very supportive shareholders. This is a bit of a different structure to a company on this in that we have a group called Route 1 that’s been a strong backer for our team all the way back to the Antares days and they’re strong supporters for Regulus and they own nearly 50% of Aldebaran. Sibanye, the company that we acquired the project from has 20% of the project and his management, and we have 18. So, it’s fairly concentrated shareholders on this. And there’s alignment amongst the shareholders on this that the important thing is to move the project forward. Ideally, we’d love to do this. Our goal is to increase the value in the company, certainly by the end game, which we view as monetization and selling the projects to a mining company at the end of this. But we’re focused more on that end game than we are on day to day on this. But we do believe that the results from Aguas Calientes have the opportunity to bring us back on the map, if you will, on this. And we believe that when we’re in a position to reveal our full vision on what Altar is and what the full potential is, that that’s likely to result in an increase share price. But there are other factors that are beyond our control, like copper price or other things that could affect us as well. So, we have some time on this. And when we’re in a position where we don’t like our share price on this, the important thing is to roll out additional information, so people can understand better what we have and to be cautious. You don’t spend as much, you don’t raise as much on this when your lower share prices. But it’s important that you keep the company moving forward.

Matthew Gordon: But isn’t that kind of your problem. Based on that maths you’ve got 12% of free-floating shares, haven’t you? You’ve got 50, 20 plus 18. Liquidity’s the issue here, right?

John Black:  You’ll notice that many of the companies that do well, this is not terribly different than some structures of, say, some of the Lundeen companies and others where you have large concentrated holdings from groups that are very comfortable in the long term on this. It almost becomes a little bit more like a private company structure on this. And sometimes when you’re in a market bottom, that’s a little easier structure to have than when you have a lot of liquidity in a tough market. Liquidity is your friend when the market’s robust and going up, but your enemy when it’s going down on this. And so right now what we focus on is setting the project up, acquiring the project which we’ve done, and then setting it up and getting ready to begin to reveal that. And as we reveal that, and we raise additional capital, that’s where we anticipate we’d be bringing in new investors and increasing that liquidity. But the nice thing is it doesn’t take too much interest in us to move us pretty quickly right now, too, because it’s there not very many shares available. So, if we deliver the results that we believe these projects will deliver, a little bit of demand will have a sharp increase in our share price.

Matthew Gordon: Potentially. I think that’s a kind of fine balance. We’ve seen a few companies over this side of the pond who’ve had too much in the hands of one or two shareholders and it’s killed their share price, it had the opposite effect. It’s a balancing act. I appreciate that. But also, it gives me an insight into how you guys are thinking in terms of taking this forward. You know, you believe you’ve got the ability through your current shareholders to get you to a point where you’re comfortable to go out to market and it put some more shares in the market. Understood.

John Black: Keep in mind one thing on this, if we had a project that required a lot more drilling to reveal the full potential on it and a lot more investment on it, that would be one challenge. But here we acquired this project under very good terms, but it’s a project that actually has quite a lot of drilling to it. The Altar project was drilled out by a junior company like ourselves called Peregrine Metals and sold to the Stillwater Mining in 2011 for almost $500MIL U.S. cash at the time. It then stalled. The company that purchased it was not a good fit for the project and it disappeared off the map. So, we acquired it for much less than that. So, you know, right now, when you take a look at our market cap and the size company we have, we have the option to turn 80% of a project that at one point was valued in cash at over nearly $500MIL U.S. and when the copper market was robust. If we returned to that type of a copper market on this, we believe we can show that there’s more to this project than was even known then. And much of that we can do from simply relatively low-cost work to re-examine this and recast the information that’s there so people can better understand that this is not simply an enormous low-grade deposit, but there are distinctly economically more attractive higher-grade zones within it. That’s what we want to reveal to the market. That won’t cost us too much money to do that. That’s a lot of geologic work. We did spend some money this year for the drilling to gather information to better evaluate what we have. But we’re now in a position where we can reveal quite a bit of information about this project without a particularly large spend on it to go forward. And we believe with that information on the table, we’re likely to see a different valuation.

Matthew Gordon: So how much money has gone into this company in total then?

John Black: The way we structured this is as I mentioned at Aldebaran was a project that was acquired by Stillwater Mining for $487MIL in 2011. We acquired the option to pick up 80%. So, we had the option to earn 80% of the project for $15MIL U.S, which has been paid and for Sibanye, which was the new owner of the project after they acquired Stillwater, has 20% of Aldebaran as part of the process. And we need to spend $30MIL over the course of 5 years to acquire 60% and $25MIL additionally to go to 80% on the project. So, over the course of the next 8 years, we need to spend $55MIL total to acquire 80% of the project. We’re well ahead on this, we’ve just completed our first year on this and we’ve spent approximately 7 or $8MIL into that work commitment. So, we don’t have to work at that pace right now. We can a little slower as markets a little bit slower on this. But we anticipate we’ll spend that money to acquire the 60% interest within the next four years. So, we have we have time to do that. What we need to do now is to better demonstrate to the market what the potential of this is first. And then we anticipate over the course of the next few years, we’ll see, most likely, an increased interest in these type projects from major companies. And that will likely come as a predicted supply gap in copper emerges and we start to see copper prices move up. And so that will provide us a better environment to raise money at less dilutive costs.

Matthew Gordon: So, you don’t feel you’re under any pressure with regards to money as it stands because you can control the pace at which you move forward.

John Black: We can control the pace of it and we have good supporters on it and we’re on a great project with much more value than is currently revealed in our share price on this. But we don’t want to spend all of our effort just trying to get that up in the short term. We really want to set the fundamental situation so that the end game is there. We focus on that maximum value at the point that we would monetize this project by selling it to a major mining company.

Matthew Gordon: Okay. Look John, I think that’s a great reintroduction to what’s going on with Aldebaran. Fascinating. I think if people can pick shares up, might be worth having a look. Well, stay in touch. Let us know what’s going on. Sounds like a bit more drilling to happen as those results come out. Give us a call. Let us know how you’re getting on.

John Black: Yeah. Keep an eye on these Aguas Calientes. That’s a second project in there that has potential to emerge as something pretty exciting on this. And then the real fundamental part of the company to watch is how we reveal that value in Altar. And we’ve discussed a little bit on where the share price is right now. But in our previous two companies, we suffered through these same points where even though we knew we were on a great project, a lot of times takes a while for the market to see that. And the important thing is, is that we will be able to move the project forward. We will have access to the capital we need. We’re no risk of concerns that way.


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

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