Serabi Gold (LSE: SRB) – Ready or Not At All, So Close Enough to Taste It (Transcript)

Interview with Michael Hodgson, CEO of Serabi Gold (LSE:SRB, TSX:SBI).

Off the back of yesterday’s press release, Mike spoke to us to give us a bit more colour on the details about the Public Hearing and the results of the first months test on the new ore sorter.

Interview highlights:

  • 1:30 – Public Hearing: A Positive Outcome
  • 3:43 – Ore Sorter: How Does it Work?
  • 9:56 – Focus for 2020: Exploration, Drilling and Building Value

Click here to watch the interview.

Matthew Gordon: Good. We saw the press release this morning, thought we’d try and catch you, and it sounds like we caught you at a good time, you’re off to Brazil tomorrow. So, why don’t we talk about the public hearing first of all which you told us about last time we spoke, but it seems to have gone well?

Mike Hodgson: Yes, yeah, I mean, you don’t get a definitive answer in the actual public hearing itself but you obviously… it could go very wrong on the day, so I mean if you have a positive public hearing in terms of like, everyone sits down and listens and all the stakeholders have the conversations and are all heard over 6-hours and there’s no… you know, it’s all done in a cordial manner, which is exactly what happened, you can’t have anything more.

So what we actually have there. It’s chaired by the State Environment Agency, called SEMAS, and they chaired it and all the various stakeholders had their say and we had pretty much overwhelming support, which was great. So they will now go away and digest all of those comments, people’s concerns, people’s wishes, people’s wants, and they will then make a recommendation to a governing body which is called KOHIMA. They’re the guys that actually, ultimately, either ratify it and take it to the board. So they’ll listen to all of the, as I say, all the comments and concerns and they’ll come back, hopefully, with an LP for us, we hope within the next sort of six to eight weeks. That’ll be a great result, we’ll be delighted to get it done so quickly.

Okay, it’s slipped a bit compared to what we hoped, but you’ll remember we had to live through all of those tailings dam problems of 2019 with Brumadinho and how that affected everybody in the mining industry in Brazil. We’ll obviously get the EIA resubmitted and the public hearing still early in 2020 and seemingly gone through in such a positive climate in a way. Yeah, I think we did a really… we’re very pleased. Very pleased.

Matthew Gordon: Well I guess you had the benefit of obviously Palito, existing business, running without any issues and you obviously had the support of the local community from that, so that all helps. And I think people mustn’t underestimate the importance of this, and we’ve certainly spoken to a few companies in the last couple of weeks who are suffering from not being able to get through the process, as it were.

Let’s talk about the ore sorter, because I’ve watched the video which kind of explains it all to me and we’ll put the link up above here now so people can go to that. Can you tell us the impact? You’ve been running it for the best part of a month and it seems to be delivering quite well. I’m looking at some numbers here, so you fed in 1,266 tonnes and you’ve identified 1,076 tonnes of waste, so that’s significant.

Mike Hodgson: Those numbers aren’t really terribly indicative. I put them in there because obviously we switched it on just over a month ago and we’ve been putting through some pretty miniscule tonnages, and we’re just playing around with it really, trying to find the sweet spot. And we’re using different types of ore. Some of the ore is actually sort of more massive sulphide ore. So really, I put those numbers in there to show people, hey, you know, it was a pile of rubbish, basically, sub-economic, very uneconomic material.

We passed it through the ore sorter and we just pulled out 200t at, like, 7g/t and the rest of it is a big pile of waste, and that just shows what this thing can do. And the video shows it, that it’s going in, you know, it’s crushed material which is 80% waste rock and if you look at underground face, underground, if you just eyeball that you can see, well hello, 80% of that face there is waste and 20% of it is a band of ore. That’s exactly what the ore sorter does. When that thing’s all been crushed it can actually eliminate all that waste and just scavenge out that sort of high-grade band of the sulphides where the Gold sits, and that’s what it does.

So I think we can see straight away it’s a very… it’s great at just scavenging out the ore out of the waste. And we won’t put our best material through it because it’s not an exact science, there are always going to be losses. Like, you will get ore going into the waste system and you will get waste going into the ore system, but I think the best way of describing it is, it is a waste remover. That’s what it is, it’s a waste remover and it’s an ore scavenger.

So we are only really using it at the moment and will be only using it until we’ve got this absolutely nailed, we’ll only be using it on our lower grade ore development, which is where we’re just driving along the belt in its most diluted materials, that’s the material with all the waste rock in, and it’s great for just recovering the ore out of that material and not having to pass all that stuff through the process pond which up until now had been completely constipating our process plans with this material.

So if we get rid of that, first of all we save ourselves, just by getting rid of that material and going for 500 tonnes a day at 7g/t, 400t per day at, say, 9g/t, you’re going to save yourself about USD$1M a year at cost which means the payback on this machine is about 18 months. But, more importantly, what it will do is it will liberate 100t a day of free space, which we can then use again to add more high grade or make our little process plant produce, instead of 40,000 ounces, which it can do today, the same plant with the same size and through-put can do 50,000 ounces. That’s the beauty.

Matthew Gordon: That’s truly remarkable. But it doesn’t actually identify Gold per se, does it? Explain to people what it’s actually doing? They can watch it in the video but I thought it was interesting to…

Mike Hodgson: Very, very important, the distinction. When you look at that video you see that yellow shiny stuff, people I know would be very excited if that was a band of Gold. It’s not. That is a band of sulphides, mostly charcoal pyrites which is a copper sulphide and pyrites which is an iron sulphide. And all of our Gold is very fine-grained contained within those sulphides. So, our ore sorter has two metals that actually split differentiating between ore and waste. What you’re always after with any type of ore sorting, whether it be diamonds or, as we’re doing, Gold, or whatever, you need contra between your ore and your waste, dark contrast. So it won’t work terribly well on a disseminated ore body? On an ore body like ours, which is very sharp, it will. So, what it’s actually doing, you crush it down to about a quarter of an inch, half an inch, so you can see there, an inch to half an inch, and you pass it through either a colour sorter or an x-ray sorter. So, let’s take the colour sorter first. In our case as you’re dealing with video, pink-based and the rest is ore. So you can just simply say, right then, I want to collect anything that’s not pink and it will just literally identify any stone that’s not pink and throw it off on to different belts as you saw in the video and the pink, the granite, will just fall off the edge as waste. Alternatively, you can sort on atomic density which is where you use the x-ray sorter, so it’s a piece of equipment not dissimilar to what we have at airports, you pass through it, and it’s actually penetrating every stone on 1mm centres, so it’s hugely detailed. And there’s a 3D sample so every stone gets analysed for a percentage or its atomic density and, of course, the granite rocks are much less dense than the sulphides and the ore rocks so, again, there’s a big contrast in density between what is the ore and what is the granite. So, again, we can sort on x-ray as well. And, if we really want, we can’t do it at the same time but we can – we haven’t tried that yet – but what we can do, we can sort once on, say, density, save the pile, and then you can pass the pile again and sort on colour. So, the permutations are endless and we’re just at the beginning of this journey really. But we’ve just simply by sorting on x-ray. It seems to be brilliantly separating the waste and putting some more add to the waste. The closing shot of the video you see that little pile and the big pile. We pulled that little pile. That’s now a big pile and before it was just lost in that big pile.

Matthew Gordon: It’s amazing. We were talking to a lot of companies about bringing ore sorters in to improve their productivity and throughput. As you say, the savings are, or can be, immense. You had a great year last year in terms of the share price. Obviously, shareholders, the share register must be quite pleased with your performance. I know you’re excited obviously about the ore sorter here but you’re obviously more excited about bringing Coringa into production. You’re off to Brazil tomorrow you tell me, before we started the call. What are you going to do?

Mike Hodgson: Well, we’re closing in on our sort of three-year, we’re doing, we’re updating our mine plans and our resource estimations. So that’s basically what I’m going down there to actually sort of oversee, have a good look at that. We’ve got some exciting drilling going on at Sao Chico. I just to make sure we can as much of those results into this resource estimate we’ve just done There will be an update coming out too some very couple of intersections on the further step outs yet. That’s not probably get the results on, quite, even the official results, but certainly it’s looking very good. We’ve got some very nice-looking introspection, visual at this moment in time so I’m going to be looking at all of that.

Coringa, a year, well that’s obviously going on very well. We’re, as you know, we talked about this last time, we have Greenstone the convertible loan note coming in at the end of next month, and that will, of course, be the catalyst to us to start work at Coringa, start on the decline and getting on the ground. And, again, the exciting thing about that is getting underground, getting the bulk sample done or getting that earth moving, see how that responds to ore sorting as well. So, I’m completely sold on the whole thing. I mean I must admit when it was all, when we all talked about it, it was about two years ago the scary thing was it basically going to amount to USD$2M on something like this was you know… Well, I don’t want it just to be an ethical success. We really hope it works in earnest. I’m completely sold. I think it’s a paradigm shift in this part of the world with all of its sulphite hosted Gold deposits. It’s going to be terrific.

Matthew Gordon: I think that’s what the shareholders bought into last year when the share price was moving rapidly up having been stagnant for so long. A couple of million bucks and a payback of, as you said, less than a couple of years, 18 months to 24 months. Fantastic. But, also the ability to double your production and get up towards that wonderful 100,000 ounce a year number it has got to be in the crosshairs for you. I mean Coringa could get you up to 80,000 and with your exploration at Sao Chico you’ve got to be aiming higher, haven’t you?

Mike Hodgson: Yes definitely, I think the ease of mining at Sao Chico ore body, that’s why we put a lot of effort on exploration now. We obviously get a bigger bang for our buck with our exploration work that we do there. If we do get a bit of a tiger by the tail there and, at the same time, the space that we’re liberating by cleaning up the Palito ore creates more space to put through more Sao Chico ore, but we’re not dismissing the possibility of being able to sort the Sao Chico ore as well. It might be a different way of doing it, but we are beginning to get some pretty good results on that. So, it’s three deposits. Coringa, Sao Chico and Palito as being sortable in the end. We’re going to squeeze, I was always saying, my comment there, low-grades and tonnes cost, we’re always going to try and get the grade up as much as possible and not just chase scale but chase quality so we can actually get to, you know, 100,000 ounces with mining as high a grade as possible so we don’t actually have the enormous through points that a lot of 100,000 ounce producers have to have to get that level of production. That’s the name of the game.

Matthew Gordon: And that’s the focus for this year or, have you got more surprises on the horizon?

Mike Hodgson: I think if we get a nice big resource increase at Sao Chico and we get successful or we get on the ground at Coringa and we bring back a bulk sample and that works very well with the ore sorter and Palito’s achieving its 45,000oz, I’d be very happy with that outcome.

Matthew Gordon: Very good. Thanks very much. I appreciate you taking our call with regard to this morning’s press release. We were keen to speak to you because it was one of the stories, success stories, of last year, certainly in terms of share price, which is the name of the game after all. So, we’re kind of keen to see how you get on this year and see if you can repeat that success. Stay in touch.

Mike Hodgson: I will Matthew. 

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.

Pan African Resources (LSE: PAF) – Be-Be-Beating Hard Times, That is my Theme (Transcript)

Interview with Cobus Loots, CEO of Pan African Resources (LSE: PAF).

These guys get things done. Mining is never easy, mining in South Africa is far from easy, but the management team at gold producer, Pan African Resources, keep finding a way to get things done and are consistently hitting targets. Pan African is well on its way to becoming a mid-tier gold producer targeting 185,000oz per annum this year. Loots ran us through the highs and lows of the last 6 months, including the recently released operational update.

Pan African Resources has a share price of GB£0.125 and a market cap of GB£278M. It is listed on the LSE.

The key highlights from the update?

  • Pan African is on track to deliver the full-year production guidance of 185,000oz.
  • Group gold sales increased by 14.7% to 92,941oz (2018: 81,014oz).
  • The Evander 8 Shaft Pillar project development is progressing according to plan, with steady-state production planned from March 2020.

We like the tailings slant on the business. Green is very fashionable right now. Barberton Tailings Retreatment Plant produces a steady stream of gold, c. 25,000oz per annum, and the Shaft Pillar at Evander, an area of developmental focus in the near future for Pan African, could provide 20,000oz, rising to 30,000oz+ “in the years ahead.” Pan African is now mining more economically due to a strategy change: mining at the shaft rather than at deeper levels. The result is an intended sub-US$1,000 AISC for the Pillar project. Solid numbers, and in line with the rest of Pan African’s other operations. Elikhulu Tailings Retreatment Plant has had a mining feasibility study conducted that is now being independently vetted by a third party, with the view to expand it to a full feasibility study. Loots says it looks like c. 90,000oz per annum, with a 9-year life-of-mine, rising to 20 years with further resource modeling. By utilising existing infrastructure, Pan African can keep costs down and get things going quicker. This is still a little way off but could be a good addition to the portfolio.

In terms of dividends, Pan African recently released its first dividends for years. Loot states the company was recently one of the highest yielding gold dividend shares in the world. Loots states that he wants to get back there. Let’s see how things turn out.

For now, it’s full speed ahead developing the projects, overcoming issues pertaining to jurisdiction, community and environment difficulties, and getting the share price where investors will no doubt want to see it.

Interview highlights:

  • 1:34 – Operational Update: Overview of Performance Results
  • 2:45 – Producing as Expected? A Run Through the Projects
  • 8:27 – AISC and Debt: What is the Current Position and What’s to Come?
  • 9:39 – Dividends: Keeping Them Going
  • 12:40 – Troubles in Jurisdiction and Community Issues: How Will They Ensure a Smooth Run of Operations?
  • 16:14 – What Should We Look Forward to from Pan African Resources?

Watch the interview here.

Matthew Gordon: Happy New Year. I haven’t spoken to you since before Christmas, so how are you?

Cobus Loots: Thanks, Matthew. We’re good. We’ve been busy as you might have seen from the operational update.

Matthew Gordon: We have, that’s why we called you. It seems like you have had a good last 6-months. You are on target to hit 185,000oz; that puts you very much in the mid-cap territory for sure. Are you pleased with your performance?

Cobus Loots:  Yes. We believe that, certainly the performance for the first 6-months provides a solid base for us to have a very good financial year. So Elikhulu performed very well, so we produced almost 30,000oz. We are well-positioned now actually for the next 6-months to increase that to go to almost 65,000oz for the full year so that is a great performance. Barberton was down slightly, mostly as a result of underground. But we have more flexibility now so we expect a much better 6-months, going forward from Barberton. And then also, and what I think is very positive, the work that we have done in the Evander 8 Shaft pillar. This project has gone from being a liability to actually now being poised to generate attractive cash flows going forward for the next 3-years.

Matthew Gordon: Okay. If you don’t mind, can we just break down that 185,000oz that you are going to be producing. You’ve got your existing Barberton and Elikhulu, both on the tailings and the mining front, and they are going as planned? The numbers are as targeted, first of all?

Cobus Loots: Well yes.Let’s start with Elikhulu first of all which we started last year: it’s a world class project. It is USD$130M that we put into the ground. It retreats old historic mining tailings, and it has a life of 12-years at present. And it is producing at an All In Sustaining Cost of USD$650 per oz or below. I think what’s more is that we are cleaning up legacy liabilities so it ticks the box in terms of ESG, looking after the environment, etc. So it’s a great project. It’s incredibly safe. We don’t have as many employees as what we would have had underground. So, we are very happy with the performance at Elikhulu, and as I said, we expect Elikhulu to do even better over the next 6-months.

And then the Barberton complex, which is also a world class tailings business, the BTRP, we do have about 20,000oz from the BTRP at Barberton and then 80,000oz at underground. So that gives us another 100,000oz per year, from Barberton. And then as I said, the Pillar, which is a project that we commissioned at the moment at Evander, that will give us 20,000oz which then actually becomes 30,000oz and more in the years ahead.

Matthew Gordon: Okay. And you actually refer to that as a former liability. Why was that?

Cobus Loots:  We curtailed operations at 8 Shaft, so we were mining 24 level, which was very deep. With a lot of infrastructure, a lot of logistics, a huge number of employees. So we curtailed that business about 2 years ago. We actually shut it down. And then the sort of question arose: what do we do with the remaining resource? We could have quite simply terminated operations at 8 Shaft, and that would have been the end. Instead, we said, let’s have a look at this Pillar project, let’s see what sort of Gold we can get out and over what sort of timeframe and at what margin, importantly. And that’s how the 8 Shaft pillar project has happened.

Matthew Gordon: Right. So basically, it was costing you a lot of money to get Gold out of the ground. It was becoming less and less profitable, having sunk a lot of money into the ground there as well. So you are now mining more economically as a result. That’s the point of what you have done?

Cobus Loots: Well, we are ceasing operations at the bottom levels which are very expensive and we are actually starting mining right at the shaft. So we have guided, we have anticipated that the all in sustaining costs of this Pillar project to be below USD$1000, which is very attractive. And that’s in-line with the rest of our operations.

Matthew Gordon: And Cobus, can I just ask you about Egoli, because you have obviously talked about the MFS, the mine Feasibility Study has been finalised now. Where are you at with that? What should we be excited about?

Cobus Loots: Yes. It has been a very interesting project from our perspective, as you said, the Mining Feasibility Study has been done. We are actually getting the study independently vetted by a third party and then they are expanding it to a full Feasibility Study, the results of which will be available pretty much at the same time as our interim financial results.

Matthew Gordon: Right.

Cobus Loots: And yes, circa 90,000oz per year, initially life of mine 9-years but if we model for the resources, it’s anywhere from 15 to 20-years.  At a fairly limited capital number for a project of this nature because of the fact that you are utilising existing infrastructure mostly: there is a processing plant, it’s operational on surface, we have the vertical shaft that’s all done. There are turns, certainly, currently, even a conservative Gold price to be attractive. So I think, you know, watch this space in terms of Egoli and our next steps when we release our interim results.

Matthew Gordon: Okay, when does that actually…how does that ramp up? How quickly does that ramp up?

Cobus Loots: You know, we haven’t yet pushed the button on development. The key is to finalise funding. And we what we have said to shareholders, we will not do the funding in any way that is dilutive. So we are looking at potentially bring in a stream or an equity investor of sorts. Certainly, the project has dig capacity in our view also. Once we are happy with the Feasibility Study and the fact that we can manage the risks, and it is a project that we need to be doing, from a pipeline perspective, we will finalise the funding and we will certainly add a time frame in terms of development.

Matthew Gordon: Okay. So the timing is not imminent? Because when I asked you earlier about, have you plans for adding debt for this year, you said, no. So, this is not a 2020 debt solution. You are saying that will come after that?

Cobus Loots: That’s right. The ramp-up period is three years, and most of the capital is spent in the later years. And if we potentially look to get in an equity investor, or some other form of finance, then that sort of takes off the burden, certainly from ourselves. But in terms of existing operations, certainly, we will be set in terms of debt, that holds true so we are not going to look to gear up the existing operations to fund a project like this. I think that it will stand on its own two feet.

Matthew Gordon: Okay. So you have been looking at the AISC and looking at ways of reducing it. I mean, I guess it is pretty standard: getting somewhere between USD$950 USD$1,000 is where you want to be, especially in today’s Gold price. So you are obviously throwing off a lot more cash, but you’ve also had to finance a lot of the development work with debt so what is the position on that at the moment?

Cobus Loots: Well, for 6-months to December, we have managed to de-gear the balance sheet and we have guided that in the year ahead, we should see a dramatic decrease in our gearing levels. You know, that’s a product of the Pillar coming into production, so we will be steadily instating the Pillar in March. It’s a product of Elikhulu performing at a steady state and the operations at Barberton performing. Certainly, what’s helping us also is the Gold price which is performing well in US dollars and even more so in South African Rand which is the currency that we look at.

Matthew Gordon: Yes. Okay. So, if I may just touch upon this here; a lot of mid cap and a lot of large companies, they tend to borrow money, then plough it back into the ground and kind of forget about shareholders. You issued your first dividend for a couple of years recently, what are your plans for keeping that going? Are you going to give back to long-holding shareholders in your company? Or is it the plan just to reinvest into the ground?

Cobus Loots: Well, if you look at our priorities in terms of how we apply capital, we need to continue to invest in our assets. But in the past, we have managed to do so, and then also pay an attractive dividend. Certainly, up to quite recently, we were one of the highest yielding Gold dividend shares in the world. And that’s where we’d like to get back to. And I think the operating environment in terms of the robustness of our assets and the performance, and then also the Gold price, should assist us in resuming even more attractive dividends in the future. Clearly, we have stalled some of the debt that we took on to fund Elikhulu, that’s still on the balance sheet, but as I said, we anticipate that number, in terms of the gearing levels, to come down quite dramatically in the year ahead.

Matthew Gordon: Any more plans for any more debt?

Cobus Loots: Well no, there’s no need for us to incur any more debt. Also, if you look at the sort of projects that we undertake now, one obviously looks at all the return metrics including internal rate of return, MPV etc, but payback is also very important for us, so how long does it take for us to get our money back and that’s where projects like Elikhulu where regionally, we were costing a payback of 4 years on a USD$130M odd, and at this Gold price, I actually expect the pay back to be sooner. So those are the sort of projects we like to do.

Matthew Gordon: Again, it’s just trying to understand the thinking of the management team here, because you’ve got options of paying it back in 4-years or paying it back quicker, paying dividends, you know, you have got the choice of what you do with that money. Some companies like to be completely debt-free as quickly as possible; others like to maintain some kind of leverage and utilise that spare cash elsewhere to develop and grow the business, where’s your head at?  

Cobus Loots: Well look, obviously, a mining company should not be over-geared and they should have a conservative level of debt. That’s really where I think we will end up in the next 6 months or so. It also doesn’t make sense for us to have no debt. In our view, it’s not efficient from a capital allocation perspective. We think that we can pay a significant, pretty much all of our debt in the next 12 to 18 months in resumed dividends so that one is not at the expense of the other.

Matthew Gordon: Okay. So dividends; they are still in the pipeline, your shareholders will still be receiving dividends as you continue to develop the business and grow the business – perfect. Can we talk about something else though? You did highlight them and I’ll give you credit for this; you don’t shirk or hide from this, you have talked about a couple of things: there have been some community issues which have affected productivity, and also, more recently, some power issues. I know mining is mining, and it is tough, but what has gone on there and will it reoccur?  

Cobus Loots: Yes, sure. I think we have demonstrated the ability to operate successfully in South Africa. We have had community unrest and that has affected, as you pointed out, the Barberton operations in the last 6 months. We had very serious power issues with ESCOM, our South African power and utilities, in December. On top of it, we also had probably the weakest December in terms of rainfall that I can recall for the last 20-years, so that will also have affected operations. So, you know, the bottom line is that one has to plan some level of disruption to your operations and you have to robust assets that can withstand these sorts of issues, and a management team that is proactive and can anticipate when they can and then deal accordingly.

So yes, South Africa gets quite a lot of bad press I think in terms of the operating environment, and a lot of it is justified, but as you said, most mining jurisdictions have their issues.

Matthew Gordon: They do, and like I say, I give you credit for not shirking away from it or ignoring it, but like I say, ESKOM for instance – what was the issue? Is it going to reoccur? Because I look at the, again, the information that you have provided, the prices have been going up and up, which affects your margins, but how do you engage with them? How do you have conversations that give you some sort of certainty about what the future looks like?

Cobus Loots: Well sure. ESKOM has been more of an issue at Evander, our underground business, and fortunately there, we have spare capacity so we can afford to turn off a mill for a couple of hours if there is what is termed, low-shedding: so where the grid is overloaded. So we do have that capacity but what I think also, the ESKOM situation is not going to become any easier overnight. We will continue to have power shortages in South Africa for at least the next 2-years. Barberton mines is less energy intensive so it is less affected. Elikhulu doesn’t use a lot of electricity so that is less affected. And fortunately, as I said, at Evander underground, we have some spare capacity so we can afford to reduce our underground consumption for a limited period. And recently, the Minister of Mines in South Africa has come out and said that they are in the process of deregulating the private power generation. At Evander, we are completing a Feasibility Study (FS) into our solar plant that will be able to look after pretty much all of Elikhulu during the daytime. And we expect that we will be able to, over time, expand that project also. So miners are being creative about finding solutions and I think that over the medium to longer-term, we will get those solutions implemented in a way that actually makes sense for shareholders.

Matthew Gordon: Interesting. You should talk to your neighbours over the road at Bushveld by the sounds of it.

Cobus Loots: Exactly.

Matthew Gordon: Okay. Well thanks for that update. It just sounds like business as usual for you. I appreciate you being quite direct about some of the issues that you miners face, but you are consistently hitting the numbers, or exceeding the numbers, despite those problems. So you always find a way. Do stay in touch and let us know how you get on. What are the next big things that we should be looking out for?

Cobus Loots: Well, we have our interim results now being released next week, on the 18th February and that will contain more detail on performance and what we expect for the remainder of the year. And yes, as I said, we are quite positive. We have laid a solid foundation, a good base to do well. So the Rand Gold price, is pretty much the highest it has ever been so that’s a good environment for us to operate in also.

Matthew Gordon: You see that continuing do you?

Cobus Loots: We sort of try focussing on those issues we can control, but it’s always nice to have tailwinds like the Gold price.

Matthew Gordon: Light a candle, for sure. Thanks again, speak real soon.

Cobus Loots: Thanks, Matthew. Speak soon.

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 (TSX: RNX)- Raise Up Your Mind, Hey, it’s Time To Shine (Transcript)

Interview with Paul Huet, CEO of RNC Minerals (TSX:RNX).

RNC Minerals was perhaps the turnaround story of 2019. Huet has steadied the ship, brought about a gold focus to the company and got RNC into production. A steady 8,000oz+ per month has changed the company and de-risked the operation, as the team look to move forward, get the share price up and probably restructure the CAD$32M of remaining debt. AISC steadily heading down. We expect to see it get below $1,000 later this year.

Despite a positive year on the production/revenue front, RNC has struggled to get the share price up. It sits at CAD$0.43, with a market cap of c.CAD$260M. Huet explained the market situation clearly: RNC’s 28% “option on nickel” at Dumont has been valued at zero, and he feels the company continues to be undervalued. We were curious as to Huet’s plans would be for 2020, but before you ask, he wasn’t prepared to talk about the royalty arrangement with Maverix Metals just yet as they are mid-discussion. He’s keeping his cards close to his chest. We do however expect to hear something by the end of Q1/20. However, it obvious to all the chess game that is afoot. The Maverix Royalty is a large 6% on Gold and 1.5% on Nickel. Forget the nickel for now. If we were RNC, we would do the bare minimum of mining at Beta Hunt. Why would you if the only company making money if Beta Hunt gets mined is Maverix? Beta Hunt must be 25-30% of Maverix income. But not if RNC reduces production, which, reading between the lines, seems to be what RNC is doing. The two need to agree, and agree quickly. Shareholders on both sides will benefit. Morgan Stanley, seem to have been pragmatic. Will Maverix be as pragmatic. Our interview with them, they talked that language.

Huet has been on a roadshow to both institutional and retail investors. RNC recently issued a 2020 guidance: 90-95,000oz per annum, excluding the often discussed coarse gold. This figure is also without taking into account an ore sorter, and possible plant engineering modifications to increase efficiency. Huet is running a tight ship, and we would expect these numbers to be almost guaranteed for 2020.

RNC will fund exploration out of cash flow. The debt is due in June, but can be delayed, or restructured on more favourable terms, given RNC’s current position in comparison to where it was 7 months ago. RNC will be looking at a c. CA$50M standby facility.

A gravity survey has revealed interesting anomalies at RNC’s two new exploration discoveries: Higginsville and Baloo. A recent high-density gravity survey has delineated a new geological structure at Higginsville: a 5km strike zone. The Paleo channel potential will be explored (these typically can result in slurry pumping to by-pass front end ore-sorting and crushing and go straight into the back-end of the plant). Potentially an additional transformative item. Long way to go though. Permitting at Baloo is reaching a more advanced stage.

There has been discussion about an ASX listing and roll-backs in the chat rooms and on social media, but Huet remains tight-lipped. RNC is getting more and more access to institutional shareholders, and that can only be a good thing.

They did what they said. There is a clear plan. Sit tight and watch this unfold.

Interview highlights:

  • Roadshow Experience and What They’re Doing it for
  • Release of Guidance: An Overview
  • Cash Position and Prioritising Spending
  • Options for Dealing with Debts and a Timeline for it
  • The Re-Negotiation of the Morgan Stanley Royalty: Plans for it
  • Building 24 months Worth of Ore
  • The Mill: A Good Purchase?
  • Lowering the AISC: What are They Doing?
  • RNC Minerals: A Potential Take-Over Target?
  • Specific Targets and Plan of Action for 1800km worth of Land
  • News on Dumont

Click here to watch the interview.

Paul Huet: Hey Matt, how are you?

Matthew Gordon:  Good. You have been on a roadshow.

Paul Huet: We have, we have been hitting up several places actually, 4 countries and 6 cities in the past couple of days in the last 2 weeks, so it has been very exciting.

We went to Canada first and then we went to the US, then Indaba, and finishing up in London. The purpose is really to just get out there and show people some of the changes we have done. You know, it has been 7 months now. I have been here for 7 months and we have managed to make a lot of changes: from shareholders to the board of directors, the executive team. We are now in production, we sustained about 8,000 oz per month for the first 6-months.. We are actually doing what we said we would do. We are keeping it simple and doing what we said we would do.  

Matthew Gordon: It is probably one of the turnaround stories of last year. You recently issued some guidance.

Paul Huet: 90,000 to 95,000 oz at 8,000 oz a month, it excludes our coarse Gold. And that’s something people should consider. It is our first year of total production and we are still fine tuning everything, if you want to call it that. We are still evaluating and assessing ore-sorters, that has certainly not gotten behind us. We are certainly evaluating engineering changes to the plant. We are looking at several things to upgrade, and how we can even increase throughputs, so there are opportunities there. But that range that we are putting in front of ourselves, it does exclude that coarse Gold.So don’t lose sight of that.

Matthew Gordon: You have also been producing cash.

You did raise a bit of cash to allow you to put things in place, but you are also still producing your positive cash flow. Can you talk to us about what are your priorities with regards to how you are going to spend that cash.

Paul Huet: As we announced, we ended the year with USD$35M in cash, so a huge, huge change. A huge shift. We used USD$3M of the USD$35M to pay down some of our debt, which was really important. That saved us almost USD$100,000 in the first quarter just in interest, so that’s important for us and for our shareholders.

We are going to spend USD$9M to USD$10M this year on Exploration this year. We have already started some of it. We have got a good detailed plan. We have just unlocked an area at Higginsville that has 1,800 Square kms.  We just announced the Fairplay open pit; that’s a brand-new area for is. It is 1km from our plant. We have pre-stripped that, we are actually starting to mine on that. That thing is only constrained by drilling. There’s no drilling around there. We did the original drilling here. So the initial grades from that pit looked to be as good as open pit at Baloo. We just got stage II permitted at Baloo. That second stage at Baloo was all drilling that we did ourselves as well. There were areas that we had discovered, that we discovered that geophysics had that gravity survey.

 What people have to remember is that this area hasn’t been explored in almost 2 decades. There has been some drilling; don’t get me wrong, but whenever there is a Royalty of 7% sitting on a project, that’s a huge burden for anybody so previous owners recognised that. Not a lot of people were willing to spend any money or effort in those areas, whereas after we had negotiated that Royalty, we’ve unlocked a huge jurisdiction.  We have opened up an area that was really gridlocked, it was landlocked for a long time under that Royalty. So, tremendous amount of upside for us to be drilling in those areas and that gravity survey just discovered a 5kms strike zone which is just north of our plant.

Matthew Gordon: I want to deal with the debt component. You have positive cash flowing, plus you have money some in the bank; USD$37M at the end of the year. You pay down USD$3M, saves you USD$100,000-ish per quarter, it was a lot of money. What was the balance off there between saying, let’s reduce that debt position or let’s get out there and drill?

Paul Huet: Yes sometimes. In our case, it made much more sense to pay off our debt. There’re often times that I’ve seen, even I’ve done actually, paid off debt with equity. We don’t want to do that to our shareholders in this case. We can repay our debt while we still have an aggressive drill campaign. We announced USD$10M, that’s the first USD$10M in this district in a very long time. That’s going to give us a lot of opportunity and our drill bit will drive our priorities. The next drilling will come from this. If we feel like we need more money for drilling, we will add money…

Matthew Gordon: What do you mean, you will add money?

Paul Huet: We will add money from our cashflow. Paying down our debt is really important. It is really something. We are looking at restructuring it as well.

Matthew Gordon: So let’s talk about the debt component. You have got your USD$37M, you have paid off USD$3M, you have got USD$34M left to pay. So most companies would look at that and say we can restructure this and pay a little bit less over a longer period of time, or we can pay it off or we can pay it down. What are the options that you are looking at for dealing with that debt? What’s the timeline?

Paul Huet: Yes, for us, our debt is due in June. We have an opportunity to extend that debt by 6 months, just by signing paperwork, or we have an opportunity to restructure that debt, which is something that we are strongly considering and something that we are working on. In fact, we have had a lot of interest from groups who I have worked with in the past who have serious interest in restructuring this debt at improved terms. Don’t be surprised if we pay down some more debt this quarter. It wouldn’t surprise me that we paid down some more. Everything has to be considered: as you talked about, we have to consider drilling, we have to consider everything and make sure we have that pipeline in front of ourselves and the amount of cash.

Matthew Gordon: Some companies would also look at things like standby facilities, because you mentioned something there that was quite an interesting point which people may have missed which was that you may be able to restructure your debt on better terms. Presumably, because the company is in a better financial position?

Paul Huet: And also, because we have had consistent, sustainable production. And another thing: a 2P reserve. That 2P reserve that we put out at Beta Hunt is very critical for lenders. So one of the things we are going to be doing is, when we restructure this debt, we will be looking at standby facilities.  I have had standby facilities in my life in my past, but putting together a USD$20M standby facility when you don’t need it, it’s the best way to get it. When you need it and your back’s up against the wall, you won’t get as good terms. For us, we will be looking at, potentially, a USD$50M facility where we take USD$30M and we restructure it. We have that. Whatever group comes with us comes across the finish line with us. Put in another USD$20M standby facility that we can use at our discretion, when it’s needed, that we can use for some consolidation, maybe for drilling. Whatever we need it for, it’s in place when we don’t need it.

Matthew Gordon: Yes, I think the truism in banking, when the sun is shining, the banks offer you umbrellas.

Paul Huet: Yes, exactly. We’ve all been through it.

Matthew Gordon: Can we just talk about Morgan Stanley? You renegotiated that Royalty with them. It has freed up this, this very large land package for you to go and Explore. What are your plans, because it is a big piece of land?

Paul Huet: Look, it’s a very large piece of land and we’ve actually started with our plan by the drilling from Fairplay. That was our number one priority.

Followed by the geophysics – the gravity study we did. We did not know that the gravity survey would unlock or show us that 5kms.

Matthew Gordon: What is a gravity survey, for the uninitiated?

Paul Huet: It’s a great Exploration tool for us. It’s an Exploration tool that allows us, targets us for drilling. That’s exactly what it does. It gives us some indications on where to drill. The thing that is exciting about this 5kms, from what we can see, and all of the historical information that we have, there are no drill holes in this thing. This thing just lit up in a gravity survey and there is not one drill hole in a structure that is quite similar to the structure that the mill was built for. The mill was built for the Trident mine. The Trident mine is just at the mill. That thing – we own it, that Trident mine is part of our land package now. Just north of it is where this 5kms strike is. And look, as a reminder; Beta Hunt is 4.5kms today, and Beta Hunt is constrained by land, not necessarily by geology.

Matthew Gordon: And you are going to throw how much money at that in 2020?

Paul Huet: We had other priorities that were much more advanced than this structure in 2020. And we are going to follow through with our plan.

But one thing I’m forcing our guys to do is follow through with our plan. This obviously changes things where we might require, we might introduce some holes into this, this year and change up this plan. Our goal has always been, from day 1 since I took over, to put 24 months of feed between Beta Hunt and Higginsville. We have stuck to that. We are going to stick to that and we had a different set of pipelines, Fairplay being one of them, the extension of Baloo being another one. So right now, we have the extension of Baloo that pushes us to the end of 2020 now. We’ve got Fairplay coming in. We will be drilling around Fairplay. There are other open pits that are more advanced, satellite targets that are more advanced than this unidentified 5kms strike. We haven’t even given it a name; it is so early – so you are right in saying that it is early stages.

Matthew Gordon: You have talked about getting 24-months of ore there to into the mill. That’s not something that exists today but you are building up towards this.

Paul Huet: That’s absolutely correct. And from both, so I am talking, about a series of open pits in front of us and from our Beta Hunt mine. The Beta Hunt mine is going to need some more waste development which we have planned this year. I think in dollars, top of my head, it’s about USD$6M in waste development. It’s all part of our budget. It’s all funded from the operations, right. It’s not coming out of treasury. In fact, treasury this year will continue to build up despite us having a very aggressive year in Exploration and waste development, some equipment purchases, some upgrades to the mill, looking at ore-sorters, we will continue to build up treasury.

Matthew Gordon: Do you keep Gold back on good months and then run it over into the next month if you need to, or does it all go into the mill straightaway?

Paul Huet: Yes. Our mine plan is what dictates it.

It’s not about hoarding the Gold, it’s about how we sequence the mine. It’s all about cross cuts during the retreat. Open pit: you end up mining where you are mining, so it’s all about our mine planning. We are trying to build up our mine plans to reflect what we have put out in the guidance. Our mine plans are a reflection of our guidance. We are doing our best to remain consistent. Consistency is good for us as well, right? It’s a lot better for us.

Matthew Gordon: And when you are having conversations about money?

Paul Huet: Yes.

Matthew Gordon: Have you had to spend any more money on the mill than you imagined? Do you still consider it to be a good purchase?

Paul Huet: Oh look, the mill was a steal. Hands down. I’ve had what, 13 mills approximately reported to me in the last two decades? You know, I built one almost from scratch, Esmeralda, it was this small thing that we had to almost rebuild. This thing here, this Higginsville plant, we have spent so far, probably about AUD$1.3M, AUD$1.4M on it.  A very, very small amount to make some major upgrades for ourselves and our mill has gone from a mill availability from about 86%, all the way up to about a 95%, and this is a real reflection on Graham and the team there. These guys are doing are doing PMs to the mill now, we are spending the right money on the mill. We are making sure everything gets properly treated in the plant and it is not neglected. The plant is not neglected. This is the artery and the heart and soul of our company. We’ve got two open pits and an underground mine feeding this plant and Doré coming out of it. We need to make sure it comes out on a weekly basis.

Matthew Gordon: And one of the reasons why you bought it was because you hoped you could reduce the AISC, I know you haven’t finished last year’s numbers and you are due to announce those towards the end of this quarter, but broadly, have you been able to do what you said, which was to drive the AISC down towards that $1,000 number.

Paul Huet: Yes. There’s no reason to doubt it’s not happening in 2020 and there’s no maybe – we will get there. We saw, when our first original numbers in the first half of the year were close to USD$1,300 per oz, Matt, AISC, Q3 was USD$1,183, so call it close to USD$1,200, so USD$100 reduction per oz. Q4 numbers aren’t out yet, finances are coming out soon, but that trend is currently continuing like we saw between the first half in Q3. So you will see, it’s certainly trending down again in Q4, as we expect it to. There’ll be no surprises, people will I think, we were happy, I think, once everything is finalised, we are not quite finalised. Things are trending in the right direction where they should be.

Matthew Gordon: So that says to me that you are going through this cost-cutting exercise across the organisation. I think you talked about Graham overhauling the operational side of things, and you have been elsewhere. Have you come across any major headaches that you have had to account for?

Paul Huet: No, no. Listen, this is mining, we are always going to have headaches, Matt, and there’s always surprises. The advantage we have between all our experiences, one way or another, we are going to overcome them. And because it is mining, sometimes you can drill and blast them and you can get through them. So we will go around it, above it, underneath it: we will get through the obstacles we have had to. There’s been nothing that’s been so bad that we didn’t anticipate it. We have had…we are very thorough in our risk register and we mitigate quite a few of the risks.

Matthew Gordon:  There have been a couple of reports about you guys being looked at as a takeover target.

Paul Huet: I think I would be very naïve to think that we are not in some people’s, or bankers’ slide decks. Anybody who is doing what we are doing and has a centralised jurisdiction, and unlocks so much value, I would be naïve to think that we are not going to be a take-up target. We’re not putting ourselves up for sale.

Matthew Gordon: That’s the next question.

Paul Huet: We are certainly not saying, ‘Hey look – we are up for sale.’ We believe we are going to drive value up for our shareholders and we give us another 6 months to a year, because we will create value in that share price for our shareholders. All we’ve got to do is to continue doing what we said we would do and continue to deliver.

Matthew Gordon: RNC has been looked at several over the last three to four years. Australian Gold miners, who are sitting on a lot of cash at the moment, because it’s been a good time for Australian Gold mines. Do you feel like RNC is a more of an attractive target should those conversations come round?

Paul Huet: There’s no doubt we are more of an attractive target. We have cash on our balance sheet now. We continue to reduce our debt. We are sustaining production consistently. There’s no doubt; we are much more attractive than we have ever been. We have, simply put, we have de-risked this thing.

Whereas, someone would have come in before and they would have said, ‘There’s so much risk in here: operationally, geology’. We have demonstrated through that 2P reserve, through renegotiation of the Royalty, through the consistent mill throughput, we have consistently de-risked this thing significantly.

Matthew Gordon: Can I just ask you about this 1,800 square kms of land package. Almost too hard to comprehend how big an area this is. But you’ve got lots of options in there. You have now got the availability of cash and you are producing free cashflow as well. Are you targeting any specific areas in there? And I ask this because you’ve got so many options elsewhere in the organisation. You’ve got to get focussed and you’ve got to help us understand what you think is important.

Paul Huet: Sure. So we have Baloo – we’ve just got the second permit to extend to Phase II that we talked about. We just did some recent drilling at Fairplay. We just did the pre-stripping; that’s very fresh and new.

If you look close to the plant, we have the Two Boys target there. We have the Poseidon South. We have the Graveyard, the Mitchell…Afratai, Challenger, and then more Paeleo channels. So look, on top of the 5kms, we have a series of areas that we are going to be targeting, and predominantly in 2020, we are going to be mining Baloo and Fairplay. plus the Beta Hunt, obviously.

You can see, and this is constrained too, so that 5kms strike that is directly North of us, will likely get holes in it. We have larger priorities. We have unlocked so much potential here.

Matthew Gordon: Everything is going great with the Gold side of the business. Dumont nickel. Any news?

Paul Huet: No update from the last one. We are still working alongside, with our partner, Waterton, to find the best strategy for us and for them. Look, the way I see it, for our RNC shareholders, we really have an option in Nickel. I firmly believe that. Nickel prices go up. I think it goes without saying, Matt, I think anyone will likely agree with me that presently, there’s no value in our share price on our Nickel asset. And that’s a positive thing. So whatever we can get done this year. Whatever synergies or strategy that we can come up with, with Waterton that makes sense, will create more value. There’s none right now so anything we can do will improve that share price.

We own 28%, Waterford own 72%. They are really driving the bus on this one. But the EV excitement is certainly not slowing down. Nickel had a really decent year in 2019, if it has a really decent year in 2020, there will be interest in our project. There’s no doubt about it.

Matthew Gordon: Thanks for coming through London and going out of your way to make time for us.

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

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Impact Silver (TSX-V: IPT) – When the Beat-Boom-Boom-Pat-Pat Like That (Transcript)

Interview with Fred Davidson, President & CEO of Impact Silver (TSX-V: IPT).

Silver is a famously volatile commodity, but hit it right and you can make money. We talk to Davidson, a long-time Silver miner, who talks us through the basics of the macro thesis. Correlation with Gold makes it slightly easier to gauge the temperature when it’s coming and when you are in it. What was less clear is how low it is here to stay.

Davidson has been with Impact Silver for 13 years and mined 9.5Moz. They are a primary Silver producer, at 95% of production skewed to Silver. Many Silver operators have come and gone but Impact Silver remains as a small but profitable producer.

We ask about growth, the options seem to be: 1. Keep producing, 2. Farm-out of one of their licenced areas, 3. M&A. Listen which he thinks is most likely. We want to know what is going to move the dial for shareholders.

They have $4M of cash, no debt, $55M of operating profits, and a market cap of only $46M. They own 2 mills. Only one is operating. And a concentrate sales agreement with Samsung. What does all this mean.

Interview highlights:

  • Company Overview
  • Silver Market: Drivers, Past Tendencies and Predictions
  • Volatility of the Silver Market: What Signs Should You be Aware Of?
  • Business Plan: Has it Changed Over the Years?
  • Scaling Up and Restrictions for Growth
  • Shareholder Returns and Timeline for Bringing Value
  • Cash Position: Will They be Going Back to Market in 2020?
  • Moments to Look Out for From Impact Silver

Click here to watch the interview.

Matthew Gordon: Hi Fred. This is the first time we’ve heard your story so why don’t you give us a 1 minute summary.

Fred Davidson: Impact Silver is basically operating in the second oldest mining district in Mexico. Cortez actually hit out here 500 years ago. We’ve been actively mining here ourselves for about 13 years. We have mined about 9.5Moz to date, at USD$175M with the revenue generated. And it’s just the start on a property that’s over 221km2. We’ve only exploited about 20% of the property. And we’re actively in production and with the current price of Silver, we’re starting to re-expand our production profile.

Matthew Gordon: I don’t know much about Silver. You’re the third Silver story that we’ve talked to. Give us your view of the Silver market. From what I’ve seen, it’s highly volatile and if you don’t know what you’re doing, that’s dangerous. So what’s it been doing and what do you predict it will do?

Fred Davidson: Predicting is more interesting. What it has been doing, it is a volatile animal. It’s regarded partially as a precious metal. It’s also regarded as an industrial metal. Solar panels, et cetera, all require Silver. A lot of the modern computers; disbursement et cetera, all requires Silver. And in fact, you’re in a country that used to have Sterling Silver as your backup for your pound.

So you run into those two things: 1. The precious metal, sort of the poor man’s precious metal, and 2. An industrial product. Traditionally, Silver has traded in the sort of 20:1 price ratio with Gold, and over the last 5, 10 years, it’s gone to the point where it’s getting probably in the area of about 90:1. So there’s a real disparity between the pricing and I think there’s an expectation that’s inelastic, which is stretched beyond its capability of holding its position.

The general market conception is that Silver is under-priced right now. It is controlled because it’s a very small market relative to Gold. It can be manipulated. Look at the Hunt family 40 years ago or so, where they moved it up to USD$40 to $50 in a matter of months, just personal financing. It is volatile. Now that volatility provides opportunity, obviously; somebody who can trade the metal does very well. Somebody who trades our stock does even better because our stock is highly leveraged to Silver. In 2016, we went from about USD$0.15 cents to about USD$1.20 in five months. So a very, very volatile product.

Our forecast going forward, as you can tell, I’m a bit of a Gold bug, but not to the extreme, we’ve seen it gradually strengthening over the last year and a half and it has been very positive heading through some of the volatility and setting a pattern for growth. We’re looking in the sort of USD$22 range over the next year and given the volatility of world events, it could easily exceed that.

Matthew Gordon: I think I want to treat this an educational process for our audience, which is retail investors, high net worth and family officers. It is volatile, but what are the drivers for this? People talk about Silver being closely aligned to Gold: when Gold does well, Silver tends to do well. What are the drivers for that?

Fred Davidson: That’s part of it. No question about it. They say it’s a poor man’s Gold, so you get places like India when you get to seasonal purchasing –

Matthew Gordon: Same as Gold. What are the big drivers to this? What do we need to understand? Because you used a phrase that was quite interesting: “for people who know how to trade Silver…”, it’s great, but for the great unwashed like me, I’m going to be the last man standing, aren’t I?

Fred Davidson: Well, you’d probably be the last guy in the door. Yes, you’re right, that’s the problem. And you’re the last guy out the door. We see it in one of the primary things, as there are very few primary Silver producers. We’re one of the unique animals; 90% to 95% of our product is Silver. What that means is, when you see a reduction in base metal production, you get a significant reduction in the supply of Silver. And like Gold, there’s probably more paper Silver being traded than there is actual Silver. When you get that reduction of supply, the demand doesn’t really change very much. In fact, that’s probably increasing with the concerns about the world with the physical demands for Silver in industrial products. The other part about Silver is, unlike Gold, in most cases Silver isn’t readily recoverable. So the secondary market for Silver, because it’s in minute quantities in your cell phone and what have you, isn’t generally recovered. You’re facing a deficit in supply and that deficit in supply plus an over-sale of Silver certificates that isn’t backed up with actual Silver is a classic short situation. I think that’s where most of us anticipate, although there’s volatility, the volatility is driving northward, not southward in this business.

Matthew Gordon: So if you look at your share price, you quoted some numbers there from 2016 . That was a heck of a ride; at the end of 2000, you went up from USD$0.20 cents all the way up to USD$1.20, but you came crashing back down again. Fairly unspectacular 2018. Same with 2019, until the middle of last year. So this thing moves in violent swings, there’s huge peaks and troughs. How does someone like me or retail investors spot the signs? Because you are saying, ‘the only way is up’, and maybe it is right now. But I don’t want to get left holding the baby here, Fred, so what other things do I need to be looking out for?

Fred Davidson: I think you have to look at continuity. Most of us look in the marketplace and we’ll say, okay, if I’m in this to speculate short-term, that is highly volatile, that’s dangerous stuff.  I don’t pretend to do that. I personally look at it and say, I see as a long-term trend and that’s actually what we did when we acquired this property 14 years ago. We thought Silver was under-priced badly and you go and we managed to get a property that the owner thought it was badly under-priced. We’ve been right. Now during that time, the volatility has been dramatic, but the trend over that period of time has been consistent and has been consistently upward. And I think that you are either a long-term player, believe in silver, pickup those companies or get involved with those companies that have demonstrated history, or alternatively, you run it short-term and you’d be a day trader, and I wouldn’t even try to be a day trader in this market.

Matthew Gordon: So you picked this thing up 13 years ago. What was the plan back then and has that changed or had to change, because of market conditions over that term?

Fred Davidson: Yes, during that time, we picked it up as an exploration project, but it had a history of production, and you look for elephants where there have been elephants. It had a small mill on it at the time. It allowed us to bootstrap ourselves. And that is over about 50% of all of our expenditures in the field have been financed through operations. So we have avoided, or reduced dilution. We then acquired a significant controlling position in two very large mineral concessions in Southern Mexico, in basically the silver belt. Taxco; They were the oldest. We were the second oldest district. We found over 5,000 old workings on this property to date and we still have a lot of exploration to do.

We found over 50 haciendas dating back…hacienda is actually a plant in the local jargon, dating back to the Spanish era. We looked at that. We looked at the mining that had been conducted in the past, and again, you look for elephants where there’s elephants. We thought Silver was a strong product that invariably would be covered; it has. We looked at a prospective ground, which has had a history of production, had a history of elephants. Even though we talk about the Spanish era, the Indians here mined well before that: Gold and Silver. And we then went in as quietly as we could and acquired as much ground as we could, to the point where it’s almost like a hand in a cookie jar; you just pick all the cookies out of it at once. And since then, it pretty well supported our premise that; A. We are capable of supporting ourselves, and B. We are capable of developing what could be an international level resource.

That’s our strategy going forward. We’ve had bumps, such as the price of Silver dropping off, or the crash in the market place, but we’ve been able to sustain our business where many of our peer group has disappeared in that period of time. And we’re still here and we are still growing. So yes, given there have been bumps, our strategy it is the right strategy. And going forward, if we see a solid Silver price, that strategy is going to get nothing but endorsed.

Matthew Gordon: Was there any data that came with these land packages?

Fred Davidson: We probably spent USD$5M or $6M accumulating a huge amount of data in a computer system, an AR system that we have developed that literally has layers of data going back 300 yrs, 400 yrs plus. In fact, in one mine we discovered from old references that were 250 yrs old. When we went out, there was an old Spanish mill and an old underground that they had been mining on.

Matthew Gordon: What does that data look like?

Fred Davidson:  Handwritten books, we’ve actually gone back into some archaeological studies. There’s historical production where the Spanish where talking about bringing 120 mules out of this area to go to Taxco, to the ore. Yes, there’s been a lot of research and we’ve had a team dedicated now for almost 10 years, outing it all together.

Matthew Gordon: That was the plan: tie up and buy up this land package, you are sitting on a district-wide package. But how do you move from Exploration into Development to Production? You are producing today, 9.5Moz. I’m looking at the market cap of $46M and I’m wondering how this thing get some scale to it? Or, does the nature of the commodity – Silver and the volatility of Silver, restrict you from doing that?

Fred Davidson: Well, on an operational basis, we have a number of targets that we move forward when there is loose change, basically. If we make a profit in a quarter, that profit doesn’t really go up because it gets reinvested in improving our knowledge or advancing one or two of the projects that we have at any one time.

But we are cash positive. The strategy going forward is, we have probably 4 or 5 projects in front of us: both Silver and Gold, that sensitive to the price of metal, sensitive to the cash I have in my jeans, we push and accelerate and you know, case in point is we have a volcanogenic massive sulphide.

Matthew Gordon: VMS – we love it.

Fred Davidson: Down in the south of us, we have got a resource there that would normally require the price of Silver at USD$22. Right now, we are working on metallurgical changes to the mining and milling which can substantially draw up that. That coordinated with an increase in the price of Silver, suddenly becomes a mine. And in fact, there are two other deposits nearby that if that becomes a mine, we would then spend the money to bring those deposits up to resource base too.

Matthew Gordon: A good business plan can make a company hugely successful. It can change the dynamic and the growth of the company. You have gone from Exploration into Production, but you are putting the money back into the ground all the time. Isn’t that part of the problem for shareholders? When you are talking to shareholders and saying, ‘trust us, this is a growth story’. How is this thing ever going to move from USD$46M to market cap, to double that? Shouldn’t you be looking to be giving something back to the market if you are producing all of this cash?

Fred Davidson: Yes. That’s one of the balances we do have to look at. There’s real value in the ground. For instance, we have a whole Gold district that we haven’t done any more than just exploration on. If we were to bring that into production, that would have a substantial impact upon the market cap in its own right. So it is one of those balances; you say, ‘Okay, we have this. Let’s go forward on it’. Alternatively, I don’t think many of my shareholders are looking for a dividend, they are looking for us to prove the underlying value of this property. I think we are very capable of doing that. We have had some ‘oopses’, but they have been fairly market-related. But what we have also done in our strategy is we have protected ourselves from the downside, that unlike a lot of my peer group from 10 years ago, we’re not selling marijuana right now. We’re still there. We’re still working on the project. And we are advancing that project.

Matthew Gordon: I get that building up a cash reserve is sensible: it makes sense to do that because it gives you options. But at the same time, we’d like to understand at what point you are going to start leveraging this? Being debt-free is fine – to a point, but you need to ramp this up. You have been 13 years at it, what’s the timeline look like for some of these VMS assets? What’s it going to cost you? When does the market start reacting to that? Can you give us a sense of how you are planning the road ahead?

Fred Davidson: Well that’s true, and we recognise that we have a property that is a Major’s property size. Part of the strategy is prioritising our targets and where we are going to spend our money, and then looking at other targets in the area and we referred our negotiation with one or two companies right now to come in and take on part of what we have got.

Spend their money on our projects.

Matthew Gordon: So we are talking about farm-ins.

Fred Davidson: Exactly.

Matthew Gordon: How far advanced are those conversations?

Fred Davidson: We are already negotiating price. In one case, they have done all the due diligence they feel is necessary. The other one is just initiating that, they have a expressed a strong interest. It is again, one of those projects that we have got that with a finite number of dollars on hand, we are saying, okay, in order of priority, as long as Silver keeps its current price, this one that we would happily have someone come in and spend some serious coin on. There are two ready at the moment: one is very serious. The other one is serious but probably without the number of resources as the first.

I’m hoping you’ll hear later this year that they have gone just beyond discussions, we intend to do something about this fairly quickly.

Matthew Gordon: That’s a nice addition to your strategy. So you are, in that case, a Project Developer – you bring partners in with cash, or an operating partner with cash, and you are also producing your own Silver as well, and producing your own cash. I’ll just come back to the share price again; there was some pressure put on it in December. There was a bit of an overhang. You had a lot of trading and a lot of selling. Was that something you knew was coming down the line?

Fred Davidson: There was a couple of groups that we knew had to get off their position for their own financial situation. I wouldn’t necessarily like to think there was a lot of selling – there was a lot of buying.Because the price did go up while that was happening as opposed to forcing the price down.We saw volumes. Well, I think it was 18M traded in December alone.

I think that the interesting fact is that normally, that would have driven your stock down pretty dramatically. It didn’t. And I suspect it is because people are starting to appreciate, A. What we have as a project, B. The go-forward strategy and C. The very fact that we are so highly leveraged to Silver, if they anticipate Silver going up $1, they can see us going up, percentage-wise, dramatically more. That has certainly happened in the past and I suspect if it continues the way it is going, it will happen in the future.

Matthew Gordon: Give me a break down of your share register. How much is institutional and how much is register and where in the world do they sit?

Fred Davidson: That’s a good question. We have been debating that one ourselves because, as you know, it is kind of hard to sort of dig through it. We found a lot of the smaller funds, the metal funds that are interested in precious metals are there. At any one time, they are probably talking 30%, 40% that Family Office Funds etc, that see us is a play on Silver. The reassurances to the downside are protected pretty well from our longevity and our production. And the upside is that we are highly leveraged to the price of Silver: Silver goes up a dollar, it goes right to our bottom line. We see a lot of those. We do have a fair retail crowd, that are again retailers in Silver themselves and then the insiders and what have you probably running at 10% to 12%, maybe even up to 15%. I’m not sure everybody tells me the truth.

Matthew Gordon: Are you still buying?

Fred Davidson: At the moment I’m stepping back because we keep on having news releases which puts me in a conflict situation. Every time we are interested in buying, there’s a blackout. For instance, the Veta Negra that came out, it sounds innocuous but it has got a lot of potential and I know more about it than we are allowed to disclose because we can only 43-101 results and I have been on the ground watching our non-43-101 team exploring that. So that is something that puts me in a heck of a conflict to be honest – it’s a pain in the butt because there’s real value here and I would like to be opportunistic myself.

Matthew Gordon: But you are smiling. There’s nothing you want to tell us, is there?

Fred Davidson: Nothing I can tell you.

Matthew Gordon: And how much cash are you sitting on today?

Fred Davidson: About USD$4M right now.

Matthew Gordon: And are you going to have to go back to market or is that sufficient for everything you have to do this year?

Fred Davidson: Well the plans we have for this year; I don’t rely on us going to market this year for our program. We are looking as well because, let’s face it, part of the game in Silver production or Gold production is size, and as some of the projects that are also out there, different locations, are of interest to us. They have been unable to raise money because the money the money that has been raised in the industry in the last year, is only going to the more sophisticated companies. There are a lot of Juniors that have taken the program on, after two or three years, they have not been able to raise money, except through their grandmother. It is opportunistic that we can take it in another project to take it to production very quickly.

Matthew Gordon: I’m not sure I understood that; you have got USD$4M, you are not going to raise any more money this year which suggests that you are doing nothing of scale. But you say that scale is important but the institutional money is going to sophisticated companies. So what are you?

Fred Davidson: Oh, I think we are a sophisticated company. People understand our expertise. People understand that it is not easy to make money and it is not easy to set up a mill. Start up production, operate a mine. And you find quite often that there is sort of two cultures here: there’s the geologist culture where they love to find something, then they come up to the edge, look over the cliff and say, ‘God, we’ve got to put it into production.’ That’s a whole different end. Those are the ones we look at, at being opportunistic from our point of view. The reason I brought that up, if something like that came along and had the right size and flavour, that might be a cause to go back to the market.

Matthew Gordon: There are three different models going on here: there is the produce it yourself which you are doing. You’ve got your own mill. You’ve got the farm-out option; and potential M&A, if you deem it appropriate to your strategy.

Fred Davidson: That’s right.

Matthew Gordon: What are the moments that are going to make a difference to your share price this year. You have told me about the VMS potential farm-out there, your production – are you planning to increase that or is that business as usual? Same rate?

Fred Davidson: We will be increasing it. We backed it off about a year and a half, two years ago because we mine from the underground for the most part. Certain mines have certain grades and certain cost of mining. When the price of Silver went down to $14, it was literally breaking even or lose a dollar, so we shut those down. We then produced from the other mines. Now, we haven’t abandoned those mines that are marginal at $14, as the price continues to rise or go up, we will bring them back into action. If we see the continued price that we are looking at right now: let’s say $17, $18, we are probably going to go back to where we were two years ago in terms of production, which is about a 25% increase.

Going forward, if we see a continued strength, then we may push forward and accelerate a couple of our more advanced targets.  Because you have to have money to do that, you have to be confident that the price of metal is stayingthere to justify that Capex that you are putting out in order to put that into production. Over this year, we see a 25% increase over last year and, barring dramatic changes in prices, a further increase next year.

Matthew Gordon: These are incremental changes to the plans. They are nothing significant, unless you deliver something on the M&A front. So what’s the problem?

What’s holding you back though? Is your grade the issue here? You have got varying grades here across a large area.

Fred Davidson: I think the problem we have got, at least has been in the last couple of years, is finite dollars that we could put back into the ground. The market gives people a market cap for discovering than sometimes, quite a bit more than production and there’s a story in the industry called, ‘Up on mystery and down on history.’ The mystery isn’t there because we are producers. The mystery isn’t there until I can wave my arms and say, ‘look, we’ve just hit a hole that is 100m long, running at this grade, market gets excited and you see strength enter the market price. That can ultimately take us the next year up on exploration alone. The price of Silver will also take us the next year up. You can easily see it double.

Matthew Gordon: What are you doing about it?

Fred Davidson: We are borrowing. We are spending money now. That’s why we raised the money in late last year. It takes time to initiate those programs, because again, we want to prioritise it – it’s not as if we have $50M in the bank, and in doing so, it’s going to be two-fold: 1. It is going to help production, 2. It is going to increase expectations as to the future. And that’s the program for doing right now on our own projects. Those other projects – I think the market will see as strikes because people are willing to spend a portion of money on our property. Going forward, it is going to be opportunistic, if there is an acquisition that makes sense, we will do that as well I suspect with the number of projects we are looking at, there’s a decent likelihood that we might do that as well.

Matthew Gordon: Fred, thank you so much for talking to us today.

Fred Davidson: Pleasure. Good talking to you.

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

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

Energy Fuels (NYSE: UUUU) – Do you Hear What I Hear Ringing Through the Sky? (Transcript)

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

It’s a bloodbath for Uranium equities at the moment. There is no news from Washington and most Uranium CEO’s have gone quiet. So we called Mark to see what he knows.

Interview highlights:

  • Continuous Silence: What is Happening in the Uranium Market?
  • Delays for the Decision and Options Available
  • US & Iran: How the Situation Affects the Uranium Market
  • The Mill: How Old is it, What is the Cost of Maintaining it and Could it be Decommissioned in the Future?

Watch the interview here.

Matthew Gordon: We are operating in a bit of a void here. I’m looking at share prices of most of the Uranium players, North American, are being hammered. What do you know that we don’t?

Mark Chalmers: Well, I think that we have is, we have investors that are just tired of waiting. They have been waiting; when we started this 232 process 2 years ago and it just drags on and on and on. Look, I share the frustrations of investors, but just remember; for every share sold, there is  one purchased, even though the price of these shares has gone down and we have all been hammered. Not just in the United States but even in some of the global equities in Canada have been hammered as well too. It certainly doesn’t make me feel good when I see these shares slipping but as you know, our company and Ur-Energy started this process 2 years ago, but we are still making progress. We are still making great progress. I think that the Government gets it. I think they get it that we have to have a nuclear fuel cycle in the United States.

Matthew Gordon: Why do you say that they are making great progress or that the Government understands?

Mark Chalmers: I think that when the tack changed from the 232 process, which is more of a  trade-focussed initiative, to national security when it comes to producing Uranium and nuclear products, you know, focussed on the military’s requirements, the Government’s requirements,  we got rid of, effectively, all opposition that we know of when we made that shift. The utilities are not openly fighting us. We’ve got good support from NEI.  We’ve had many, many meetings, I wouldn’t want to count them up. Hundreds and hundreds of meetings with people in the Administration, people in Congress.

Matthew Gordon: You are meeting these important people up on The Hill, what are they saying?

Mark Chalmers: You know, I think that we have gone through a huge education process on how dependant we are for import products in the United States and I think that when we talk to them, they are shocked at how dependant we have become. The government inventories have been there for decades, but they are finite and they are diminishing. As long as we are the largest consumer in the world, is that where you want to be, and not have the capabilities to replace those inventories because Uranium nuclear fuel products for the military, has to be unobligated products by the treaty, so it basically has to be by treaty, mined, converted and enriched in the United States of America.

Matthew Gordon: Pompeo and Trump; do they understand the scale of the problem?

Mark Chalmers: Look, I haven’t met with Pompeo, I haven’t met with Trump but I believe they both understand the magnitude of the problem. I think the people surrounding them understand the problem. I think they are understanding they need to make a decision quickly because of this imbalance of our ability to produce these very specialised products for the US Government.

Matthew Gordon: 12 months ago they had this same problem, today it is more imperative. Given the nature of some of the politics in America at the moment; we have this impeachment hearing going on, we have got Iran waivers being discussed, another 60 day extension, is it possible to make a decision in that environment?

Mark Chalmers: Look, we think so. It’s certainly been harder to get to the top of the pile. Since the original working group deliberations and the report they prepared, it’s been really hard. Every time we thought we were getting closer, it kept getting delayed. Certainly, with our discussions with people in Congress and those in Administration, we say, ‘Look, we are out of time. We need to tell our shareholders what the outcome is with this review. They need to understand, we are getting hammered with our share price and we also need to send a clear message to the world of Uranium mining and these nuclear fuel products; including the Russians, the Chinese, the Kazakhs, that the United States of America is not going out of business, in this area, at the front end.

Matthew Gordon: What are the options on the table now? We’ve been reading about Government-buying programs of US Uranium.

Mark Chalmers: Look, we try not to make it guesswork because it’s better for us to provide some guidance here. I mean, the first thing we want is, we want the Government to come out and say that the Government is supporting the nuclear fuel cycle in the United States: mining, conversion and enrichment, at a level that at least provides some critical mass so that we have the capabilities to produce our basic requirements, not all our products, but we can flex up if required. So the number one is; we want to be able to show our shareholders and tell the world, or have the Government tell the world the conclusions that they have made through  both the working group and the Section 232 investigations.  That’s number 1.  Number 2 – we want to see, or we hope to see immediate demand for Uranium mining. Uranium mining is the most challenged first step of the process. We would like to see the Government starting to buy Uranium: like now, this year -2020, and onwards to make sure that the Uranium miners can sell their product at fair prices. Fair prices. So that we can get some cashflow re-established. 

These companies that are not producing now – zero cashflow, it’s not a real good outcome; it’s not sustainable for a long period of time. And then lastly, the plan, the plan that they announce, we do realise that some of this, or a big chunk of this is going to have to go through appropriations. The expensive part of the plan is really the enrichment. Uranium mining and conversion already have a lot of the infrastructure in place on the lesser side of this re-establishment of the fuel cycle.  when you start talking about building new enrichment plants, being able to make everything from 495, 235, all the way up into 90s 235, that’s going to start costing billions. Now, the Government was already planning to re-establish enrichment without, in the early days, without looking at the Uranium and the conversion steps.

Matthew Gordon: Interesting. 20% of US energy is produced by nuclear fusion. There have been a few plants that have come to end of life, and a few due to come to end of life. The utilities have got oil, they have got gas, they have got renewables; nuclear is part of that, but for them to invest billions of dollars into building, or upgrading new plants, must be a big part of the conversations that they are having with the Government too. So, the miners are just a small part of this, but it’s got to be joined up thinking.

Mark Chalmers: Yes. And I think that there was a lot of logic when the President came up with his working group. Now granted, the working group’s main focus was just these first three steps of the fuel cycle but certainly, the Government, or the Trump administration is certainly committed to keeping its mini nuclear power plants operating, going forward, for obvious reasons. I think that the Government, like the DOD and the DOE, are also getting increasingly optimistic about the micro reactors and the small modular reactors. You know, this new Haleu fuel which is 20% 235, is also becoming a product that the Government thinks they will need for the SMRs particularly. And then, lastly, space travel – you know, that’s coming back on to the horizon. Now that is not probably a large consumer, and takes some time out, but again,  I’ve said this to you many times, it is not time for the United States to not be in this business.

Matthew Gordon: What is your view on this Iranian waiver issue at the moment. It’s a real political hotbed. The Europeans don’t want it. I know there’s a lot of discussions internally between Pompeo and Mnuchin about it. They are in disagreement about it. Is that a big distraction for you?

Mark Chalmers: I think it helps us because I think it shows how sensitive and inter-related this fuel market is outside of the United States. Even this morning I was hearing that Trump and Pompeo were wanting these waivers to go away. I also heard, and I heard this on the radio, Fox News, that the utilities, they don’t want it to go away because they have such a dependency already on the former Soviet Union, Russians, for fuelling their reactors. So it is all interconnected. People talk about, we’ve got all of these stockpiles, we’ve got all of this Uranium. We don’t need it for another 5 years, 10 years so obviously, the business couldn’t ever be healthy, and I know that’s not the case. But then, if you start looking at when you remove or let these waivers expire, and it starts to create issues where Russia cannot import into the United States, or cut back on that, a lot of these utilities are going to start running out of fuel, like within a year and that is sure going to shock people. What happened to all of those inventories? Where are all those products? You know, we thought we had 5 to 10 years of those products available: we don’t.

Matthew Gordon: How much inventory is available to US ultilities today? What are they sitting on? A year? Two years? Three years?

Mark Chalmers: Look, the utilities: I understand they want the lowest cost fuel to keep nuclear as competitive as they can. We know that fuel is such a small part of nuclear generation, but nuclear generation is struggling. But, you know, Uranium is in all these different shapes and forms and you’ve got to make sure you keep those in to balance with what your requirements are.  I think that this just highlights the fact that the United States doesn’t have the ability now, you know, URAMCO is fore-owned, in New Mexico, and they can do enrichment there up to 495. But we do not have US-owned capacity for enrichment. We do have US-owned capacity for conversion but that is shut down right now. I think it just highlights the fact that you do not want to be overly-dependant on all of these other countries and you do not want to be in a position where you have to fight with  one or both of your arms tied behind your back the Iranians and with the relationships they have with the Russians.

Matthew Gordon: Can we just talk about your mill, White Mesa. You know, ‘he who controls the mill, controls the district. So people are saying, hang on, the mill that he has got has a huge capacity which you can’t possibly fill. How do you maintain this mill? What’s the cost of keeping this thing going? At what point do you decommission something like that? Or is it a case of, you just replace the bits; its ongoing maintenance as you start processing stuff through the plant, you just constantly upgrade.

Mark Chalmers: I think the mill was originally built to operate for like 20 years and now it has been around for over 40 years. There have been a couple of campaigns of modernisation, you know, with control systems and automation. We have replaced a lot of the tankage, we’ve built new tailing cells. There’s been an evolution in technology over the years. So the mill, even though it’s an older facility, is in very good, excellent condition considering its age. So it is unique; as we know, it’s the only one that is operable, licensed, fully-staffed right now. It has the Vanadium circuit, hey, Vanadium is starting to get a bit of life in it. The price of Vanadium is starting to go up. Granted, when it was USD$30, dropped to 5, up to 6, we never thought that would look good but we are hoping that the price of Vanadium continues to go up here this next year or two and we can capitalise on a fairly substantial inventory of Vanadium that we have at the mill. But no, it’s in good shape, as I said, it’s basically, largely staffed. We did lay off a number of people in the last week or the week or so ago. We shut down the Vanadium recovery process because of prices. But it’s in good shape and we are ready to go.

Matthew Gordon: You’ve let some people go, where they permanent staff or temporary staff?

Mark Chalmers: Yes, most of the people that I let go were temporary staff. When we have to spool up the mill, we try to keep a core group of full-time employees and then we spool up with temporary people where possible. It’s our ultimate objective though to offer as many fulltime jobs as we can in the region.

Matthew Gordon:  We’re days away from a decision, but we have heard that before a few times before.

Mark Chalmers: I can assure you, I will let you know and the rest of the world and we have put a lot of our skin and sweat and money, we have worn out, I don’t know how many pairs of shoes I’ve worn out walking the halls of Congress and DC. But we’re excited it is finally going to happen and I know there are the nay-sayers who say it is never going to happen, they don’t think it’s going to happen, but I think we have done a fantastic job when you look at our company, because we have been doing most of the lifting, Energy Fuels has been doing most of the lifting, probably 75% of lifting here. I think it’s remarkable that we have got this thing elevated to where this is at this point in time.

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. We provide paid for consultancy services for Energy Fuels. 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.

Wardell Armstrong – Every Grunt, Roar and Snort, Not a Tale I Distort (Transcript)

Interview with Mark Kenwright, Associate Director of Wardell Armstrong – the International Mining Consultants.

This is a first conversation with a very well respected mining consultant, with a view to open up to Retail shareholders how institutions view risk when making investments. Due Diligence is everything. Kenwright is honest and gets straight to the ‘crux’ on a variety of topics investors may find interesting.

Wardell Armstrong, founded in 1837, is an international consultancy firm providing engineering, environmental and mining services in the mining & minerals, infrastructure & utilities, and property & development sectors. Kenwright himself is a chartered professional FAusIMM CP(Geo), with over 24 year’s experience as a geology/exploration Manager.

Wardell Armstrong doesn’t build mines, but they provide studies and reports at various stages to help companies get mines constructed. Companies generally hire Wardell Armstrong to obtain a competent person’s report, scoping studies and due diligence studies and similar before conducting an IPO listing or investing into them. These reports can cost anyway from £50,000 to £150,000. The “bread and butter” services that Wardell Armstrong provides are scoping studies, desktop studies and due diligence for mining companies at a development stage. They are providing a much more detailed version of what Family Offices and HNWIs should be doing themselves.

We were interested in asking about the transparency and integrity of Wardell Armstrong: do clients influence their reports? Kenwright insists that while Wardell Armstrong can treat certain subjects delicately, everything must be disclosed as part of their publications. Nothing is held back and they have a legal obligation to ensure this is the case. If Wardell Armstrong doesn’t talk about something at the request of one of their clients, they have to disclose why. There is a table that very few investors seem to look at towards the end of these studies, that will inform them of things they need to know, yet often don’t.

Kenwright then touches on the IMO3 conference in London. The title this year is ‘Mining and the Electric Vehicle.’ Mining companies, regulators and academics will meet on the 29th-30th January to discuss issues, ideas, and solutions to problems in the mining world. Kenwright then talks about the Western Africa security situation. The Sahel has been suffering from increasingly widespread instances of terrorist attacks, and mining companies, such as SEMAFO, have suffered heavily at the hands of ISGS, Ansar ul-Islam, Boko Haram and al Qaeda amongst others. How has this impacted other mining companies and what is the outlook? Wardell Armstrong is well aware of this issue, courtesy of their standard practice of performing a risk assessment. Kenwright describes the deterioration of the situation in Burkina Faso as “shocking.” Kenwright has discussed the situation with senior security operatives in the region and they have coined the phrase “Kabulisation,” in relation to the similarities with Afghanistan, where security forces only have control of a very small area around the capital. Everything else is “bandit country.” We wonder if this will expand into other territories.

Kenwright explains there have been 650,000 Burkina Faso residents displaced; this has not received any mainstream exposure. He does, however, claim it is still possible to mine economically in the region. Kenwright takes a “life goes on” view, but can investors afford to be so confident?

Kenwright also touches on the outlook for the struggling lithium market, and provides some general investment advice, such as considering avoiding a management team that changes frequently.

Interview highlights:

  • An Overview of Wardell Armstrong and Their Services
  • Competent Person’s Report: Components and What Gets Looked Into
  • Client Influence: Reliability of Reports, Duration of Production and Price
  • The Situation in Africa: Effect on Companies and Investors. Should You Still Invest?
  • Lithium: Opinion on the Market
  • Research and Resources

Watch the interview here.

Matthew Gordon: I’ve been wanting to help investors understand institutional diligence. Wardell Armstrong is well-known to most of us in the industry. Why don’t we kick off and help people to understand what is Wardell Armstrong and what is their place in the market in relation to mining?

Mark Kenwright: The Wardell Armstrong Group has been going since 1837. We’ve got 13 offices in the UK, one in Moscow, one in Almaty in Kazakhstan. The Wardell Armstrong International, which is what I am part of, we focus on the mining, exploration, metallurgy, geology, social side of mining. Most, 95% of our work is all offshore: so in Africa, in the Middle East, in Russia, CIS countries. We have, interestingly because of the whole Lithium space, we have started to do more work, both here locally, on our doorstep in Cornwall but also in places like Spain and in other markets that have perhaps been a bit more active recently as they have been in Eastern Europe. We are involved from desktop studies, all the way through to due diligence, scoping studies, feasibility closure. We don’t build mines.

Matthew Gordon:  Mining is about risk mitigation, financing mining operations is about risk mitigation. You need to know what you are walking into. What is your typical brief from these companies when they hire you?

Mark Kenwright: Typically, we would get involved where a company would need a Competent Person’s report for listing, an IPO listing in London either on the main exchange or the AIM exchange, or in Australia, Canada or Hong Kong or wherever. So we do a fair bit of that CPR listing which involves all the disciplines, from geology and mining and everything else. But we also would go out and get involved in expert witness type work; so we would have to do a site visit. But then the bread and butter would be the scoping studies, desktop studies and due diligence where somebody, as an example, a few years ago, for a country, we had to do a due diligence on some mining assets because a company was going to give a loan to them, but they wanted an OFTEC agreement as part of that loan. So they want to ensure that the asset and the management and the plant and the mining and everything else can produce the metal that they want against that loan.

So we really bring a wide range of expertise. I personally have got 24 years’ experience. We have got a few youngsters but there’s a lot of grey-haired people here who have got 25, 30, 35+ years of experience. So I have worked all over the world: I’ve lived in Africa for 18 years, been back in the UK now for 7 years. So it is really bringing that depth of experience and that range of experience.

Matthew Gordon: When we’ve used companies like yourself in India, in South America, we were trying to protect our investment. We are trying to make sure we are not going to put money into a situation where we are going to lose it. And it’s a much more detailed analysis in diligence than perhaps most retail or family office or high net worths might go into, but when you are deploying USD$100m, you want to make sure that things are as they say they are. So, let’s talk about a Competent Person’s Report.

Mark Kenwright: Well, the basis for everything within a mining project is obviously the mineral resources so you would obviously have to check right from the start, and that means typically, having access to a data room. We would examine the drill hole data base and especially look at the overall mineral resource estimate and the quality assurance, quality control: the QAQC checks  which typically would involve standards, blanks and duplicates. And you would want to see a range of 5% to 10% insertion rates. If someone takes 100 samples from one drill hole, you would have an extra 5, 10 samples inserted at regular, or even irregular positions, to see if the lab is doing their job correctly. So you want to make sure that all those aspects are correct.

It starts with the mineral resource estimate. You would examine, briefly, the exploration history. You would examine all of their, typically, you would examine all of their standard operating procedures; so did they do what they say they would do? There’s nothing worse as a consultant, going on site and somebody says, ‘Yes, every tenth sample we insert a blank or a standard,’ and they don’t do that; they have just shot themselves in the foot there.  So, do what you say you are going to do. Me, as a consultant saying to our client, ‘Have you done what you said you were going to do?’

Now, I might disagree with what they have said they are going to do. I might say, no, you need to do every 10th sample, or 20th sample if they have done every 50th, or whatever their standard is, but their standard is their standard – so that’s the first thing you want to do.

The second thing is to obviously make sure that there is no fatal flaws. So yes, you could have a Gold project, obviously, but is the Gold wrapped up in arsenopyrite? Is it recoverable? When they did the mineral resource estimate, did they use the right search parameters? Did they do some basic geo-statistics? Did they log the core properly? They literally, physically log the core, or re-log the core and get a sample of those and make sure that what they are saying is, you know, a granite is a granite or whatever it is. And that is done in every department, as it were.

So, me as a geologist, my sort of expertise is in exploration and in project management, exploration in large programs, USD$30m exploration projects, large teams, so I know what to look for when someone says, yes, we have done X,Y and Z in geology. If we are getting called out and somebody is doing drilling, expanding the resource and they want someone to sign off on the mineral resources, I always want to be there within a day or two of them having started that drilling program. So again, to make sure when they are drilling, the drillers are doing what they are supposed to be doing and what the geologist at the drill site is doing what they are doing. So, it is really trying to make sure that, ideally, an excellent standard is met but at the very least, a good standard is met.

Matthew Gordon: What about all of the other things that you look at when you are trying to assess or diligence a project, in terms of the jurisdictional risk.

Mark Kenwright: Ordinarily, a company like Wardell wouldn’t do a legal due diligence but we would examine the mineral title documents. We would briefly look at the mining law within that jurisdiction to make sure that they are in compliance when they, if it’s an exploration project or a mining project, when the license terminates, is an example. Because one of the things that we discovered, in say, Russia, people had a mining ore reserve, past the date of their mineral license. So all those ore reserves had to in fact be discounted to zero because you don’t have the right, legally, to mine them. So you would do those sort of sense checks but you would also, obviously, examine the mining plan, the mine design, and a fairly detailed level, what parameters went into the pit optimisation of the underground ops? What was the Gold or commodity price?  What are the recovery factors, what are the mining costs? What are the G&A costs? What were the royalties? The taxes? So you do get quite granular in those things. You want to examine their financial model but typically, you also create your own financial model.  And you can, everybody is fighting to make the project as attractive as possible. You can get into some robust discussions about commodity prices or recoveries but as a consultant, we always have to err on the side of caution, as you said right at the start about the questions of the risk.

Matthew Gordon: Are you ever influenced by the company in the terms of the way that you write your reports?  Is there any reason to doubt the veracity of what you are saying?

Mark Kenwright: You can get into a situation where, as an example, a company says, we’ve got this one test that shows 80% recovery, but the overall test might show 65%. So you can disclose both of those figures but clearly, you have to, as a consultant and somebody who, remember, we have to take professional indemnity insurance as well as our brand, our name risk as well. So we as a company, again, always have to err on the side of caution. Now, there are ways and means you can skin a cat. There are ways and means you can write something perhaps more positive or less positive but we have to disclose the issues at hand.

With the JORC code 2012, the most recent version of that came out, there’s the Table 1 at the very end that very few people look at that within that, there’s the principle of; if not, why not? If you are not talking about something or if you didn’t do something, you have to disclose why. So that’s actually a very useful table for investors to look at. For any irregularity basically.

Matthew Gordon: Do companies have to disclose the Competent Person’s Report details as part of the exchange of regulations?

Mark Kenwright: Yes, whenever you list on the Stock Exchange, the CPR, the Competent Person’s Report is within those listing documents. In full detail, typically with appendices etc. Now, just one other point, and it’s a very valid point and I’d like to make a couple of points about the Competent Person’s Report, or even a feasibility report. There’s always a Competent Person in their field. I’m a competent person as a geologist, I’m not as a metallurgist or a mining engineer, you will typically have 6 or 7 or 10 competent persons, having compiled a competent person’s or a feasibility study. But you will typically have, and in our case, it is Doctor Phil Newall, who is the MD of Wardell, he would typically review all of those reports and be the overall lead person. But we personally have to take that responsibility. I am a fellow of the AusIMM, I am also a profession geologist. I am also on the list of registered consultants.

You will obviously get some requests for; don’t put this in, or do put that in. But at the end of the day, it’s taken me 24 years to get to the position I am at. I’m not going to lose my reputation or be disciplined by AusIMM or any other body to then lose that accreditation because it is quite difficult to get, you know. You have your own internal professionalism as well as the company. Now, having said all that, people can make mistakes.

There was a very interesting report done by the Ontario Stock Exchange or the Securities Commission, sorry, in 2013 where they examined 50 feasibility studies or reports, and I think 40% of them had fatal flaws. What they would consider to be fatal flaws.

Matthew Gordon: What’s a fatal flaw?

Mark Kenwright: Things that hadn’t been done. Now, they didn’t disclose who they were or what they were but the point is that even if it has the words NI 43-101 written on the report, written on it, or on the feasibility report, you still have to read it yourself and take a judgement, number one. The other point is about feasibility studies; you can get a negative result with a feasibility study. People think that, oh, it’s got a feasibility study – it’s a great project – it’s not always the case so you do have to take the time to read those. At the very least, I would say, if you’ve got limited time and you have got 15 reports to read, read the executive summary, read the conclusions and recommendations and skim through theJORC Table 1. Obviously, you should read all of them but –

Matthew Gordon: So that says to me, people, the information is there; do your homework. People like you have spent a lot of time, effort and experience in putting these reports together. The conclusions are quite easy to find if you want to find them. How much money do companies pay for a Competent Person’s report and how long do they take to put together?

Mark Kenwright: A Competent Person’s report, if it’s a single asset like a single Gold mine or project, could cost anywhere from £50,000 to a £150,000. It really depends on how much information there is, how much information you have to do. If somebody says, here’s a database, and here are some reports, we bought it off a project, then we have to do everything, then it is going to cost a fair amount of time, and it will take 4 to 6 months, maybe even 8 months. If a company says, we’ve got all this information we’ve built up ourselves, we just need you to review it, sign off on the mineral resource estimate, ore reserves and make sure you are happy and come to some conclusions, recommendations with metallurgy, as well as obviously, the very important environmental, social and all of the rest of it, that can be a lot shorter. But you know, to do a Competent Person’s Report,      especially if it’s listing on the Stock Exchange, where it can go backwards and forwards with the authorities, it’s a good 2,3,4,5 months.

Matthew Gordon: I kind of like the reassuringly expensive ones, because it suggests that more work has gone into it. We’ve been offered reports for as low as USD$25,000 which makes me nervous because that seems like a tick-box exercise and a signature.

Matthew Gordon: What is going on in Western Africa? There’s a lot of information about terrorist incursions in some countries. If we look at some of the presentations from SRK which suggests that the problems are just getting worse. Some countries along that Western Coast of Africa which are suffering; people are being relocated, people are dying and businesses are obviously being impacted. 

I refer to Semafo, before Christmas, the attack there: 37 dead, 60 injured. Talking about attacks in Mali; 70 soldiers killed, and one last week; 86 soldiers killed by ISGS (Islamic State Great Sahara).  It’s been coming for a while. I have been talking to a few CEOs recently, with interest in the area. They are nervous, of course, about what may come. I think it is important that people understand this. Is that an area that you have looked at, that you are aware of or have discussed as part of your work?

Mark Kenwright: Whenever we as Wardell Armstrong, and I’m sure other companies like ESSO, or whoever, whenever we go to anywhere really, we actually, for our insurers, have to do what we call a risk assessment. And part of that, one of the very basic, standard things you have to do is, you go to the FCO website and look at their coloured maps. And it is shocking, unfortunately, how quickly things have deteriorated in Burkina Faso. I have been to Burkina Faso four or five times. Completed 6 feasibility studies for a Nordgold subsidiary there. Since I have been going there, since 2013 I think it is, and when you go back and look at those maps where you have the FCO saying don’t go there – the red area – don’t go unless, you know, and then you have the orange area and green area where it is sort of safe.

I spoke to Joe Fifield from SRK, who is head of security at the Arab and Africa Conference, where I also presented there last year, and in discussions with him, I sort of coined the phrase, ‘the Kabulisation’ of Burkina Faso; because I’m sure you know, in Afghanistan, the security forces hold Kabul and maybe 150kms to 100kms around it and everything else is bandit country. There’s an element of that at Burkina Faso. Now, having said all of that, absolutely terrible, shocking attacks, both last year and more recently.  And the displacement of people: I think there have been 650,000 Burkina Faso people displaced. I mean, it is…you hardly hear about that unless you go looking for it or you live in that country, or you are involved in that space. But you can still operate, believe it or not, in those countries. IAMGOLD have got Essakane Mine in the North. They are able to operate.

Matthew Gordon: Why can they operate? If you are talking about this relocation of people, of these incursions, you’ve got deaths, not just of security and police and army, but in churches and schools. It sounds horrific, and if you don’t go looking for this, it’s not much talked about here in European press. But if you read the African press; it’s everywhere. So how do companies continue to work?

Mark Kenwright: See, it’s a little bit like, and I lived in Northern Ireland when I did my first degree, it’s a little bit like Northern Ireland; life goes on in lots of these places, with the exception of the very North of these places where people are scared and running for their lives, but there are these terrorist attacks, but they are infrequent. It’s not, I’m sure there are some that are every day or whatever, but the very big attacks that make the news are sporadic and infrequent, and unfortunately have a high impact, both in the loss of life and all the rest of it.  As I said, there’s Essakane who are operating, there’s also Nordgold who have still got a couple of mines, Bissa and Taparko, are still operating. You’ve got to get the security right. You’ve got to get the risk analysis right. When I have been, we will typically travel in two Land Cruisers, an armed guard in both, and no fanfare, no big convoys, so people don’t know, unless someone does a phone call, which obviously, thank God, hasn’t happened so far. So you have got to get that security analysis, risk and mitigation in place. Perhaps the worst thing about that, looking from the outside, I’ve not worked with Semafo and I don’t want to bad mouth them or anyone else, they were attacked twice in effectively the same place, lessons weren’t learned. Of course, I’m sure they have learned those lessons now. Going forward, you might have to, as an exploration geologist, you might have to travel with a bullet-proof Landcruiser, literally, USD$150,000. And there’s other areas;  I know a project, it’s not too far from Essakane, there’s a Gold project sitting there, but you can’t go and explore or work there for the moment because of the issues. So until things settle down, the Burkina Faso –

Matthew Gordon: So you think the big guys with revenues enough to pay for adequate security should be fine, could be fine? We hope?

Mark Kenwright: All three of those, yes.

Matthew Gordon: Is it going to be tough for exploration companies with limited budgets, to develop projects?

Mark Kenwright: There’s also that Canadian Geologist who was killed last year. I think he was killed 20kms, 25kms from the Essakane Mine, in a national park?

Matthew Gordon: Yes.

Mark Kenwright: That’s what I heard. And again, I don’t want to talk but yes, you have got to be careful. We at Wardell Armstrong, we will go to these places if we know the company and if they can demonstrate that they’ve got a track record and obviously, we are happy with their security. We have a standing rule: the first thing the Managing Director says to you is, if you are not confident, you won’t go.

I think you’ve got to look at the management of people. It’s interesting. You have probably heard of a guy called Danny Callow who is an ex-Glencore guy. He is with a big attractive-looking mining project in Mali. They have ground, I think in Burkina Faso and he has publicly stated that they won’t be going there until things settle down. So you’ve got to have management with that maturity and wisdom to really understand what they can and can’t do. Another really interesting thing about the quite understandable reaction to the Semafo attack, and also other attacks in the future, is contracting companies, I think was it ALS? The just called force majeure and walked away. So, you can have an asset, are you going to have all these people to run all of these things for you? All of these things, I’m sure, are doable but it will come at an extra cost. It will come with extra studies. You know, it used to be…even now, perhaps, security is almost like a throw away – oh yes, security, it is operated in whatever it is. I suspect very soon, that’s going to be a full section on its own within some of these studies.

Matthew Gordon: People need to walk into this with their eyes open, because it is their money at   risk.

Mark Kenwright: If I can just add one last thing, and we have talked about Semafo quite a bit, in their defence, and I’ve never spoken with the guys, I don’t know anything, they wouldn’t have operated in a vacuum either; The Burkina Faso Government, the security forces that were with them would have done, I’m sure, their own assessments, if there are fingers to be pointed, I’m sure thatit’s not just in one place. Let me put it that way.

Matthew Gordon: Does it affect operating businesses? Hopefully it doesn’t. What measures and what cost will those measures take to ensure continued operational success?

Mark Kenwright: As you said, this is a large area. I measured it on Google and it is about 4,000  kilometres by 600 to 1200 kms, and that whole region has its own sort of independence, nationalistic, political overtures as well which are part of the whole mix so its going to take a holistic approach to solve that.

Matthew Gordon:  What most people don’t realise about Africa; you have got these country boundaries but most countries are tribal. The tribal component should not be ignored. The religious component is obviously making a huge impact too. Economic rationale, and the disenfranchised youth. There are a lot of moving parts here and one needs to understand that country risk is more than just the geological risk but it’s, as you said, legal, mining code is critical, the political environment is important.

Mark Kenwright: That’s right.

Matthew Gordon: Mark, thank you very much for your time. I do appreciate it. Like I say, I am really excited to be talking with Wardell Armstrong, and your International Team specifically. Because, I think, as I say, if you can help us to identify what are those red flags?

Mark Kenwright: My pleasure. Hopefully I will see you at the Mining and Electric Vehicle Convention next week?

Matthew Gordon: You will, Sir, for sure.

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

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Brandon Munro – When the Needle Starts Clickin’ it’s Where I’m Gonna Dig (Transcript)

Interview with Brandon Munro, CEO of Bannerman Resources (ASX: BMN).

Munro gives us a detailed response to the question, ‘Last year was another uranium trainwreck. What is happening?’ Uranium investors are desperate for some good news; it’s been all too long since they heard any. However, Munro explains in this interview that beneath a surface of squalor lie plenty of reasons for investors to feel a little more chirpy. However, there are also some reasons investors need to stay grounded.

If investors buy into the uranium macro story, they simply need to keep their faith. Munro argues all the uranium market requires is a sentiment shift in order for investors to begin seeing results. However, there are a few more substantial pieces of verifiable information; there are signs of things moving behind the scenes, and indications spot price could decide to awake from its prolonged slumber. Industry insiders claim UF6 reserves, held by utility companies, are all but gone. EUP conversion price has risen by 400%, unbeknownst to many investors. The price of uranium enrichment has also risen from US$30 to a more sizable US$50.

The information presented by Munro is positive for investors, but let’s stay calm and pragmatic. Nothing has changed just yet. Additionally, Munro, like many industry experts, explains uranium is very unlikely to reach the US$150/lb peaks of the previous cycle. Instead, a sharp peak of US$90/lb is seen as more feasible, followed by a fall back to a stable and consistent US$50-60/lb. There is no nuclear renaissance hype in the present day to drive prices to their previous highs.

Munro also touches on some issues that have been doing the rounds in the Crux community as of late, specifically the Sahel terror situation and the disastrous impact it is having on some mining companies.

Bannerman Resources itself hasn’t seen a great deal of share price movement this year, but Munro claims it is primed for growth in an imminent bull market, given its strong, experienced management team and solid portfolio of assets in favourable jurisdictions.

Interview highlights:

  • Difficult 2019, What’s to Come in 2020?
  • Uranium Inventories: A Historical Overview & Problems Arising
  • Markers for Investors: When is the Market Going to Recover?
  • Joint Comprehensive Plan of Action: What’s Changing in the Geopolitical World?
  • How will Political Turmoil Affect the Uranium Market?
  • Return of the Peaks: How Quickly Could it Happen and is it Outright Possible?
  • Future for Uranium Juniors
  • A Look into Bannerman: Importance of a Seasoned Team and a Mining-Friendly Jurisdiction

Click here to watch the full interview.

Matthew Gordon: Hi Brandon. We last met at the World Nuclear Association event in London where you sit on a couple of committees.

Brandon Munro: I sit on a working group that is producing the next nuclear fuel report. It was released in September, in 2019, so we have now started kicking off with the 2021 report. So I am involved in three of the working groups and I chair the working group that determines the demand projections for nuclear fuel projections out to 2030.

Matthew Gordon: You have had a few meetings in London this week, a few working group sessions this week, you kindly agreed to come and tell us a little bit about what you are discussing. So, last year – difficult year. Another difficult year for Uranium. I’m not quite sure anyone knows what’s going on. Do you?

Brandon Munro: I can hopefully share a couple of insights with you: what we have got is an extraordinary situation where the visual part of the market, which of course is the spot price and the non-existence of any real term volume.  There is no real price discovery, but the extent to which this exists in the spot market, we’ve got something that just looks dull, boring, disappointing and that’s had a corresponding effect on most equities.  It has been carnage out there for the last year for many, many companies. But what we can see taking place under that visual surface veneer, I think is very positive for the sector.

Matthew Gordon: Let’s look at a few of those moving parts:  behind the curtain, because people talk about the macro story. There is billions and billions of dollars of nuclear reactor infrastructure being built across the world, in multiple jurisdictions and countries. And people focus on Germany, reigning things back, the French did, now they are not. But there is more to it than that in terms of that infrastructure build out, but I don’t want to talk about that today because I think that is well covered. Can we talk about the inventory side of things because I think you have talked in the past about different piles of U308 and UF6 and EUP, what is happening there?

Brandon Munro: What we are seeing is inventory tightening.

Matthew Gordon: What does tightening mean?

Brandon Munro: The sector always exists with a lot of inventory. That’s been the case for the last 30-years. It is not helpful to look at the absolute total amount of inventory that is calculated throughout the sector.  You need to understand where that inventory is held. Inventory that is held by the Russian government or the US government or Chinese stockpiles, that is kind of interesting, but it doesn’t dictate anything in the market, because that material is just locked up for strategic purposes.  The relevant part for investors and the price, is mobile inventory; what inventory is available either to supress demand or to be sold into the bid when price goes up. Because that is what is interesting to an investor; is that going to suppress a price rise?

Matthew Gordon: Absolutely.

Brandon Munro: And what we have seen there is a tightening. In U308, we have seen tightening, largely because if the deficit that we have got at the moment. So even after allowing for secondary supplies, we have run a 20Mlbs deficit for the last couple of years. So that is being drawn down, predominantly by utilities underbuying. But what I find fascinating, as you mentioned, you have got three forms of Uranium in the nuclear fuel cycle. And for the listeners, you have got: U308, which is the mined concentrate. That has been subjected to conversion and conversion is a service that is applied to the U308, that the utility pays for, that turns U308 from a powder, or yellowcake, into a gas; Uranium Hexafluoride. And that is still a homogenous commodity because it is just UF6. From there you get enrichment, again, typically a service paid for by the utility where the Uranium that they have bought off a mine, then goes to enrichment, to the specifications required for their particular type of reactor technology.

In the old days, that’s how it worked. The utilities would buy the Uranium and they would pay for the conversion service, they would pay for the enrichment service. But what’s happened since Fukushima, when we had reactors come down, particularly in Germany and Japan, is inventory started to build up, not only in U308 but also in UF6 and in EUP; the enriched Uranium product. And that has been a problem for our market because you have a substitute ability between those three forms of nuclear power. And not only can the utilities arbitrage between those three forms; if they don’t like the price they are getting in U308, then they can go to UF6 or EUP. But they can also ignore the time criticality of planning before in the old days, they would have to have bought their U308, two years before they needed it, because it takes a lot of time to transport and move through that cycle.

Now, if they sort of mess up on the planning, well that’s okay because there was UF6 available that they could buy one year out from when they needed it, or EUP which they can buy 6 months out from when they need it.

And that has contributed to the utilities being able to hold off on re-starting the contract cycle.

Back to what’s relevant today and why I am saying that the sector in the market is tightening in a very favourable way. First of all, UF6 has tightened almost entirely. So I have just been to a room with people who plan in this sector, and what happened, as you know, a couple of years ago, Covidien put the Metropolis conversion facility into care & maintenance, and cleverly, they bought all of the UF6 they could find. All of the mobile inventory they could find in the form of UF6, they bought up.  And they did that because they had conversion contracts. And when they closed the doors on Metropolis, they would have to continue delivering into those. So UF6 is very tight. Even so much so that a few months ago, we saw Uranium Participation Corp. swap out their UF6 for U308 and take advantage of that arbitrage.

We’ve also seen a tightening in enrichment and that has been exacerbated by geopolitical concerns around Iran sanction waivers, and maybe we can come back to that. Se we are seeing a UP tightening: U308, we are also seeing tightening but not to the same extent, hence why we have got $25 Uranium, or $24.50 Uranium.  But if you look at what happens when those markets tighten, UF6, in the time frame I have described, that has gone up 400%, spot conversions. So conversion is the price of the service, so the difference between what you pay for UF6 and what you pay for U308. 400%. And that has been a wake-up for the utilities because many of them forgot that those sorts of increases are possible.

Matthew Gordon: So that tells us something. What about the enrichment component? Has that gone up?

Brandon Munro: Yes, also. Not to the same extent but it has gone up from mid-thirties, so it is measured as USD per, the SWU price, the Separative Work Unit, gone up from mid-thirties to about USD$50. So, that is also a healthy increase.

Matthew Gordon: This is what you mean by ‘behind the curtains,’ there are things going on which are indicative of a movement, or the need for a movement, relatively soon. So, why weren’t these conversations happening at the beginning of 2019? Because the numbers were starting to move in 2019, but they haven’t had an effect on spot, obviously there aren’t that many contracts being written, so how do you work out where the threshold is? Where is that critical threshold that these numbers need to get to. Where are the markers for investors to actually know when this market is going to go? It feels like not too many people know what’s going on in the Uranium space at the moment.

Brandon Munro: I’ll tell you all that it needs, because, as you know, I’ve been in meetings in London for the last couple of weeks and I get asked the same question: what’s the catalyst?

You only need a sentiment switch for this market to tighten. And that sentiment switch can come from anything, so if we use the examples now of UF6 and enrichment; in UF6, when sentiment was low, Covidien were able to buy all the UF6 that they needed to buy, and they did that. The moment the price started to go up, the mobile inventory disappeared.  And that is a fact in this market; there is an inverse relationship between the mobility of inventory and the price; as the price goes up, inventory disappears. And we even saw that, talking to some of the traders as I have over the last couple of weeks. We even saw that in November, October, November when we started to see a bit of an increase in the Uranium price, it went up by 8% in a couple of weeks, and the inventory, the availability of U308 vanished. It only started to come back when the price softened again and the various parties who had it to sell figured that there was no time value in money at that point.

Matthew Gordon: Sentiment of utility buyers?

Brandon Munro: Correct

Matthew Gordon: Nothing to do with retail, nothing to do with institutional buying?  

Brandon Munro: So let me try to explain that a bit further and put some numbers on it.

So, maybe sentiment is a little bit wishy-washy, but what we are really talking about is their view of the medium-term price and what effect that is going to have on their immediate actions, okay. So, some numbers: we are running a 20Mlbs deficit in the U308 sector at the moment, after taking into account secondary suppliers.

So, to put some numbers on that: 2016, the sector was knocking out about 160Mlbs of U308 production. Mined production. That’s now come down 25Mlbs because of care & maintenance in McArthur River, the Kazakhs producing and various other supply disruption that has taken place in the sector. Secondary supplies – all of the various forms: running at about 25Mlbs against a reactor burn up of 180Mlbs. Rough numbers. So, so far, there isn’t enough demand at the U308 level to put pressure on the price. So what we know, is that there is about, instead of 180Mlbs worth of demand, because that’s the amount that’s being burnt up each year, it’s about 160Mlbs of demand. Caused by two things: preferential buying of UF6 and EUP over U308 and utilities wearing down their inventories. So 20Mlbs, if I now translate that into numbers in the US for example, in rough terms, the US nuclear fleet consumes about 50Mlbs of Uranium and they have been underbuying in the last few years by about 20% – so 10Mlbs per annum.  All they need to do is make a decision that they are going to change their policy from under-buying to full coverage, and that’s 10Mlbs. That’s a dramatic effect on that 20Mlbs deficit. Or we could see financial plays into the marker again. In 2018, about 10Mlbs was taken out of the market by Yellowcake and UPC topping up. Again, that’s a 10Mlbs swing. A swing like that, particularly if it goes up to 180Mlbs and starts to expose that supply and demand deficit in U308, that’s enough to generate a very sharp price response which will then have secondary effects in terms of secondary buying.

Matthew Gordon: Do you think that there will be a financial impact from players like Yellowcake in the market? Yellowcake have got their own issues at the moment. I don’t see any generalist funds wanting to back it – another team buying up Uranium at the moment, are you aware of any?

Brandon Munro: Yes. But it’s private. We are aware of Family Offices clubbing together. We are aware of banks and hedge funds. But it is not the same model as Yellowcake. Yellowcake is a buy created market instrument with liquidity and hold into the long term. So the other buying in the financial market that we are starting to see is not a sequestration of that Uranium in the way that UPC and Yellowcake is.

Matthew Gordon: It is such a small market; it’s a USD$10Bn market, it’s nothing so the big institutions – it would surprise me if they were to create teams to take advantage of the Uranium space.

Brandon Munro: Yes. And look; let’s face it; investor sentiment is desolate at the moment in Uranium, so for generalists to get involved in the commodity, we are going to need a movement in price. I don’t think we are going see a change in investor sentiment until we see a change in price. I don’t think there is enough potentiality visible in the market for investor sentiment to change price.

Matthew Gordon: Talk to me about the JCPOA please.

Brandon Munro: So Joint Co-operative Plan of Action.

Matthew Gordon: Who are all of the parties involved in that?

Brandon Munro: So it is Iran on the one hand and then you have the UK, France, Russia, China and the US; so they are the co-operative parties. Put in place in 2015 because as you know, Iran was showing signs of building a military nuclear program. The plan was designed to hold off sanctions on Iran in return for Iran complying with certain obligations. Predominantly they were obligations of maintenance and monitoring, unfettered monitoring of their facilities and obligations designed to go further than non-proliferation obligations that go further than everyone else, to put a big spacer between Iran defaulting on its obligations and having the capacity to produce military grade Uranium.

Matthew Gordon: Before Christmas, things started getting more complicated; the US pulled out, plus the actions of a couple of weeks ago by the US, further complicated relationships with Iran. So, can you talk to us about your view on the US and European, well, generally European and allied with Russia as well and how you see that going forward.

Brandon Munro: It’s good to step back a little bit to try and work your way through the detail in the complications here. So, the JCPOA was set up, one of the first things that the Trump administration did was to withdraw. And they did that in a way that withdrew unilaterally. There was a diplomatic scramble by the other co-operative parties to try and keep the agreement on foot.  And what that enabled the Trump administration to do was to re-establish a whole range of sanctions on Iran that were being held off because of their commitment to the JCPOA: oil sales, access to the US financial markets etc.  But what they didn’t do, they didn’t allow those sanctions to extend to the provision of services and fuel to the US nuclear industry. And there was this thing created called the ‘Sanctions Waiver’. And the sanctions waiver needs to be re-evaluated every 90 days. So every 90 days, the Trump administration sits down and decides if they are going to give another 90 day waiver or, are we going to withdraw the sanctions waiver? Importantly for the sector and for the utilities and for listeners, the next sanctions waiver consideration date is 31st January.

Now, what happened, November 15th, Mike Pompeo announces that the Trump administration is withdrawing the waivers in respect of Fordow enrichment facility that was being used initially under the JCPOA to create medical isotopes but one of the progressive breaches of the agreement, the JCPOA that Iran announced, was enrichment of civilian grade Uranium rather than just for medical isotopes. Now, Fordow is a tailor-made facility for the electorate in the US, built into a mountain, real James Bind stuff. Clearly it was set up to produce military grade enrichment; when you look at the configuration of the cascades and that sort of thing, so it is an ideal target for the Trump administration to show that they are really serious about this.  December 15th coming up, the utilities become very concerned because no-one was particularly clear who was involved in the Fordow facility and when the waiver gets lifted on December 15th, it could have been mayhem. Now, to understand why the utilities are concerned, half of the enrichment services provided to US utilities comes from Russia; some of it directly from TFEL and TENEX and some of it is effectively resold by other enrichment providers. And the excess capacity in the Western world of enrichment, isn’t enough to fill that gap. Not only that, but RosAtom, as the Russian nuclear giant, it is involved in absolutely every aspect of the civilian nuclear power cycle. As it turned out, TFEL withdrew from its involvement in the Fordow plant because it was providing assistance with its medical isotopes and according to them, any civilian enrichment creates contamination which makes that program impossible. So that one sort of washed over: December 15th came and went and all was okay. So now we fast forward to what you were talking about with the huge escalation of tensions in Iran – a month before the next sanctions waiver. So, there is a lot of concern from US utilities, but also European utilities that if that sanctions waiver, or the entire deal falls over, the Russian nuclear providers are going to have to make a decision; do they back Iran and continue to support Iran? And be restricted from providing a whole range of services.

Matthew Gordon: It’s not just the Russians here; you’ve got the Brits, the French, the Germans, there’s a lot of superpowers in the G7 who are involved in this. G7 plus Russia. They don’t agree with the American stance and position – certainly not what happened two weeks ago. And I think there has been a lot of posturing going on, and I don’t want to get this into a political conversation, I want this to be about Uranium, but the reason why Europe hasn’t followed the US is that they think the Iran deal is a good deal.

Brandon Munro: Correct.

Matthew Gordon: It’s working and I think a lot of people in the US think it’s working, but it’s rather unfortunate timing, because again, there is the perception, but the perception is that in an election year, going to war has traditionally been quite a good vote-winner. So, you know, that whole mess has been slightly discredited with the timing, but what impact is that going to have, if any, I’m going to bring it back to investment, okay – is what’s going on in Iran going to have an impact on the ability for equities, Uranium equities to move forward, or is this something that is actually going to be another negative impact, another negative event in the world of Uranium equities? 

Brandon Munro: Let me just clarify one thing before I answer that question, yesterday, so until very recently, all of the other parties, ex-US, were declaring their support for the deal and doing their upmost to keep the deal on.

Matthew Gordon: Thanks for giving me an update, good,

Brandon Munro: Just yesterday, they invoked the dispute clause under the JCPOA.  Article 36.

Matthew Gordon: What does that mean?

Brandon Munro: That basically means that there is a 14-day dispute resolution and what Boris Johnson has said is that he would like to see a new deal which he aptly named the ‘Trump Deal’.  So, I think what they have realised is that they need to try and get Iran to come back to the negotiating table and renegotiate the whole JCPOA.

Matthew Gordon: So that is hot off the press.

Brandon Munro: Hot of the press. Which helps to contain or to eliminate the sanctions exposure of the other countries.

So how that unfolds; we have got absolutely no idea. And what effect that has on the sanctions waiver that is considered on the 31st, if such a thing still exists – so that has created a new layer of uncertainty. Now to go back to your question, it’s a difficult outcome to pick because it depends, let’s just ignore the dispute that has been called for the moment, it depends on Russia’s reaction. I think they are so dominant in the nuclear sector and it is such a profitable, effective business for them that they would throw Iran under the bus, but you can’t put a significant probability on that because it is so wrapped up in Russian foreign policy which has been extremely successful in the Middle East.

Matthew Gordon: It has. Most people don’t understand that.

Brandon Munro: That would then, so if they were sanctioned, if Rosatom as a whole were sanctioned, that would lead to a period of chaos in the nuclear supply chain, because they are so pervasive in everything, particularly what the traders are doing; much of the supply of U308 these days is coming from carry trades and so forth that the traders are involved in, but they often have so many chains of custody with those supply chains that most of the time you have got Uranium 1 in there or Rosatom in there somewhere, and there’s a chance that it could invalidate all of those. As well as the effect on enrichment.

Matthew Gordon: Why is the US taking a risk on this? It is a no-size industry, it is negligible compared to oil. Obviously, Iran is sitting on a lot of oil, again, this is a conversation for another day, 50 million barrels discovered last year, new barrels discovered last year, and this sector, geopolitically is the messiest thing I have ever seen in any investment class because it is a very emotive topic, why? Why are people so wound up about it? Investors get wound up about it. Countries get wound up about it.

Brandon Munro: Gets you and me pretty excited.

Matthew Gordon: I’m excited because I think there are some great opportunities. I think there are some great companies just sitting here waiting for people to just get back to doing business and stuff.  For sure. Again, maybe we should talk about that, it is another big topic that, that’s another geopolitical component that I know we did talk about way back.

Brandon Munro: You asked me what effect this is going to have for equities. So, there is a period of, if it unfolds that way, there is a period of confusion and chaos and hard to know what equities would do. Into the medium term though, it is going to be beneficial for U308 and beneficial for equities. Number one: it is an important reminder to the buyers in the sector, the utilities that geopolitics does matter and geopolitical risk does play a role. So they can’t just hoover up all the material from Kazakhstan that they want, at whatever price they want, they must have a diversity of supply which leads to a stacking in the price that they pay for Uranium.

Matthew Gordon: Because the supply chain may break further down the line, they need to get certainty.

Brandon Munro: Yes.

Number two: if we see a break in the chain of custody amongst all of these trades, then it is going to push the utilities back into dealing directly with producers which in the medium term is a good thing for transparency in the U308 price and it is also going to lead to more price discovery. Whilst the traders argue that they play a very important role in ensuring the efficient operation of the markets and so on, where we are at the moment is that they are playing a role in suppressing price discovery through the various instruments that they have got.

So positive in the medium term, unknown in the short term. But with any unknow, we could see a very sharp price reaction in U308 which would be extremely positive in the short term.

Matthew Gordon: I think people would have argued that at the beginning of 2019 too, wouldn’t they? So what lends you to feel that it is more the case today than it was a year ago?

Brandon Munro: Because we are talking about the scenario where we have sanction waivers lifted and we have chaos in the sector.

Matthew Gordon: We get a lot of commentary from retail investors, family officers, fund managers, CEOs of Uranium Juniors and they are talking about a return to the peaks of $130, $140 Uranium, sitting at $25 today, I’d love your view on that one. But the other thing they talk about is the speed at which that returns, the speed at which the share price returns and it’s a hockey stick, of course. Those are great stories. I don’t believe them. But they are great stories. What’s your position? Do you think we are going to see a repeat of the last cycle? Honestly?

Brandon Munro: Yes. I don’t think it’s realistic to expect a repeat of that degree of volatility.

Matthew Gordon: Why?

Brandon Munro: Well, when you look back at that volatility and I was in the sector at the time but I was working as an M and A lawyer, so we are on the M and A side; take-over defences and so forth and I can remember, there was a lot of commentary about Uranium going to $200. And it was a great unknown. The extent of reactor builds was an unknown. Obviously an up-side unknown; there was a nuclear renaissance, there was a huge amount going on. It was a demand story in those days. And when there’s enough people saying Uranium could go to $200, as it sails through $100, it still feels like a viable buy to keep buying it up.

And we still had some other dynamics in terms of Chinese being very early in their procurement cycle, they had big plans which are now back on track, but back then they were significant. Those dynamics don’t exist at the moment. Instead of being a demand story, what we’ve got today is a supply story. A lack of supply story and a lack of incentivisation. I do believe there will be volatility and I think the opportunity for this market to slowly balance out at the right price, I think that opportunity has slowly been dissipating over the last 12 to 24 months.

We would need price signals today, and really over the last 12 months, to incentivise enough new production to create a balanced market. So an overshoot is certainly likely but I don’t see it being likely that we will see an overshoot $120, $130, $136 that we saw last time. It shouldn’t be part of an investor’s plans.

Matthew Gordon: Lots of companies talking about the need for a $50, $55 spot. Just to be able to break even. Then you have got to incentivise to actually make some money, because that’s the name of the game  

Brandon Munro: Yes.

Matthew Gordon: Whatever that number is: $65, $70. It feels like today, a long way away.

Brandon Munro: It feels like it.

Matthew Gordon: But it may go quickly. So you were saying that it may quickly go up to those sorts of numbers but then the controls in place or moderation in the market, or a little bit more savvy investment strategy now compared to then, will temper that growth point? Or are you saying that this is a slow and steady growth there? Again, because we have seen some numbers from various analysts which suggests that this may hit $40 by the end of next year. Which obviously doesn’t do anything for anyone. So what’s your thoughts?

Brandon Munro: Yes, that’s right; $40 doesn’t do anything for the sector.

Matthew Gordon: It might as well be $25.

Brandon Munro: Correct – but that is exactly the point; in terms of fixing the supply disruption that we have got today but coming down the barrel particularly when Kazakh production starts to taper off, it could be $25, it could be $15, it could be $40. It doesn’t incentivise anybody.

Matthew Gordon: The Kazakhs have just announced that they have over-produced by 4%.

Brandon Munro: The Deputy Minister, are you referring to that announcement?

Matthew Gordon: Yes. They don’t seem to be following their own guidelines, are they?

Brandon Munro: I don’t know.

Matthew Gordon: Okay.

Brandon Munro: There’s a number of statements; I did ask Kazatomprom that question over the last couple of days and they didn’t know either.

Matthew Gordon: So where does that leave the rest of us?

Brandon Munro: What we’ve got, we have this situation where we need a significant escalation in the uranium price to even start to put new projects into the game, and as you say; is it going to be enough for them to get financed and constructed and built? So the ranges that you are talking about – I’ve got no problem with Uranium prices getting there and staying there. And I think there is capacity for an over-shoot. I just don’t see $136.

Matthew Gordon: What do you see?

Brandon Munro: I can see an overshoot to $90.

Matthew Gordon: Okay, sustained?

Brandon Munro: By definition it is an overshoot, so not sustained.

Matthew Gordon: Because at the beginning of this conversation, you talked about some of the controls in place and some of the people who can control the market to a degree. And I have asked this question continuously over time and people say it’s impossible for any big players to control the market. That may or not be the case, personally I think it is in the interests of people like Kazatomprom, like Camaco, not to let the market go too crazy because no one wants 500 entrants in the market place like last time round. At the same time, we have had conversations with CEOs, talking about roll ups and consolidations and so forth, listened to Rick Rule saying there are perhaps 6 to 10 players who will run in the market. There are 50 today. So obviously, people are expecting a lot of change in the structure of Uranium producers. What’s your take on what the horizon will look like? How do you see the junior mining space playing out? Because there are like 5 biggish boys and then there’s a bunch of others.

Brandon Munro: Well, if we talk about capacity of the market, volatility and capacity to overshoot.  I think for an investor, they have to be saying, is there investment in the category of producible pounds in the next   cycle, or is it something that could come on in the cycle afterwards. Because if we do see an overshoot, it’s only the companies that are in a position to benefit from that overshoot that are going to produce a superior result. Sure, there might be a little bit of a bubble amongst all Uranium companies with an equity’s response, but at the end of the day, particularly for institutions and investors who need liquidity, if it is not producible pounds, then in a sense, whatever the price is doing in the next cycle is irrelevant. Perhaps it will help their cost of capital which might mean that they are diluted a little bit less, but you’ve got to be able to produce pounds into the next cycle.  As you know well, there are very few companies in that small universe of Uranium investment that can do that.

Matthew Gordon: To me, that is some big red flags across the market. People need to understand what good looks like and what not so good looks like. Previously we have talked about teams who have produced and sold into market. We think that is really important because it is a lot more complicated than other sectors. We have talked about the need for the asset to be of a scale; scale is really, really important here and to be able to mine economically because again, the basic rules of mining still apply. Companies with a sense of what the economics looks like. This gives you some cues as to whether to invest in them or not.

But, you guys for instance? What’s your team’s structure? Have you got people on board who have been there and done it before, in a cycle?

Brandon Munro: Absolutely.

Matthew Gordon: You have? Okay.

Brandon Munro: And for us, that has been extremely important. So if you look at who we’ve got in the team. So in Namibia, our chairman is Mike Leech. He was the Managing Director of the Rossing mine at a time when it was the largest Uranium mine in the world. But before that, he was for the last 15 years, he was CFO so he was involved in all of the marketing and contracting and knew everything about that, to do with Rossing, which was a dominant player.

Matthew Gordon: Let’s take that; you say that, when you go and have conversations, sorry for swinging it back to Bannerman and I’m putting you on the spot here a bit, but I want people to understand the mindset of the junior miner board, okay. You’ve got an experienced team, when you are talking to – whether it be funds, I know that you have a lot of talks with people in China because the scale of your project would suggest that that is probably where you are leaning but I’m sure you can tell us another time. What are they looking for? Is that an important factor to them? I certainly think that it is, but do they?

Brandon Munro: Absolutely. Because as you say, you say; Uranium mining is a little different and I know there’s a lot of understatement in that.

Matthew Gordon: Yes.

Brandon Munro: It’s critically different. You need two things at a senior level: you need that understanding of Uranium; there’s people who have done it before, but you also need to know the country.

Matthew Gordon: Okay.

Brandon Munro: So we’ve got Mike Leech; so in terms of knowing the country, former President of the Chamber of Mines in Namibia and former Chairman of the Namibian Uranium Association, the list goes in. In my opinion, he is one of the most senior mining executives in the country.

Matthew Gordon: So Namibia is known for mining. What is the main mining output?

Brandon Munro: Uranium and Diamonds. It does have Gold, it does have Copper, Lead, etc. Mining is extremely important to Namibia. It’s a big chunk of its GDP and the majority of its foreign earnings and Uranium is half of that equation.

Matthew Gordon: So it is important that you get into production and generating cash and employing people.

Brandon Munro: And it’s not just Mike, our Manging Director in-country, Verner Evault, he was our manager at Rossing, he was born Namibian, very well known in-country. Very great reputation. Dustin Garrow is our marketing advisor.

Matthew Gordon: We have interviewed him a couple of times.

Brandon Munro: Dustin sold Namibian Uranium for Paladin, he obviously knows Namibian Uranium because he has been in the industry for more than 40 years. But, he knows Namibian Uranium, he knows exactly what needs to be done to get it out of the country. We are not going to have a mishap in our first shipment and all of that stuff that can go wrong in that sector.

Matthew Gordon: I had forgotten he was involved with you guys. We like him a lot. He just talks common sense. I encourage people to watch the interview with Dustin.

Brandon Munro: And as you know, I lived in Namibia myself for more than five years so I know the set up in Namibia.

Matthew Gordon: There’s a lot of things going on in Namibia like unemployment is quite high. You sort of look at what’s happening in various other countries in Africa, is Namibia a really benign environment or should people be worried about the jurisdiction?

Brandon Munro: From a living their point of view, it’s entirely benign. I lived there with my family, with my four kids for more than five years and I never even had my car broken into. I’d liken it to living in large parts of Australia.  Good infrastructure. Very strong development agenda, as you know, because of unemployment and fiscal reasons, etc, etc. But the other thing is, because the country is largely built off diamonds and then Uranium, there’s a very strong not only acceptance of Uranium but respect for Uranium. You go into Swakopmund, which is the coastal town near our project and half of the infrastructure has been built by Rossing. People remember, appreciate and value that. And that is so different to so many different Uranium mining jurisdictions. Even the little NGOs, the interest groups that we have got there that oppose nuclear power and oppose  and Uranium mining, we let them have their voice, I’ve been in debates with people there; it’s all very respectful but they don’t get any traction with local people because people value and are appreciative of what Uranium mining has done for the whole country.

Matthew Gordon: You are going to come back and tell us the Bannerman story properly.

Brandon Munro: Okay. I’d love to do that.

Matthew Gordon: In the next couple of weeks, probably online when you are back in Oz. It’s good to see you over here. Really is – it’s always good to see you over here. Perhaps you can share some of your WNA conversations with us as well, when we talk.

Brandon Munro: Great. It’s always good to catch up. Thanks for making the time.

Matthew Gordon: I appreciate it. See you soon.

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

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Serabi Gold (LSE: SRB, TSX: SBI) – You Broke The Bonds, And You Loosed The Chains (Transcript)

Serabi Gold - Palito

Interview with Michael Hodgson, CEO of Serabi Gold (LSE:SRB, TSX:SBI).

2019 was a good year for most gold companies, including Serabi Gold, who saw its share price treble. Now Serabi is looking to push on to achieve the Gold returns shareholders will demand.

Serabi’s debt to Sprott Lending Partnership, c. US$6.5M, and Equinox Gold Corp., US$12M, has been looking. Rather than raising equity to resolve the problem, Serabi Gold has opted for 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. This wards off dilution for now, but if Greenstone decides to convert notes into shares rather than cash that would suggest the company has delivered on its production targets and the share price has bounded on further.

Serabi Gold will now look to push forward with the development of Coringa, which is geophysically and metallurgically similar to Palito, but with a higher gold grade of 8.34g/t. 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 doubled.

Serabi will use the majority of the c. US$14M in the bank to develop Coringa, introduce an ore sorter at Palito and continue exploration at Sao Chico. Serabi Gold appears to be well set up to build on last year’s 40,000oz+ gold production figures. Let’s keep watch and see if they can deliver.

Interview highlights:

  • Press Release: $12M Convertible Loan
  • What is a Convertible Loan and What Terms Bind it?
  • Had They Looked into Equity Options Beforehand?
  • Greenstone Group’s Support
  • Year of Delivering: What Will They Do With the Money?

Watch the interview here.

Matthew Gordon: You have a press release out this morning: USD$12m convertible note. Why have you done that?

Mike Hodgson: I think everyone will know, Serabi investors and people who have been following us, that we have the Coringa project which we have been advancing, making good permitting progress. It’s a very similar deposit to our Palito operation, so we see it as quick organic growth. We are working through the permitting process and have a license to start the underground operation and that is something that we are eager to do. One outstanding condition on that has been that we have one final payment to make to the company we purchased the asset from, called Equinox. They were called Anfield in the past, but they have since become Equinox, and we owe them USD$12m. Whilst we are eager to start our underground operation at Coringa, it is something that we wouldn’t be comfortable doing until we have fully owned the asset. So the payment will be used to settle the final payment to Equinox which is going to be happening, all being well, at the end of February 2020.

Matthew Gordon: And you also have debt with Sprott outstanding. Will you be tackling that or is that something you can roll over?

Mike Hodgson: The good thing about this USD$12m convertible loan is that it frees us up to use our own cash. We have been running up our cash position quite nicely during 2019. We opened the year with USD$8m and we ended the year with over USD$14m. We have been building up cash. The whole idea, the original intention was to build up that cash as much as possible and to actually make the Equinox payment, but instead, we will use that cash to pay off Sprott, and to actually end that debt as well, which is sitting at a little over USD$6.5m. We will pay that out of cash flow; this is what this convertible loan allows us to do. It liberates our cash to do that, and continue with our various work programs at Palito and Sao Chico. We are actually drilling a lot to try and increase the Resources and to fund that underground development which we are going to do at Coringa from Q2 onwards in this coming year.

Matthew Gordon: What is a convertible?

Mike Hodgson: Okay, well, a convertible loan is essentially money where a lender puts money to the company on a condition over a term, in this case, 16-months, they then have the right to take shares, at a pre-agreed price, the exercised price, which will be set at the beginning of the loan. In other words, in the next few days, they have the right to actually acquire those shares at a fixed price, at the end of the term. They may want it to be converted, so in this case, it would be fairly close to the market price, but they could choose to actually get paid back in cash instead. The company also needs to demonstrate that they can pay the money back in cash as well. At 16-months, cashflow is actually strong enough to do that, but we would obviously expect the conversion with Greenstone to take it in shares.

Matthew Gordon: It is at their election; if your shares are moving up, or if they feel your shares will probably move up, they will elect to take shares. Or they could just treat it as debt and you repay them at the end of the term if you have the cash, or perhaps you refinance it if you didn’t have the cash.

Mike Hodgson: That’s correct.

Matthew Gordon: It is an interesting device which some Juniors use. Did you look at the option of equity, because I imagine that last year, or towards the end of last year, it was a tricky period for equities? I think most companies were asking for a 10% to 15% discount. Did you have those conversations?

Mike Hodgson: We did. Last year started, production-wise, we had a terrific year and as I just said, we generated cash; we generated USD$6m to USD$7m during the year, which was a great effort. We had a poor share performance in Q2/19 when we had two shareholders: one an institution in London, and one a private lender, invested some time ago, both selling their positions and that really took our share price through an all-time low for the last few years of £0.23p. So, at that point, equity was absolutely out of the question.

Despite that, we did see a price recovery during the year. Serabi, like many Juniors has suffered over the year, with liquidity – we did actually find over the second half, on this Gold run on H2/19 – we saw a lot of investors come into the stock and that really drove the price up. For once, in quite a while, we had some real liquidity, share price went back up to about to £0.70p/80p range, which certainly brought the prospect of equity into question. But having investigated it, speaking to the brokers, the board, major shareholders generally, it was still expensive money. Most of the equity deals kicking around wanted 20% discount to the market, so it was still going to be quite an expensive way of doing this.

So, Greenstone; they are fairly new investors with us. They have been very supportive. They offered us a convertible loan, so it seemed favourable, the cheapest money and the best option to take.

Matthew Gordon: Quite an endorsement by Greenstone. For people who don’t know who Greenstone is, they are a geologically technical fund in London. This takes their position to 37.8% potentially, or something like it.

Mike Hodgson: Yes.

Matthew Gordon: So quite an endorsement from them. You must be pleased to have them onboard and supporting you?

MIKE HODGSON: Absolutely. They took a big role in our company in that we have regular technical discussions. We have had a lot of support. They have got a good engine room; people who we can call on. They have obviously got a huge reach in terms of things that the company can be doing as well. They are super helpful and it is good to have a shareholder of that type of calibre in our stock.

Matthew Gordon: Smart money with deep pockets. Very nice. Can we talk about what you are actually going to do with the money? You have talked in the past about obviously getting into production. I also want to look at what you’ve been doing at Palito and Sao Chico because you have talked about exploration in the past, so what is happening this year with this new restructured Serabi Gold company?

Mike Hodgson: Yes. Well we are really, really busy at the moment. We had a great year. We broke 40,000oz for the first time ever, which was a huge achievement. We ended a quarter, Q4/19 with another 10,000oz which was really pleasing. So that means that 5 out of our last 6 quarters have broken 10,000oz, so we really are in regime, established at 40,000oz. Very steady – which is not something you usually see with a small producer. It is very consistent. The grades are very solid. Production and throughputs are going well at the mines. We still remain a plant-constrained operation; which I will come onto in a moment. We are doing something about that, but it was still very, very pleasing. We expect this year to be more of the same with the good news that we have our ore-sorter, which is being commissioned as I speak. I am actually going out very quickly next week, to site to see this machine working. We are commissioning it right now. We have got the manufacturer at site. We are calibrating it.

Now, the effect of this ore-sorter is that, the most diluted ore that we have got, which is generally the Palito development ore, and some of the lower-grade Stope ore, we can pass this material through this ore sorter, which essentially removes waste. Either by optical; by colour, or by density. Now, we are a plant-constrained operation. Our restriction is the milling section which is around 550tpd. If the grade is sitting normally at about 7g/t or 8g/t, that means that at the end of the day, the maximum output is around 40,000oz.

The ore sorter is going to sort of screen out some of that waste rock which is currently entering the process plant and will actually liberate some space so we can actually add more higher-grade ore and get that plant processing the same volume but of a slightly higher-grade. So if the grade can go up, from say 8g/t to 10g/t, we can squeeze that plant to get something like 45,000oz to 46,000oz out of it this year.

That, obviously, might not sound a lot but it is 12.5% to 15% more. It goes straight to the bottom-line – literally. The additional mining cost is there, but the additional processing cost is not. So it makes a huge amount of sense. So that is going to be a great plus in the actual operation.

At Sao Chico, which is our satellite ore body, we feel that that is probably the place where the extra ore production, mine production, will come from, to take up the slack that I have just talked about; add these extra ounces of higher-grade ore. And we are drilling there at the moment and have been drilling for around 2-months now and that will continue for the next 3 or 4-months. We are doing step-out drilling there. It is going very well. We are just literally drilling extensions to the current mine limits. If you can imagine an ore body – it is open to the East, it is open to the West, and open at depth, we are doing underground drilling with a contractor. Doing deep underground diamond drilling, to test the ore body at depth. We will be doing the same on strike at the surface with the contractor as well.  So that aggressive drill program is going to go on for the rest of…until Q2/20, with a view of hopefully drilling a new Resource update at Chico at the end of Q2/Q3. But most importantly, it is going to actually allow us to run our mine plan a bit longer. That’s the key there.

We also have at Sao Chico, outside the mine limits, but in our exploration licensed areas, some really exciting geophysics anomalies which we actually discovered back in 2018. We have finally got a drill rig in those as well so we are actually drilling those at the moment, we are only into our second hole. The results of which will be coming out in the next 2-months. So we are going to see a steady stream of drill results, coming particularly from Sao Chico, the mine itself, the step-out drilling, and drilling anomalies during the first half of this year.

So all of this is being funded out of our cash flow. We ended the year with USD$40m cash in the bank. We are going to pay USD$6.5m off to Sprott at the end of next month, and the rest of the money will be used, along with contributing cashflows we continue that exploration program. And finally, as obviously, and the real reason we are doing the convertible loan, is the work as well at Coringa.   

We have the mining license. Coringa, our new asset which we are going to bring on stream in the next 18-months. We are making great progress on the permitting.  We are very close to getting the first license, the most difficult license to get which is called the Preliminary License. That is conditional upon a public hearing which we are going to have. The date has now been set; it’s on 6th February. That’s when all of the stakeholders go to a public meeting which is in the region. It is important that it is in the region because it is in the town where Serabi is already one of the biggest employers and therefore, we are a big fish in a small pond. We have great local support. One really important note is that on December 6th, we actually got a sign-off from FUNAI – the Federal Agency for indigenous communities which these days, one can imagine in the Amazon, that is a very important group of people, which you do really need their support. They actually signed off with full support for the project. There will be no negative impact for them, in fact, positives, so that was a tremendous piece of news for us.  Which means that we will go into that public hearing well placed, albeit the public hearing will go well and we will get the preliminary license on the back of that.

That is the hardest license and where you are going to get stopped. You are going to get stumbling blocks but we feel pretty confident. We have made the project pretty water-tight. We have got no tailings there anymore. All of the environmental impact studies etc in our plan will be to not use tailings and dry-stack tailings, again, it is as good as it can be so we feel very confident on the back of that meeting on February 6th, we will have positive news.

Just to finish on that point, we already do have the license to start the underground mine. We are going to get that underway as soon as possible. It is important to demonstrate that we are a company that is really committed to the project in the region. Getting it started, putting jobs in the local community at the earliest stage and getting that all-important geological information for lenders and equity down the line. However, we finally fund the project, at the back end of 2021, we want to advance the project and get more confidence on the asset itself.

We want to know our AISC. We have actually managed about USD$1,050 for the year in 2019 with our production, and Coringa is going to bring in an additional 35,000oz to 40,000oz. Similar cost, but whilst there won’t be direct operational synergy, as they is 200kms apart, there will obviously be maintenance synergies, management synergies, some shared facilities like assay facilities and we are trying to locate some of those facilities between Palito and Sau Chico and in a city called Nova Polesa, which basically sits equidistant between the two assets. It is a town of about 40,000 people. There are a lot of positives there and that, I think those extra ounces will come in low-$900s so overall, we will be an 80,000oz producer with around an AISC of USD$950 as opposed to USD$1,050 today. So, with today’s Gold prices and today’s exchange rates; that’s a pretty nice place to be for a company of our size.

Matthew Gordon: Last year your share price trebled. You finished with a lot of cash in the bank. You are re-structuring. Trying to give yourself a good start to the year. What we need to see from you is delivery of all of these things; getting into production, doubling your production with the addition of Coringa, so it is a case of delivering and doing what you say this year, isn’t it, for you?

Mike Hodgson: It is, but it is not something we haven’t done before; at the end of the day, it is repetition of Palito so we are not leaving our comfort zone, we are just doing the same again.

Matthew Gordon: Step and repeat: cookie cutter approach. Mike, thanks for that update. We will stay in touch and do let us know how you get on with that Preliminary Licence. It sounds like a big step for you.

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

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

Energy Fuels (NYSE: UUUU) – Picking Winners & Identifying Losers (Transcript)

A conversation with Mark Chalmers, CEO of Energy Fuels (NYSE: UUUU) about what Uranium investment targets are going to need to have to make it in this cycle. Without contracts in place some Uranium companies will not get funded. So price discovery is important but that does not equate to immediate financial relief for some. Don’t be left holding that Uranium stock.

There is lots of money to be made if investors focus on the fundamentals and are not distracted by rhetoric by Uranium company’s that won’t make money even at $100 a pound. Pick companies with the right business model. Management teams experienced in bringing Uranium companies in to production and selling in to a contract market.

We discuss our investment thesis with several Uranium CEO’s. If you believe in the macro story of the Supply Demand story for Uranium then you need to know how to pick winners in this section. Not all boats will float on this high tide.

What is clear is that if the management team has not worked in mining Uranium before and produced and sold uranium in to the market, they don’t know what they don’t know. Cash is King – In a market short on institutional funding, some companies are running on vapour and struggling to find money and if they can, it is expensive and dilutory. Quality assets – the basics of mining are the same. Companies that can get Uranium out of the ground cheaply will do better than others. Investors need to understand a company’s ability to mine economically.

If you buy in to the macro story, we encourage Uranium investors to start looking at which companies are most likely to make it. It is apparent to industry insiders and veterans which companies and which assets will find it more difficult than others. We are listening to them and forming our thoughts.

Interview Highlights:

  • 90 Day Working Group Announcement Expectations
  • Importance of Management
  • Cash is King: Who Won’t Survive?
  • Who Should I Consider as an Investor?
  • Energy Fuels: Rebuilding the Share Price, and The Mill – A Means of Standing Out
  • The Market: When Will it Change and What’s The Plan if it Doesn’t?

Click here to watch the interview.

Matthew Gordon: Good to see you, albeit online. We caught up at the WNA Symposium in London last month. What was your take on it?

Mark Chalmers: Well it’s a good event. I really enjoyed being there again. And I caught up with a lot of people.

Matthew Gordon: There was a lot of excitement around the WNA Fuel Report as possibly being a catalyst for change. And we agreed at the time that it wouldn’t be. But the next catalyst for change is President Trump’s Nuclear Energy Working Group. It’s a week or so before that is due to announce.

Mark Chalmers: We don’t know exactly what timeframe the president will act on the report. Or what announcements will be made.

Matthew Gordon: There’s been various speculation as to what it could entail. But you’re not expecting it to focus necessarily on the uranium market, but the nuclear market as a whole. It’s hard to forecast what the impact could be for US uranium companies.

Mark Chalmers: There’s no guarantees, but I believe the working group gets it. I think they get it. I would be absolutely shocked if we get nothing here. The question is what will be proposed and what will the President decide is appropriate. It’s not very often you get on the President’s desk twice in 90 days. And I’m very proud that we’re able to do that. We’ve got this focus on the front end, the fuel cycle. The focus is absolutely required by the United States government, the largest consumer of uranium in the world, the United States of America is one quarter of the world’s uranium. We cannot go to zero.

Matthew Gordon: done a lot of interviews now with uranium CEOs over the last 3-4 months. As an investor, we’re starting to build up a picture of what the market looks like. I am a believer in the macro story in terms of the supply / demand story and what those numbers look like. I don’t have a sense of timing. I don’t think many people do. I’ve heard from 3 months to 24 months in terms of timing from people. I wanted to speak to you about some of the thoughts that we’ve had, and get some affirmation of some of those thoughts, if indeed you agree. There are lots of different companies at different stages and different positions financially, who may or may not make it, depending on how long this goes on for. But it was clear to me that you need three things. 1. You need a management team who’s been there and done it before. And I don’t mean mining. I mean getting uranium out of the ground, getting it to where it needs to be in terms of being able to process it and sell it and to market – that’s one. 2. Cash, because a lot of companies are running out of cash. And 3. Fundamentals of the asset itself, you’ve got to come back to that, because mining is mining. Start off with the management component with you first?

Mark Chalmers: Oh, absolutely.

Matthew Gordon: You is because you have been through a couple of cycles. You have produced. What would you say to investors about the importance of why the experience of having been through, not only a couple of cycles, but you’ve actually produced product and got it into market. Why do you think that’s important?

Mark Chalmers: Uranium is very unique. And it has a number of dynamics. When you start looking at uranium projects, it has the mining risk, and processing risk. It also has a lot of risk because it is uranium and that is obviously connected to the nuclear fuel cycle. A lot of people underestimate how all those things meld together and how one of those elements can really throw a monkey wrench into any project. When you look at other mining industries like gold and copper, silver, zinc, whatnot. They’ve had a lot more continuous operations over the years. They haven’t had the hiatuses that the uranium market has had. We go through these peaks and valleys. And the valleys, often are very pronounced and very long lived. And you lose a lot of that expertise and the knowledge. So there are similarities, but also many differences.

Matthew Gordon: Your last point about a lot of the expertise has been lost, because the sector has been in the doldrums for a while. People have got to make a living and they go off and do other things. I’ve spoken to only four CEOs who have ever managed to get companies into production. The rest are learning on the job. And as an investor, my problem is I don’t necessarily want them to learn with my money, because things can go wrong if you don’t know what is coming down the line. To coin your phrase, “you don’t know what you don’t know”. And that’s fine with someone else’s money, but not with mine. I just thought it was interesting with some of the conversation’s that we’ve had, it became obvious that these companies were just hoping that the market would come back and there would be enough money sloshing around. And some of these mistakes would get hidden by all the money that would be thrown at them for investment. But when things are tight, like they are now, if you don’t have the cash to be able to cope with this market, you’re in trouble.

Mark Chalmers: It’s pretty hard when these companies get to the point where they’ve gone to the equity markets multiple times. The share price continues to decline. The market just gets tired of the story. And so that’s why it’s important to maintain a healthy cash balance. And I think the one thing that is really a problem for a lot of these really small mining companies, juniors, micro caps, and it is pretty chronic in the entire industry, is that people get down to that last $100,000, or $1M and then they go out and try and raise money. It’s expensive or impossible to do. We’re not in that position. We’re a lot more complicated than a lot of these other companies. Other companies may have one project or it’s not constructed. So, the holding costs may be lower. But you just don’t want to get against the rope, because when you’re against the rope, people know you’re against the rope.

Matthew Gordon: I’ve gone through a period of learning about Uranium equities, speaking to some great influencers in the market, some fund managers. I’ve managed to speak to a couple of the utility companies. And I had a conversation a couple of weeks ago. It made me really nervous, actually, for the first time in this space. And it comes back to that line, ‘not all boats will float on a high tide’. They just won’t. I’ve been approached by a couple of groups to ask for my advice on a couple of junior uranium companies, who are struggling for cash and who are speaking to these finance groups to take them out. It’s like they’ve had enough. They’ve fought their fight and don’t want to go on, or don’t know how to go on. And that made me nervous, because it reinforced my thoughts. I’m a buyer of the macro, there’s going to be winners, but not everyone’s a winner. It’s clear because there are people struggling right now. And the longer this goes on, the more problematic it becomes. So, if this thing goes on another 6 months, I can see more than a couple of companies struggling because they don’t have the cash, or the ability to persuade a generalist fund to put money in. And the specialist funds have made their bets and they can probably see better than some of generalist funds, as to who is going to make it and who’s not.

Mark Chalmers: With a lot of these companies. Not only do they have no money, but they also have projects that are not proven. And in many of those projects need hundreds and hundreds of millions of dollars of capital investment, if not billions of dollars.

Matthew Gordon: When you start talking about things like getting some debt into the company to be able to be in a position to build out whatever it is that they’ve got, or be able to even pay for the Feasibility Studies (FS). Again, there’s no real plan there. Mark, you’ve been around the block. You’ve seen a few things and some of the companies I’m probably talking about. What’s your take on the market?

Mark Chalmers: I don’t envy them. I don’t envy them, because when you’re at the bottom of the bucket and there’s no water coming in to fill up your bucket, what do you do? And it goes back to, ‘there’s no shortage of uranium’. Uranium deposits out there in the world have not all been created equal. And if they don’t have any money for just daily operating expenses… In a lot of cases, those projects are not proven yet, they’ve never been commercialized. So, there’s a lot of technical risk for those projects. In most cases, it’s going to be far, far more difficult, costlier and take more time than they expect. And then you throw on top of that a new project. It’s going to cost hundreds of millions of dollars. In most cases hundreds of millions of dollars, if not billions of dollars. It’s a hole hard to crawl out of. And so, I don’t envy these folks at all. You’re at a huge disadvantage if you don’t already have proven projects, if you don’t already have projects that have the capital investments made. You’re way back in the back of the bus and when you’re in the back of the bus, and you don’t have any money, you’re not going to get up to first class.

Matthew Gordon: What I’m hearing is that exploration companies are some ways away. Certainly, not in this cycle from getting into production. So as an investor, do I put my money into those now because money’s cheap, but risk is high. There’re some companies with a possibility of being funded to get into production. But again, they’re not going to get into production anytime soon. The next 2-3 years, maybe if they’re ready to go today. But not many are. Would you talk to producers who are armed and ready to go?

Mark Chalmers: If you’re playing a sector like uranium, your safest bet is to play probably 2, 3, 4 of the better, more established companies, and you can do that in a way that manages your risk. We’ve seen the damage, or collateral damage, that’s happened to a lot of people back in about 2010/11 after Fukushima. With the deterioration in share prices. That hit us all. That hit Cameco, that hit Energy Fuels and everybody else. So, there is not such thing as no risk, but there is such thing as having less risk. And there is a saying, if you believe in a macro, which I agree a 100%, that you can play certain companies that have less risk and have probably the same upside as a lot of these riskier plays.

Matthew Gordon: You guys got hit, July 11th/12th with the Section 232 announcement. You guys got hit big time on your share price. You dropped off a cliff. You’ve recovered about $0.45 – $0.50 cents since then. What should that tell investors?

Mark Chalmers: That’s an example that certain events can clobber these stocks. I believe that there people were certain of a positive outcome on the Section 232. We thought, as well as many others, even that we talked to the government, that there was a high-likelihood that that was going to happen. It didn’t happen. We got hit, as did most others, particularly those in the United States. It’s a sector that in the up markets, it’s multiple bagger. In a down market, it can be a multiple bagger in the opposite direction. It is a tricky sector, but it still goes back to sophistication in how you make your investment. It shocks me sometimes that people come to me and say “oh, I’m getting in the uranium business and I picked X, Y and Z” and those are exactly the products that I would never have recommended to these people. Now, even in some of those cases, in the right circumstances, people can make money on those stocks. I don’t think there’s any absolute 100% the best plan. But I also think that a lot of people making these investments, they don’t like the super high volatility. And that there are just different elements of risk. And what people do, what percentage of their assets that they’ve invest in high risk returns, compared to what their ultimate horizon is and how they’re diversified, that is down to them.

Matthew Gordon: Can I just talk about your mill, because this the other bit, which it’s not one of my tick boxes, but it’s definitely a massive plus for you guys. It’s one of the only operating mill in the US. Is that right?

Mark Chalmers: Correct. If you go back like 30 years, there were like 35 mills, And White Mesa has basically been in good standing, has been completely operable since that point in time. There are two other mills. There’s a Shooter Canyon mill that ran for a few months or something back in 1979/80 or something, then shut down. And then there’s the Sweetwater Mill in Wyoming that ran for maybe was a year or two, also shut down 30, 35 years ago and hasn’t operated since.

Matthew Gordon: Looking at your mill, it gives you certainly optionality in terms of what you do. But for people without a mill, what are their options? How do they go about processing their ore?

Mark Chalmers: Well, they either have to build their own mill, or if in the region, they have to basically strike a deal with us to have access to our mill. And there are some examples of work that’s been done in the past with toll milling agreements or joint ventures. So, if you don’t have the mill, and you’re a conventional miner, you don’t have any options, you have to make some choices. I’ve had people tell me they don’t need to mill. They can ship it to China or to Brazil or somewhere like that. That’s farcical. It’s farcical. You’ve got the costs of transportation. The mill was correctly positioned for sustainability. And that’s a big issue that investors should feel comfortable that our mill has been around nearly 40 years and has survived these peaks and these valleys because of its flexibility. And, it’s been able to cash flow, and many times, even though the uranium price were too low to run it just for uranium production.

Matthew Gordon: What are your plans for the next 6 months if nothing happens in terms of the price discovery in the market or 12 months?

Mark Chalmers: If we don’t get relief through this government working group we will manage our expenses as tightly as we can. We’ll continue on with the macro environment we think is alive and well. We’ll continue pushing these different parts of our business that are less uranium price dependent like the alternate feed and the clean-up of abandoned uranium mines. Everybody needs higher uranium prices. This is really a critical crossroads that we’re at with the working group. We’ve survived the test of time. We’ll continue to survive the test of time. But it will be more difficult until uranium prices recover.

Matthew Gordon: And I keep asking every time I see you because I’m not quite sure what the answer is going to be each time.

Mark Chalmers: Well, I liked your comment that a lot of people have quit speculating on that. And I think that’s one of the reasons that these uranium share prices have been suffering. I think a lot of people are tired of speculating, including investors. Everybody seems to be wrong. You know, like you said, six months or two years or one year or whatnot, people been saying that…

Matthew Gordon: If you’re a fund manager, you don’t care if it’s one year, two years or three years. You’re getting paid your 2% and 20%. It’s okay. You can afford to be wrong for another three years, If you’re an investor like a Joe Schmo like me, where you’re putting your own cash into this stuff and you’re underwater and you don’t know what’s coming, you’re unsure. People have been telling the macro story for so long that you’re beginning to doubt whether that’s true or not. You jump up and down and go, hurrah, every time you hear someone talk about the macro story. But maybe you start having doubts. So, getting some sense of timing is important because it’s our hard-earned cash here we’re talking about.

Mark Chalmers: Absolutely. And I always say that whenever people have the most doubts, as is when you should be investing more. People like Rick Rule, it’s quite interesting to listen to some of his discussions and when he started getting interested in uranium. And it was the late ’90s. And he’ll tell you how many doubts he had. But then he will also tell you that he had multiple investments. So, I think the worst was like a 20 bagger or something. So, it is a very unique sector and frustrating. But when it comes, it comes and it comes big. And, there are there a lot of people that made a lot of money in this over the years and there is going to be a lot of money made again.

Matthew Gordon: I just want to make sure that people aren’t being misled and that they focus on the fundamentals, what’s important with regards to the company, assuming the macro is true. I want investors to make the right bets in the right companies rather than have their money frittered away by companies perhaps that are just struggling with G&A, let alone getting into production.

Mark Chalmers: There are companies out there, I won’t name names, that even if the uranium price goes to $100 dollars, they will not be successful. And I think that’s what you’re alluding to. You don’t want people to get in investments that will have no possibility of ever really making it. They might get a bit of a bounce off of an up market. But investing in broken business models isn’t a really good long-term strategy.

Matthew Gordon: I’m not alluding to, I’m trying to shout from the rooftops that in our assessment, having looked at these companies, looked at the numbers, done the analysis. I agree with you, whether $100 bucks or $70 bucks, there are uranium companies which are just not going to make it. They’re not designed to make it. They don’t have the people on board to show them how to make it. People need to ask the right questions.

Mark Chalmers: Being in the space, I have to be a little more careful when it comes to pointing out some of the shortcomings.

Matthew Gordon: I wanted to speak to bounce our thoughts off you. I’m not sensing any pushback. Appreciate your time and taking the call as well.

Mark Chalmers: It’s always a pleasure, Matt. I enjoy talking to you.

Company page:

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. We provide paid for consultancy services for Energy Fuels. 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 (LSE: SRB, TSX: SBI) – Steady Growth for Shareholders. At Last. (Transcript)

Having flatlined for 4 years, Serabi Gold are looking to double their production and get to 80,000oz by getting their recent acquisition to market. High grade selective mining. It’s an old story which is looking to getting going again and like most junior Gold miners for the last 4-5 years, the only thing holding them back was access to money. They have had their head down focusing on producing at 40,000oz at a steady state for the last several years. That is not an exciting level. Most small institutional funders are looking for 100,000oz per annum. So what has Serabi done to change things and make this story relevant again for investors? We get the back story and find out how they plan to sweat their current assets and more importantly how they intend to fund it.

With Gold above $1,500 they are finally making a reasonable margin, even for an underground operator. We find out how they have structured their debt and what happens next. What do you think of their plan?

Retail investors have started to get interested again. And a couple industry strategic players involved. It feels like a new story as shares have started moving in the right direction. That said what we like is that they appear to be sticking to what they know and are targeting growth from very similar assets. Existing greenfield and brownfield also look promising.

A very open and confident pitch by the CEO. They have always had a plan, and now with the cash and cash flow and they seem to know how to deliver it. We follow with great interest.

Interview Highlights:

  • Overview of The Company
  • Team Experience: Have They Got What it Takes?
  • Share Price and Shareholders
  • Company Strategy and Assets: How Are The Projects Coming Along?
  • Update on Coringa and M&A Plans
  • Market Conditions: How Will Free Cashflow Affect Their Chances?

Click here to watch the interview.

Matthew Gordon: Let’s kick off for the one-minute summary for people who haven’t heard the story before.

Mike Hodgson: 40,000 ounces, high-grade gold production in Northern Brazil. Para state. It’s a big artisanal gold field. We are the first operator in that part of the world. We’ve got great local relationships. We’ve actually put a mine into production. It’s taken a while. The company did it many years ago. The mine actually closed. We actually started it up as brownfield site we’re mining high-grade gold, 8g/t. Which really, I think sets us apart from the rest. People have got so used to 1g/t, 2g/t. We are 8g/t. We are underground high-grade, selective mining. And we’ve acquired about 18 months ago the Coringa asset, which is essentially a carbon copy of our current Polito operation. We’re going to put Coringa to production, make it 80,000 ounces. We’re growing organically, but certainly in a very controlled way.

Matthew Gordon: I’m interested in this story, because you guys have been in South America for a while. I’d love to understand a little bit about the team’s experience in mining in South America. What’s everyone done?

Mike Hodgson: Brazil is a country that probably is very dominated by large enormous surface deposits. I won’t pretend to say it’s been easy. We’ve actually had to address the fact that there aren’t very many small underground mines in Brazil. Therefore, there’s a people skill shortage. I suppose we’ve cheated a little bit. We actually are next door to Peru and Bolivia and we’ve got a very key people that come from there. I was the COO of Ovando Minerals in Bolivia before this job. I’ve spent much of my career working in the Cornish Tin Mines. So I’m very specialized in small underground mines and I worked for TVX before on a small underground mine. I can’t escape it, but clearly, I’m probably moderately successful at it. So we built a team, which involved key management in the mine, which came from Bolivia. And we brought over a Peruvian contractor to help us with the selective mining. Our ore body at Polito and the ore body that will be developed and put into production at Coringa, are high-grade subvertical narrow veins. Quality ounces is what it’s all about. Controlling dilution is what it’s all about.

Matthew Gordon: Apart from yourself, who on the team experience has that level of experience?

Mike Hodgson: Well, on the board itself is a gentleman called Eduardo Rosselot, an older colleague of mine. A mining engineer, a Chilanian guy. He’s been very important in terms of actually helping us with our funding. And the rest of the team in Brazil, we’ve got key Bolivian mine management. The Mine Superintendent is Bolivian and all the technical team are Bolivian. The key to our success is really this team of mining expertise and we have actually boots on the ground. That works very well. The Peruvian contractor we’ve now actually nationalized. They are now all Brazilian paid and on the Brazilian payroll. It’s a very important point because, there’s no real problem in terms of these people working in Brazil language wise, which certainly was something which concerned us at the very beginning. But just going back a step, probably people may or may not know that Serabi did put Polito in production 2003. It started probably the correct way. But back in the 2000s in London, where company originally listed, there was, let’s say a lot of people in the stock, who perhaps shouldn’t have been in the stock. They did really understand with junior mining. And I think the company did two things. 1. It chase scale to try to meet shareholder expectation. 2. It also changed the mining method because it was very difficult to find the right people for the job. So when we actually restarted this mine back in 2012/13, we got the right team in and the formula for success has been the mining. My saying always is ‘grade pays, toness cost’.

Matthew Gordon: You raise interesting point. There have been, and possibly still are, some people have been in this a long time, long suffering. The share price has been flat for a couple of years, but it’s recently picked up again. You must be quite pleased?

Mike Hodgson: We’re delighted. A little bit of brief history on that. It comes back to some of the people that I’ve been around with, like Eduardo Rousselot one of our Chilean directors. He was really instrumental back in 2012 when we want to reopen this mine. The markets were terrible. There was no money out there for exploration. There was no money for resource growth. There was only money for cash flow. And it was hard to find. Eduardo introduced us to the Fratelli Group, one of our biggest shareholders. These guys put money in at risk where nobody else would. And they backed us.

Matthew Gordon: And they’re still there?

Mike Hodgson: They’re still there. A big shareholder. They basically went through 50% because they did want trading freedom. But frankly, there was no one else coming in any way. So that’s where they were. We reopened the mine very successfully, got up to 40,000 ounces pretty quickly, were we’ve now been for about 3 years. They underwrote the entire financing, took all the risk. The problem with that was our stock was incredibly tightly held. We had no retail.

Matthew Gordon: Not no retail. Not enough retail.

Mike Hodgson: Very little retail. There’s no liquidity. Everything was great about our company except the capital structure in a way. And we thought, well, we’ll fix that.

Matthew Gordon: What have you done about that, because I note Greenstone are now in there.

Mike Hodgson: There were ticking along quite nicely, doing 40,000 ounces. Operationally terrific. Corporately still with some problems. But back in 2017, we actually acquired the Coringa asset. Now the Coringa asset was from a company called Anfield, which has now been rolled into Equinox, one of Ross Beaty’s companies. Before that, it was actually in the hands of a company called Magellan. And we’ve been trying to buy this asset for a long time, because it’s a carbon copy of Polito. We’ve been mining Palito for a number of years. We know we’ve got all the relations in the region, we’ve got the methodology, the formula…

Matthew Gordon: Before we get into the project, because I do want to come on and cover that. I just want to stay with the shareholder component and what the thinking is.

Mike Hodgson: The buying of Coringa actually was a catalyst to do another capital raise. We bought Coringa for $22M and we funded $5M out of cash flow, but then we obviously got to find another $5M and then the final payment. $22M in total. We did a capital raise in March 2018. And that point Greenstone came on board. And River & Mercantile in London.

Matthew Gordon: Just explain to people don’t know Greenstone, because they are pretty well known in the industry…

Mike Hodgson: Greenstone are a private equity fund, London based, they’re invested in probably 10 or so stories. Pretty much a multi-commodity.

Matthew Gordon: A very technical team.

Mike Hodgson: They whey work with us very well. They obviously liked Clive and myself for a long time. They’ve been trying to get into Serabi for a long time. And they’ve been looking for the opportunity and acquiring Coringa was the opportunity for them to come in.

Matthew Gordon: They know what they like. And they are very selective. It’s a very strong team.

Mike Hodgson: They came in around that financing in April 2008. A group called City Financial came in. And also we had a Swiss family office that was still actually in the story. Now this year, obviously, we know the City Financial ran into some problems. And the Swiss Family Office also wanted to liquidate their position, which at the time wasn’t welcome news. So, 6% of our stock was just basically dumped on the market in the Spring of this year. And our price went £0.40 to £0.23. And we thought that was a bit of a nightmare. Turned out to be an absolute blessing in disguise, because that stock just got picked up by retail guys. So, for once, and you’ve seen our graph of our liquidity, it’s amazing. We’ve just flatlined for about 4 years, doing all the right things, but not getting any love. No appreciation. And then all of sudden, retail guys get a hold of it. We’ve gone from like 9% retail in London to probably 16%-17%. And it’s happy days.

Matthew Gordon: It helps. It is really important for new people coming in to look at the corporate structure of a business before they invest. We’ve talked in the past about the paralysis that can come with too much institutional investors. Either one individual or multiple institutions who sit and hold, and don’t trade.

Mike Hodgson: With Greenstone, in that financing in 2018 didn’t really do a lot for liquidity. I liked this expression, ‘it gave us an amount of democracy at least’.

Matthew Gordon: What does that mean?

Mike Hodgson: These days, I don’t know. At least we had two big shareholders on the Board now. So there was a natural balance now. We got three shareholders now over 10%. And two of them sit on the Board. So there was a bit more democracy there. Fratelli came down from 52% to 32%. So that was good. That raise didn’t bring in liquidity really. But obviously, the selling of this stock in the summer helped.

Matthew Gordon: So you now recognise the importance of retail, family office and HNWIs?

Mike Hodgson: We have tried so hard to get retail into this company. It’s just been institutions coming in. We’ve only done two raises.

Matthew Gordon: So now you got a better retail in there. I want to spend some time with you and understand what’s going on in terms of the business plan, the strategy, how you’re going to deliver it, where you’re going and who’s going to actually deliver that? So describe if you can, what is the plan? We know where you’ve come from, you’ve done a great job describing that. So today you’ve got a couple of assets. So you got to deliver those.

Mike Hodgson: Technically, on their current operation, Polito. Basically is one plant, which is plant-constrained, which is actually pretty unusual these days. Because most companies of mine-constrained. Now, the good thing about being plant-constrained is it brings discipline. You’re always treating it with the highest-grade possible.

Matthew Gordon: Just be clear to people what you mean by that.

Mike Hodgson: Well, grade is king. We’ve now had a head grade around 8g/t for ever. So that’s what we work with. And being plant-constrained means we’re not just throwing tonnes at the plant. We’re actually throwing quality ounces at the plant. That’s the important thing. Palito is in a very steady state of production. Two ore bodies feeding a central plant. 500t per day between 7-8g/t. That’s what we do. And we’re kind of limited at the moment. We don’t really want to expand the plant, because our ore bodies, as you can see from the presentation, they are high-grade, narrow veins. So all our business is to actually mine these veins as well as we possibly can, minimizing dilution as much as we can, to get quality out of the mine. And then basically through the plant. Inevitably even doing this where the best possible way we can, we still get some dilution into the into the system. Over the last 18 months we’ve actually been testing ‘ore sorting’. I know this is a big buzzword these days. I’ve just come back from Beaver Creek and it is all the rage. It won’t solve all our problems, but certainly help a lot.

Matthew Gordon: What is that going to help with?

Mike Hodgson: There’s ores and waste. The gold is inside the sulfides and outside that is just pure waste granite. The ore sorter is actually a waste remover. It sorts on either color, or on density. The difference is really, really good. The intention is to pass our lower-grade material through the ore sorter. And it’ll screen out waste. First of all, it’ll take waste out of the system. That will save us about $1M a year. But more importantly, it actually liberates about 20% of space in the plant. We can actually add more high-grade ore and make a little plant go from 40,000 ounces per year to 50,000.

Matthew Gordon: And very low cost presumably.

Virtually no cost. That almost goes straight to the bottom line. From today we’re 40,000-ounce operation probably making about $4M-$5M a year.  It’s positive cash flow. We put in the ore sorter.

Matthew Gordon: It doesn’t cost a lot. Comes out of cash flow.

Mike Hodgson: $1M

Matthew Gordon: So no dilution. And improve efficiency and productivity.

Mike Hodgson: That’s the first thing that we’re doing at Palito. Down in Coringa, our other new asset, which we are developing. That is actually build ready. When we bought that asset, Anfield did a terrific amount of work there. They spent a lot of money. And they built camp. They bought a process plant. They bought all the toys. A lot of the mining equipment. They did a lot of work. They did the studies, which is great. People ask me all time, why did Equinox sell the asset. Scale! Too small for them.  At the time they probably thought the asset was going to be a lot bigger and was going to be their platform to build a gold mining company in Brazil. And they were looking for something a lot bigger than Coringa could be. Although it’s a very tiny deposit, it doesn’t really work for anybody else except us. We’re in Tapajos. We’re the only hard rock producer. Coringa’s 200km down the road from Palito. There’s little point two companies having to 50,000 ounce mines, in the same region where there’s very little else. They belong in the same stable. So the marriage occurred. We bought the asset. We’re now working our way through the permitting process. We’ve just submitted our new Environmental Impact Assessment (EIA) or statement yesterday. We should get a public hearing in around well, after that’s been protocoled and approved, which hopefully will take about less than a month. We will get a public hearing when we actually go to the local community, and hopefully get approval. And I think because we have been in the region for 10 years with the same authorities. We’re not exactly the new kids on the block.

Matthew Gordon: So just on that. We’re starting to build a picture of the types of facilities, mines, operations that you are comfortable with. And they are similar in profile.

Mike Hodgson: Very similar. I don’t think you can actually have a deposit more similar.

Matthew Gordon: Sorry I did mean to ask, in terms of the ore sorter, what’s the timing of that and more important what is the timing of when the benefits of that start flowing through?

Mike Hodgson: The sorter has taken a while to get. But it’s now at site. It’s being all the infrastructure around. It’s now being fabricated and installed. We will switch it on probably in November 2019. We hope to be doing its job in January 2020.

Matthew Gordon: So imminently it will start to contribute towards the bottom line?

Mike Hodgson: We’re going on guidance. We’re about to close Q3/19. It’s been just the same as Q1/19 and Q2/19. Another 10,000-ounce quarter. So we’re bang on guidance to do our 40,000 ounces for the year. And I think next year we’ll hopefully be making a hole in 50,000 ounces because of the ore sorter.

Matthew Gordon: So that that’s going to hit the bottom line from Q1/20?

Mike Hodgson: Yes, it will. And we’re sitting here today, 40,000 ounces making about $4M – $5M. That’s going to go up very handsomely with the ore sorter. 10,000 ounces of very little incremental cost. With just a little bit more process cost.

Matthew Gordon: Something to look forward to end of Q1/20. So now we’re going to talk about Coringa, because it meets the profile, it’s a similar looking system. More of the same. You know what you’re about. So tell us about what’s happening at Coringa.

Mike Hodgson: Repeat the formula. Coringa, obviously, our big news recently was the publication of our PEA, which was great. It really just demonstrated what we absolutely expected.

Matthew Gordon: You made a few tweaks to it?

Mike Hodgson: Yes, it’s going to be a 40,000-ounce deposit. The process plant is there. A little different to Polito. This process plant was bought from a mine in Para. It’s actually much bigger, so there’s no capacity issue with this plant. It’s a very similar deposit to Polito. We are just working our way through the permitting process at the moment. One thing that we do have already is we have the mining license, which is something Equinox never got to. We can start the mine tomorrow, subject to funding. We are going to start going underground. Why is this important? It’s important because we want to first of all, we want to establish the continuity, because Coringa degree is a greenfield site. It’s drill holes. 1. We actually want to establish that continuity. 2. The indications are in a lot of the drill holes that actually the widths at Coringa are probably a little better than Polito. And I think there’s an opportunity to maybe semi-mechanise this deposit, which would be great. Great for cost per ounce. And 3. we want to take a nice big bulk sample because Copringa is 200km away from Polito. We will truck that bulk sample up to our ore sorter at Polito. And we will let you run it through and see how it performs. I would suspect that the ore sorting is going to work very well and therefore, although we don’t need the ore sorter from a capacity issue at Coringa. Why process granite? Why not put an ore sorter in there? Again, it’s all about grade, grade, grade. Get that grade up as high as we can and the get the ounces from processing as little material as possible.

Matthew Gordon: What was the timing on all of this?

Mike Hodgson: We want to actually start the underground development in before the end of the year. In Q1/20. Now, we can start the mine. What we cannot state at Coringa yet is the process plant and the construction. We’ve got to work our way through the process. Now, that’s why the EIA has gone in. We hopefully will get what’s called the Preliminary Licence by the end of the year. That is basically the Environmental Impact Assessment (EIA) followed by the positive public hearing by the end of the year. If all that happens, that will be great. Then we can actually launch into what’s called the construction licence. We then bring in an engineering company to come and do the basic engineering, which is basically the design work for the erection of the process plant. That will probably take around 6 months. So we would like to think we’ve got the construction licence by early Q3/20 next year. Which means that we can start building.

Matthew Gordon: Construction towards the end of next year is what you are aiming for?

Mike Hodgson: I would like to think we’ll start August time we will be starting to build. And having just done it at Polito.

Matthew Gordon: You are talking to the same departments and government bodies. You have established relationships. The track record. You expect those sorts of timings based on what you previously experienced.

Mike Hodgson: Exactly. These are the guys that gave all of this for Polito five years ago. We’re just doing it again with Coringa. So they’re very comfortable with us as being the only game in town really. But the good thing if we do start the mine first to actually assess and maybe improve the mining, optimize the mine plan by this underground development. And maybe optimize the flow sheet by adding in an ore sorter. We’re just going to improve those PEA numbers even more. And the good thing about that is I think people will note that in the PEA, we’re talking about a CapEx number of $25M, there’s 20% contingency as well. And let’s face it, that study was completely based on Polito. It’s the one thing we have 100% confidence in is costs.

Matthew Gordon: True. I’d say you more than most. Because most PEAs have a variance of +/-30%. You’ve based it on what you’ve done previously.

Mike Hodgson: I thought that the consultants were being rather penal. 20% contingency on costs on a mine that’s just up the road is identical to the one we’re going to do. So we’re pretty confident that the $25M, we can chip into that. And there’s also the All In Sustaining Cost (AISC) is coming in at about $850 and this 20% contingency on that. So, we’re looking forward to Coringa really bringing our costs down.

Matthew Gordon: Now, that’s because most of your costs are staying at Polito.

Mike Hodgson: So that’s why it’s loaded.

Matthew Gordon: The blended number?

Mike Hodgson: $900-$950.

Matthew Gordon: A nice number. Is there much you can do about that? I know you’ve got various fixed costs which you can’t affect.

Mike Hodgson: The gains are basically if we can actually get some mechanised mining in there. The gains are going to be will an ore sorter work at Coringa too? These are the real nice little gains.

Matthew Gordon: Is there a number you’re chasing?

Mike Hodgson: I think we’re pretty tough to do underground mining much less than much less than $900, maybe high $800s. That’s gonna throw off a nice bit because it wasn’t so quick.

Matthew Gordon: We’ve got three locations. What’s that combined number look like? You’re heading up towards original size production.

Mike Hodgson: So the two are the two mines, Polito and Coringa. They’ll both be doing about 40,000 ounces each now as well as that. The other thing that we’ve been doing is basically on mine site exploration in and around the Polito and Sao Chico ore bodies. One of the use of proceeds of the capital raise that we did in 2018, when Greenstone came on board, was we flew an airborne geophysical survey, over the whole tenement. 40,000 hectares of that wasn’t cheap, but the results it threw off were great. The thing lit up like a Christmas tree. Again, what we’re looking for is, are these sulphides which show up with airborne geophysics very well. And we have artisanal mines all in our property. They’re not a problem. They only mine that top 10m They are their exploration tools. They’re great. So a combination of those and anomalies etc are really important. We use the airborne geophysics as a high-level filter. And then wherever we have anomalies, we go on the ground to do follow up ground geophysics and geochemistry, and just basically this risk reduction before we actually drill. And we’ve actually got some fabulous anomalies, both in geochemistry and ground geophysics in and around Sao Chico, which is our satellite ore body. And where we are now drilling at Sao Chico in the immediate mine site area looking for strike extensions, which is going very well. And then we’re going to move on to these discovery drill programs on these anomalies, which are only 3-4km away from the actual Sao Chico deposit itself. We can turn exploration success into production growth very quickly, particularly at Sao Chico. So the third part of our our strategy is to continue Polito as it is, add the ore sorter. Develop Coringa, advance the permitting and actually get underground at the same time. Finally, on the organic growth, its mine site exploration and maybe a little bit more in and around our current producing assets Polito and Sao Chico. So all in all, base case 80,000 ounces, we think we can with a bit of exploration success in and around our backyard’s, we can get to 100,000 ounces in the next 2-3 years.

Matthew Gordon: Well that’s the magic number.

Mike Hodgson: It is but it frustrates me a little bit because, I think the most important thing is cash flow. Free cash flow. Everyone’s obsessed with 100,000 ounces.

Matthew Gordon: It’s more an indicator of scale and opportunity. I think the picture you’ve painted today is an interesting one, in the sense that, you know the type of structures that you’re after and the types of projects that you are comfortable with and have the knowledge of developing. You’ve got to get Coringa going. But it also says potentially future M&A is we know what we’re looking for. We’re very, very specific. I know you’ve got the organic stuff. Is there much M&A thinking going on?

Mike Hodgson: I just think we recognize that we’re not ready for that yet. I think I think at 40,000 hours it’s hard. You have really got the currency, and we’ve got a project to build already. So that’s where our focus lies. I think once we’ve got Coringa permitted and we’ve got the funding in place, and we’re building it, we’re really on our way to 80,000 ounces. I think at that point we’ve probably got the firepower to have some serious conversations. And, you alluded to our costs. At the end of the day, it’s underground mining. It’s not the cheapest mining on the planet. Open pit brings that. So, I would like to think our next acquisition would be if we do one, or merger it’s a blend of underground high-grade with some scale to get our costs down.

Matthew Gordon: is there much of that in Brazil.

Mike Hodgson: Yes, there’s more of that than there is the underground. I think we’re the best small underground miner in Brazil.

Matthew Gordon: I’m a buyer of that.

Mike Hodgson: We won’t do a deal for the sake of doing the deal.

Matthew Gordon: That’s what I mean. There’s dilution in that. It’s a new type of mining for you. And there are many carcasses on the side of the road in Brazil. Step forward with caution.

Mike Hodgson: Our ex-chairman always says to me, sometimes the best deals you do are the ones you don’t do.

Matthew Gordon: Keep your money in your back pocket. But I like sweating your own assets with this organic growth. If you’re in an area that’s prolific and well-known, why not.

Mike Hodgson: The area has seen 30Moz of artisanal gold mined. There’s been no systematic exploration in this part of Brazil, which scares a lot of people off. But for us, it’s a blank canvas. And I really do think the ore sorting, and our approach is going to be a bit of a paradigm shift to this part of the world. We do not market ourselves as a Brazilian mining company. We market ourselves as Para mining company. Because Brazil is a collection of 26 states. State government rules over Federal government big time. You’re not going to solve any problems in Brasilia. It’s all in Bélem in the State capital. And again, we’re in Polito. We’re going to try to develop Coringa using that relationship. This is a great place to be.

Matthew Gordon: So let’s talk about the market. Obviously you are producer, so you’re seeing the benefits of the gold price, which is great. Explorers and developers are not seeing it. Most of them aren’t seeing it. You are. Which is great news for the bottom line. More free cash flow. But you’ve got things to spend it on?

Mike Hodgson: We always have. We’re saving as much cash at the moment. We have a final payment to actually fully acquire Coringa at the end of the year. We’ve just got the cash. We’ve basically got that in the bank. Which is good. So we’re just trying to build as much as cash as we possibly can through the end of the year. So make sure Coringa is 100% ours. Which it will be and then we derive forward.

Matthew Gordon: You’ve got the cash to acquire the asset. You’ve got incremental free cash flow in with gold as it is today, long may that continue. Is that enough to allow to do the things that you want to do. Certainly around growth organic, for instance?

Mike Hodgson: It’ll be tight. It all depends on where the gold price is going to be. I look at Coringa and we’ve got we’ve actually got we’ve had it we’ve got a great relationship with Sprott Asset Lending. The only equity raises we’ve done the last 5, 6 years, have been the equity raise to put Polito back in production. And obviously the what we did last year to get Coringa. In the meantime, we’ve just taken on some debt.

Matthew Gordon: So that’s Sprott?

Mike Hodgson: Sprott Asset Lending out of Toronto. We basically borrowed $8M. We paid $8M back out of cash flow. They thought we were legend Most people do an equity raise to settle the debt. We earnt a huge amount of trust with these guys and they are absolutely ready and waiting when we’re ready permitted with Coringa.

Matthew Gordon: So again, I just say it sounds like you know what you’re doing with it goes to your cash position with the acquisition and the debt and so forth. So maybe that’s one we can pick up on the next update when you have delivered a few of these things. Because I guess you’ll be in a position to know where you’re at, and what you want to do. But, just just on this market condition at the moment. Have you got any views? Is it going to sustain? Do you have an opinion?

Mike Hodgson: Well, we had a board meeting today. Everyone around the table had a different view.

Matthew Gordon: Well, who knows?

Mike Hodgson: Do you?

Matthew Gordon: Well, no, absolutely. Absolutely not. But I’ve heard some really quite strange $3,000 type numbers being put out there. Obviously that sells.

Mike Hodgson: I just went to Beavercreek to the Metals Summit. We are all of the gold bulls? 85% of our costs are in Brazilian Real. Once we’ve got the double whammy. We’ve got we’ve got the gold price growing and 6,300 Real ounce. I mean a year and a half ago it was just over 3,000. There always used to be a natural hedge between the Brazilian Real. When gold strengthened, the Real was was weakening or vice versa. We never really got the double lift.

Matthew Gordon: A lot of people are getting that.

Mike Hodgson: Record levels in Australia. Record levels in Canada. All the resource-based economies are actually getting this.

Matthew Gordon: But it’s question of how long it lasts?

Mike Hodgson: At the end of the day, you look at the macro economics. China and the US and all that, it probably bodes quite well for gold with all this uncertainty, I think. But, people with much better pay grades than I, have got it pathetically wrong. Well that’s probably why, the time is good. Our share has gone to three times, and the market’s there at the moment. I hope he’s gonna be there when we finally need it.

Matthew Gordon: It’s been a good chat, good introduction, because we haven’t spoken before. Our listeners and subscribers have not heard the story before. I know you’ve been around for a while. I wanted to speak to you. I like the robust, relentless, can do attitude of the business. And its share price has been what it’s done for the last few years, but it’s on the move. It’s doing all the right things it seems to me. I want to see that you continue to deliver what you say you’re going to. Do you want to leave us with maybe a few reasons why new investors should be looking at Serabi now?

Mike Hodgson: We’ve now got a record. There’s liquidity. You can get stock now, which is great. For a long time, you couldn’t. So that’s a plus. And there’s a lot more steam in this price. We’ve got a real great economic tailwind at the moment. We’re going to be meet guidance. And next year it’s going to get a little bit better.

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