Sierra Metals (TSX: SMT) – Good Fundamentals, Main Shareholder Restricting Stock (Transcript)

Interview with Igor Gonzales, President and CEO of Sierra Metals (TSX:SMT).

The fundamentals of Sierra Metals are good and the company is effective, safe and robust. However their share price has been negatively affected by a significant shareholder, Arias Resources Capital, needing to off-load up to 30% of the shares. Arias controls 52% of the shares so liquidity was an issue previously. The market knows this and despite successful operations on the ground, the price is being held back. We try to find out how the company is resolving this issue. Let us know what you think about their response to this in the comments below.

Sierra Metals is a South America brownfield and greenfield focussed Silver, Copper, Lead and Zinc miner. $290M, NPV c. $500M. They have paid back a $34M of debt and $15M revolving credit back by restructuring their debt, currently at $59M. Revenues are $52M with $13M of operating cashflow, to fund their capital requirements and operating costs. 2019 is a year of heavily capital costs as they will be investing $83M.

Sierra Metals is one for new investors. Existing long-term shareholders should also feel that the share price will eventually be resolved with Arias. Short-term holders and traders may be be less satisfied, but they always are. We view this as an opportunity to get in cheap.

There is a new 43-101 due by end of the year and another in Q2/20. Lots of infill drilling. Brownfield and greenfield exploration is the foundation for their strategy going forward. A good track record of delivering improvements in operations and they are generating cash. Operating in two countries with good mining codes and taxes with a good infrastructure and in the right mining jurisdiction. There is a lot to like on the mining side.

Interview Highlights:

  • Overview of the Company
  • Projects in Peru & Mexico
  • Company Financials: Arias Resource Capital, a 52% Shareholder – How Quickly Do They Intend to Sell and Are There Any Regrets?
  • Why Invest in Sierra Metals? What’s in it For Investors?
  • Strategy & Risk Mitigation

Click here to watch the interview.


Matthew Gordon: We spoke back in May when you told us your story. We want to catch up and see how things are going. So, why don’t you kick off for people who’ve not heard this before with a one-minute summary and then we’ll get into some questions.

Igor Gonzales: Sierra Metals is a poly-metallic producer that operates in two jurisdictions, Mexico and Peru. We have two operations in Mexico, the Bolivar mine, which is a copper and gold Silver play, and the Cusi mine, which is a Silver play. It’s our smallest mine. And then in Peru, we have the Yauricocha mine, which produces all fine metals. We are now in a process of expanding our company.

Matthew Gordon: Tell us what’s going on in Peru?

Igor Gonzales: In Peru, given the fact that we have an older mine that has been operating for 70 years, we need to keep on top of the infrastructure upgrades. And therefore, we have five ongoing projects now in Yauricocha. The main project is the shaft upgrade, the Yauricocha shaft. This is a brand-new shaft that we’re building from scratch and we’re in the third year of construction and we have 1.5 years to go. However, we’re going to be implementing portions of the project as they become available. Then, we just completed the Yauricocha tunnel, which connects all the entire mine facilities with the processing facility, that’s now up and running and operating. Then we have all the ventilation upgrades that we’re doing, and that work is continuing as we speak. We also have the tailings dam, phase five upgrade. We obtained the permits and now we’re in full construction mode, which should finish the main dam for phase five sometime in September of this year. And then we also have a new mess hall and camp refurbishing project which is ongoing and will finish in the second quarter of next year.

Matthew Gordon: What’s happening in Mexico?

Igor Gonzales: We completed two expansion projects. One in the Bolivar mine, which initially was conceptualized to go from 3,000tpd to 3,600tpd. We then added some additional capital spend and now we have completed all the construction of that expansion and we are in the final phases of the ramp up, both the mine and the plant. And I’m happy to report that as of Q2 we have on average 3,700tpd per day, which is above the initial target and we continue to ramp up those 4,000t in Q3. We would like to take that ramp up to 4,250tpd in in the Q4 of this year. So that ramp up is going well. We achieved the intended initial capacity and then we continue to ramp as we go. Then on our next mine, the Cusi mine in Chihuahua. We increased its capacity from 600tpd to 1,200tpd. 100% increase in capacity. We have completed most of the construction. We still have a few things that we’re finishing up. But we’ve had struggled with the ramp up both at the mine and at the plant. However, we will continue to increase the throughput. We’re now approaching 1,000tpd so we’re getting closer to the 1,200tpd and we’re trying to get to 1,200tpd by the end of Q3 of this year so those are our two expansion programs.

Matthew Gordon: Let’s talk about your finances? When we talked previously you were talking about investing $83MIL into the company. You’ve got a market cap of $290M, NPV $500M. Those are good numbers, but you’ve got some debt as well, and you’re self-funding on the capital expansion program. So, can you run through some numbers for us, please?

Igor Gonzales: I will talk about the debt. We had a loan from a Banco Acredito Peru this year at the end of Q1 for $100M and that allowed us to pay a remaining $30M-$34M in the purchase that we did in Yauricocha, which was another loan that we had outstanding. And we also pay a revolving credit of $50M and we will have $30M of funds for additional expansions or we would like to give it. We have reconfigured our debt profile. Right now, our net debt is about $59M. Now, going to our performance for the Q2. We had revenue of about $52M and about $13M in operating cash flow, that allows us to still fund our capital requirements and all our operating costs. This is a year of heavy capital investment for us. We initially budgeted for $83M. We had a strike Yauricocha that forced us to defer some of the capital into 2020. However, we remain with the same projects. Also, we completed the capital spend in Bolívar and we are completing the capital spending in Cusi. So, it’s going to be a very fruitful year for us once we are done with all the capital investment.

Matthew Gordon: I feel that you know what you’re doing, your team knows what they’re doing. It’s a very well-run, safe and to use a word that you’ve used in your presentation, it’s a very ‘robust’ operation. But I’m not excited by it, and I want to know what am I missing. Because you’re producing cash flow. You’ve got revenue. You’re in production. All the right parts are there. What am I not seeing?

Igor Gonzales: I think we’re not also happy with the current share price, which think we’re undervalued.

Matthew Gordon: Why?

Igor Gonzales: We think that we don’t have enough float in the market, in our share. We have a main shareholder which holds 53%, Arias Resource Fund; he holds in two funds. He’s trying to resolve Fund 1, which he’s committed to do and I think that’s part of the equation here. And so, when this Fund 1 issue gets resolved. I think that the float is going to normal levels and then that’s going to help our share price.

Matthew Gordon: How much does Fund 1 own?

Igor Gonzales: Fund 1 owns roughly 30% and Fund 2 about 23%.

Matthew Gordon: So that’s a lot of shares to come into the marketplace, which is great for potential liquidity, but it’s also a problem for the Fund. How quickly does he need to sell these into the market?

Igor Gonzales: I don’t have that information because we don’t we don’t manage the Fund and Arias Resource Capital has that all that information.

Matthew Gordon: So, they are not are not obliged to tell you how they’re going to manage that into the marketplace?

Igor Gonzales: I know they’re doing some movements to try to resolve that. And they have invited third parties to review our operations and see if they can commit to packages. But that’s as far as I can I can tell.

Matthew Gordon: Because that’s going to be holding the stock back, because people know that’s coming.

Igor Gonzales: They’ve been inviting the parties to look at our operations. We’ve entertained their visits and so forth, so I think it’s a moving process.

Matthew Gordon: It’s a moving process, which is affecting your ability to create shareholder value today. All you can focus on is delivering on the mining side, the production, the announcements.

Igor Gonzales: Exactly. That for us is extremely important not to lose focus of what we are here to do, which is our long-term strategy. We need to continue to add value to our units and to create value for our shareholders, independent of who holds our shares. I think that focus needs to remain and we are doing that, we’re delivering on the expansions. We will do another expansion in Peru. We’re now doing all the permitting work. And so, we continue to drive our strategy forward to grow the company.

Matthew Gorodon: It must be like trying to do your job with one hand tied behind your back, because you’ve got a significant shareholder restricting your ability to create value for shareholders in the marketplace. So, you are having to focus on mining, which is which is good is what you’re good at. And I fully trust that you get at it from what I see. Do you regret doing that deal with Arias?

Igor Gonzales: No. Arias had the ownership of the shares for quite some time now. I entered the company after all the shares were in place, so I have to focus is on trying to grow the company myself and not be side tracked by the activities of the shareholders.

Matthew Gordon: It’s a kind of salutary lesson in terms of how share structures are set up and ownership structures are set up, because it can restrict a company’s ability to perform as it should. I would argue that on your fundamental numbers, your shares shouldn’t have done what they’ve done in the last year. They should be heading the opposite direction. So, what’s your message to shareholders on this topic?

Igor Gonzales: I think our main message to shareholders is we’re staying the course. We’re creating value. We’re showing the numbers, we’re reducing our costs, we’re increasing our production throughput and recoveries. And so, we have all the main elements that create value in a company and they are in place. So, we will continue to do that and remain focused on that aspect of this.

Matthew Gordon: What I’m about to say, I don’t think is of any comfort to your existing shareholders, but for new shareholders coming in, this is a very interesting proposition. And I don’t expect you to comment on that, you’ll get yourself into trouble.

Igor Gonzales: Once the metal prices recover, the potential for our shares to improve are quite significant.

Matthew Gordon: So, it’s a question of time? When Arias sorts out Fund 1 or one of their two funds, and gets these block sales away, then your arm will no longer be tied behind your back. You feel that the market should recognise what you have been doing, is that what you’re saying?

Igor Gonzales: Ibelieve so. I believe that once we have the right float then the market will start recognizing the value for Sierra as they should.

Matthew Gordon: Do you mind if we just talk about strategy? What’s your thinking in terms of building this business? I know you could say you’re mitigating jurisdictional risk because you’re in two countries. You’re underground mining. That’s what you know, that’s what you’re good at. And you’re obviously in production, which is all good. But what is it that you’ve set out to build? And what will this company look like in 12-24 months’ time?

Igor Gonzales: A fundamental element of our strategy is exploration, brownfield exploration for one. And then the second phase is greenfield exploration. We have been putting important Resources in both areas. We’ve been growing the Resource of all our three mines steadily over the last three years and we continue to do so. As a matter of fact, we will have two new 43-101’s for Bolivar and Yauricocha by year end in 2019. And another 43-101 in the second quarter of 2024 at the Cusi Mine. We continue to do brownfield infill drilling also, in all three mines, but in Bolivar and Yauricocha, besides the brownfield, we’re also doing some greenfield exploration close by the operation. In Yauricocha, we have high value targets for this year. We’re already drilling with two platforms and in Bolivar we’re also doing some near mine exploration, but these are brand new targets and we continue to expand our Resource. So, I think that’s one of the key elements for our growth is to find additional Resources, then turn those Resources into a reportable Resource, via 43-101’s and then conduct the expansions that we require accordingly. So, exploration for us is the fundamental foundation of our strategy.

Matthew Gordon: So those are things that you’re going to do. Build up the Resource and reportable Resource, but to what end? What’s the strategy? Not what’s the deliverables? You are going to drill holes to build a company of a Resource of what size and for what purpose? Are you going to mine it yourself?  Are you going to sell it? What’s the game here? What do investors need to know?

Igor Gonzales: Well, it will be hard for me to tell right now what we are going to find via the exploration. However, we’re open in doing joint ventures or bringing new partners if our exploration results deliver significant results. So, I think we keep ourselves so open. We keep analysing other properties, other projects that come by and we were open to growing the company also via that avenue which is associated with other enterprises.

Matthew Gordon: But you can’t say to what end? If someone said “What is Sierra Metals? What are they trying to be?” What what’s your answer?

Igor Gonzales: We would like to be a second quartile producer in terms of volume of production. And right now we’re in the third quartile and our target would be to be in the top of the second quartile and the top of the second quartile of production with all the other Silver producers.

Matthew Gordon: I think the fundamentals of your company are good, but I’m struggling to understand why I should be investing in your business. You talk about track record, robust performances, strong capitalization, low net leverage, robust liquidity. What do all these things mean? Why should I invest in your company and not the 50 other South American businesses doing the same thing?

Igor Gonzales: I think what we’ve got is a business that is generating cash. We’re operating in two countries that are very supportive to mining. We have all the Resources available to do our jobs in terms of contractors, people, services and legislation and tax stability. We also would like to point out that the potential of our properties is very significant given their location within the countries where we operate. In the case of the Yauricocha mine, it’s located in a major fault system where North and South you have very large deposits and so the likelihood of finding significant additional Resources is important. Likewise, in Mexico, in the Bolivar mine, we’re in a location where it’s a mining jurisdiction with a huge potential for growth. So that’s another part that is very appealing to our story. We’re not just in one mine and trying to develop one mine, and that’s it. I think we can grow these mines into something much bigger. We don’t have the results yet, but they all the geological information that we have to date indicates that we are in a very fertile zone. Our track record, if you analyse Sierra at 5 years ago and Sierra today, we increased our throughput and our production, our cash flow generation tremendously. 5 years ago, we were probably in Yauricocha around 2,000tpd. In Mexico, at 800tpd and today we’re at 4,000tpd. So, we’ve improved our capacity to generate cash via production in a significant way. So that’s our track record of creating value for our investors via the improvement. In the meantime, we also have generated the cash flow. We’ve been trying to manage our debt. We have a solid financial position. We have $40M cash as we speak. We have a $59M in debt. And as soon as we finish our expansion projects, our ability to generate cash is going to be even greater than what it is today. But the most important element of our business is the people. We have been able to attract talented and experienced people into our team. And we operate with three mines and the mines have their individual staff. But we also have a senior team at the corporate office that provides technical support to our operations in projects, in managing, in planning, and very soon in maintenance and asset management. So, with that oversight and support to our operations, we bring the experience at the head office that can be utilised in the different operations without interfering with their work, but reviewing their plans, improving our plans. I think that part of the business has been reinforced in such a way that we brought in very talented individuals in to our company.

Matthew Gordon: I buy a lot of that. These are good mining jurisdictions. We’ll see what the drilling reveals. Having $40M in the bank is fantastic. Having free cash flow is fantastic. But you’re still paralysed in a way, in that shareholders make money when your shares increase. Don’t you think that you need to get involved in a conversation with Arias Resources Capital. Rather than them just sending people through to diligence your mine. Shouldn’t you understand what is the process by which you are going to release this pressure on us, because it is pressure on your share price. At what point do you get involved and say we need to be part of the solution?

Igor Gonzales: We review this situation with the board on a regular basis, and we have a share buyback program, for one. We had an ATM in place or another. Arias Resource Capital is moving is trying to deliver on Fund 1 and they are trying to resolve that issue. And we’re all aware of that. In the meantime, we have to stay focused on what we’re doing. But we don’t have control of what Arias Resource Fund does with the shares.

Matthew Gordon: I appreciate you don’t run their fund, but I’m saying that they should, as a matter of courtesy and expediency, work with you to agree and resolve the way forward if they are to exit quickly.

Igor Gonzales: And we’re are co-operating, they’re bringing parties for review, etc. and we are cooperating with that. We have an active data room where they can go and see our company and they can analyse the potentiality of our business.

Matthew Gordon: I think that you’ve got a great company. I think you’ve got a great team. I really like the way you talk about your business. But I think there’s this pressure with Arias Resources Capital which needs to go away. But when it does, I would like to think that your shares will be given the chance to breathe again and maybe start moving in the right direction. Igor, thank you very much for your time today and your explanation. You’ve been very honest, as always. So, thank you.

Igor Gonzales: Thank you, Matthew.


Company page: https://www.sierrametals.com/home/default.aspx

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Luminex Resources (TSXv: LR) – Gold Miner with a Tight Shareholding Structure & Access to Cash (Transcript)

Interview with Marshall Koval, CEO of Luminex Resources, a Gold Explorer and Developer in Ecuador. Part of Ross Beaty’s Lumina Group, Luminex Resources has a very experienced management team with a track record of delivering returns to shareholders. They have quickly established deals with BHP, Anglo American and First Quantum. We discuss all of this and address retail investors’ needs in detail in this interview.

Interview Highlights:

  • Lumina Group Track Record and Highlights
  • Strategy, Model and Thinking for building a large Gold & Copper Producer in South America
  • Assets and JV’s: Breakdown and Commitments
  • Share price: Changes and Causes
  • Mining in Ecuador
  • Enhancing Liquidity: How are they Promoting this Gold Company?
  • Company Financials and Remuneration

Click here to watch the interview.


Marshall Koval: Luminex Resources was the company we spun out in 2018 and we’ve got a large portfolio of assets, earlier stage exploration in Ecuador.  A bit different than the Lumina Gold story which is a development project, but we’ve got large scale exploration properties for copper and gold as well, and then we’ve got some world class partners that we JV’d with to do some of the exploration and we’re doing a bit of work ourselves on our Condor project.

Matthew Gordon: So you’re referring of course to the Lumina Group.  Why don’t you tell us a bit about that?  There’s a bit of a track record. You’ve been making money for people.  I think you’ve raised – you told me last time – $175M and returned $1.5Bn to shareholders. 

Marshall Koval: Lumina Group was founded in 2003 by Ross Beaty who took a view on copper.  So went out and acquired a lot of world class assets and it was sort of an option play originally.  And as time went on, you control these projects, you have work commitments and basically the long and short was raised about $175 million, like you mentioned, and returned $1.5Bn to shareholders.

Matthew Gordon: Obviously with Ross Beaty’s involvement that gives you access to capital and reputation as well, plus you obviously have delivered as a management team.  With Luminex Resources, it’s a relatively small market cap right now.  It’s early days.  You’re also involved in Lumina Gold. Where are you spending most of your time?

Marshall Koval: Right now it’s been about a 50:50 split for me.  We’re advancing the Lumina Gold Cangrejos projects towards pre-feasibility studies.  So there’s a lot of technical, engineering work, fieldwork, so I’ve been working on that, but also I’ve been front and centre on all these deals with BHP, Anglo American, First Quantum, that we have joint ventures within Ecuador.  The combined amount of those deals is about $140M committed to copper exploration.  So we’ve been running 2018 and 2025.

Matthew Gordon:  Why have you spun out Luminex Resources from Luminex Gold?  They’re both gold companies.

Marshall Koval:  Basically, our philosophy is we’re an exploration development group.  We tend to try to acquire large scale projects like the Cangrejos project in Lumina Gold, and basically the idea is to add value, derisk these and move these on to somebody that would build the projects.  It’s basically the same model as Lumina Copper.

So what we had is when Ecuador opened up their concession system and granted new concessions, we acquired – even though we’re a gold company – quite a few copper early stage exploration projects.  So by spinning Luminex out, we have a core asset in the Condor project which has about 1.4Moz of gold in Indicated and 2.5Moz in Inferred.  But we also had these early stage copper exploration projects, so rather than going to the market and deluding our shareholders, we went and did JVs with three major companies to explore these copper assets.

Matthew Gordon: Let’s get into that because I can see Condor, Tarqui, Pegasus, and Orquideas.  Do you want to break those down?  I think what our audience is really interested in is what you’re thinking, what your strategy is.  What are your plans for these? 

Marshall Koval: So these copper assets. We’re pretty opportunistic.  We had a lot of information in Ecuador and when the concession system option came up, we acquired all these projects – Tarqui, Pegasus, Orquideas and Cascas.  And then we did initial work ourselves.  We have a team of over geologists in Ecuador, so we did a lot of the basic exploration work beyond what was already known about these projects.  And we advanced them to the point where we actually didn’t go out and solicit companies to do deals.  This was all inbound. 

The first deal we did was with First Quantum on Orquideas and Cascas.  Right now First Quantum is in the field.  We’re the operator in he project but working closely with First Quantum.  We’ve got five drill holes in and about 1500 metres of drilling, so far.  So that deal with First Quantum we had to spend $38.5M over five years to earn 51% and they can earn an additional 19% if there’s a discovery and they carry us to a production decision.

Matthew Gordon: So they can earn up to 70% subject to them paying up for that and obviously getting through to construction.  But what’s in it for you?  You’ll get 30% of what?

Marshall Koval: There are two deposits – the Orquideas which is being drilled out and that’s to the north and then the Cascas to the south.  These are large copper anomalies we’ve identified with geocam and geophysics and they’re about 5km x 2km / 3km wide – both of them.

So basically if there’s a major discovery – and these are straight copper projects, no gold.  Then we’ve got with Ross’ involvement in our group, if there’s a major discovery we can participate in the 30% if it gets to construction, or we have the option to sell out that portion.  There’s a lot of groups – a lot of them are Japanese companies like Sumitomo for instance, that would look at buying a 30% interest in a major copper mine. So it gives us leverage to the upside, is basically the idea with all these.

Matthew Gordon: So explain those numbers.  So First Quantum put in $38.5 Mover the next five years.  They get 51%.  Are you putting in any additional cash?

Marshall Koval: It’s a straight earn in JVs, so after they spend the $38.5M they earn the 51% in the JV company, and then if they advance it through pre-feas, feasibility study and construction, we’ll carry it for the 19%.  And then when you get to 70%, that’s where we would have to put our pro rata in.

Matthew Gordon: So that’s great optionality for you on that deal.  That was the first deal.  Let’s go to the second deal.

Marshall Koval: So Anglo American is a bit different approach.  So on the First Quantum deal it was two specific deposits that had been identified.  Anglo took a broader scale.  So the Pegasus A and B is our largest land position in Ecuador.  Let me just say this – we’re the second largest concession holder in Ecuador and the Pegasus A and B is the largest concession that we have.  So we have about 135,000 hectares of mineral concessions and Pegasus is about 65,000 hectares. 

So Anglo’s view is a bit different.  They’re looking at a broader regional district sort of scale.  There’s upper porphyry and some gold showings that we’ve identified in the area.  So Anglo’s approach is more systematic, broader regional scale exploration.  So the deal we have with Anglo is they have to spend $57.3M over seven years, earn 60%.  And they can earn an additional 10% if they carry us to a construction decision. So right now they’re in the process of a lot of field geochemical work, they’re getting ready to fly a geophysical over the entire land package to look at perspective terrain.  And so that’s basically the Anglo deal. We’re really excited to have both these – and BHP too as part of.

Matthew Gordon: One, access to capital, but two, these are names that people trust as well.   It lends some level of comfort to investors. So that’s a slightly earlier stage project but again because we’re talking about seven years for this earning period and then you’ve got BHP.

Marshall Koval: So BHP is a deal we just closed in the last month.  Basically BHP… So let me back up.  Anglo is the operator on the Anglo deal.  First Quantum , Luminex is the operator and on the Tarqui project, BHP is the operator.  Tarqu’s on the area of Mirador, which is a copper mine that’s in construction right now.  So it’s in that ugly prospective copper mill, and this is a small land package compared to the other ones.  We made a discovery out there and it looks pretty promising.  It’s some of the best copper terrain that we’ve found in Ecuador through the work that we’ve done. 

So the deal with BHP is they have to spend $42M over six years to earn 60% and after that they can earn an additional 10% by spending another $40M, and that should take you roughly through a feasibility study if there’s some discovery there.  So basically that’s the idea.  These are large targets, large anomalous areas that we found in the field.  They were putting off risk to these first class partners to advance these projects.

These leads us – our primary focus after these three partnerships is our Condor project.  Most of these assets are in south eastern Ecuador.  The only one that’s stuck in the central area is Anglo American.  You can see all of our holdings on Slide No 5.  You can see where these different properties are in the country. 

Let me just go back to Luminex.  We just announced high grade discovery at Condor.  And Condor’s interesting because it’s a large land package, the northern part of the property is a thermal gold deposit and the southern part is gold, copper porphyry and we just made a high grade discovery at the camp zone and we’ve drilled four holes into it now.  So that’s pretty exciting.  We put a couple of press releases out in the last month or two, and we can get some details on that lately.  Right now we have one drill at Condor and we’re drilling at Condor, but we think we made a significant discovery beyond the known resources that have been reported to date there.

Matthew Gordon: So these are all relatively early stage projects in the scheme of things, hence the market cap.  Your market cap is quite low.  I guess the BHP explains the bump in the share price this month.  You went from $0.70 to $0.90.  I think $0.92 today.  So these partnerships that you’ve created, how long did they take to actually come into fruition?

Marshall Koval: These are big companies and these are complicated deals because basically you’re structuring the earning agreement, royalty agreements, KV agreement, assuming that you have a producing property.  So there’s a lot of paper and there’s a lot of negotiations involved, but generally they’ve taken nine months to 12 months to go from initial interest to negotiation closing of properties.

I want to add one thing on the… It isn’t just these deals that have moved the share price recently.  I think the discovery we made at Condor at the camp zone has also helped move the share price as well.

Matthew Gordon: Being what? 

Marshall Koval: So basically what we announced were three drill holes in the camp zone area and to give you an idea – these are near surface out crops.  Then we drilled down to 200 / 300m.  To give an example, in the first drill hole we drilled we had a true width inter hole of 30m that was 4.77 per ounce per tonne gold.  The second hole we drilled was a similar sort of thing.  25m at 2.49 g/t and within that there was inter hole of 9.6m of 6g/t gold.  So if you look at the mineralisation there, it’s pretty wide zones and it’s got some similar aspects to mineralisation that we see up at Fruta del Norte.

We just announced a third hole and that had 25 metre true width of 4.5/tg gold.  So these are structures that out crop at the surface and we’ve been able to define them down to a depth of 200m / 300m.  So right now we’re drilling those and I think that this discovery has a lot of momentum that can potentially move the share price if we continue to have success there.

Matthew Gordon: How much of your market cap would you attribute to the deals you’ve done with First Quantum, Anglo and BHP versus your own project?  How do you break that down?

Marshall Koval: Obviously there’s optionality to the resources that we have.  We have rightly four million ounces of gold at Condor.  Again, it’s exploration stage, sort of advanced exploration, not development.  But I think it’s really hard to break it down, but I think if you look at – when we first announced a deal with BHP, the share price moved up to about 85 cents and then the market settled back down.  I think most of the run – the $0.70 to $0.92 – had more to do with the camp zone.  Maybe we’re seeing about half of our value from the Condor asset and maybe the other half from these JVs.  It’s a hard thing to pin down but that would be my guess.

Matthew Gordon: And any more deals coming through?

Marshall Koval: We need to get inbound interest and it’s kind of interesting.  I think what’s happened in Ecuador is – as we all know it’s …

Matthew Gordon: Tell us about Ecuador because it’s a relatively new mining jurisdiction.  It’s mostly agriculture.  So how have you been getting on?

Marshall Koval: There’s been some historical mining, primarily for gold in areas like Zaruma and other parts of the country, but basically the country had a moratorium on new concessions being offered in 2008.  Basically they had punitive fiscal regimes, so that kind of shut the industry down and I think it hit the bottom basically in 2014 when Kinross decided to back out of the Fruta del Norte deal.  That was a world class gold project. 

I think what the government had was some budget of about $100 a barrel oil.  They’d primarily been oil producer with most of the economy besides agriculture.  And when that happened, when oil went down to $40M, $50M, in that range, it really blasted the economy of the country.  And Correa was the President of the time and he was actually the guy that shut down mining, and he realised that he needed to open mining back up because they needed foreign breadth investment, and that was the best opportunity to give it.

So if you fast forward, this was sort of 2014, things started opening up.  We were in the country around 2013 thinking things were going to get better, look at a lot of stuff, work with the government to tell them that they needed to improve their fiscal regime.  And so after the Kinross deal collapsed, Lundin Gold acquired Fruta del Norte and Lundin and several other companies pushed on the government to get a better fiscal regime.  So as we sit today, the fiscal regime is workable.

Matthew Gordon: What does that mean in terms of tax, royalties, etc?

Marshall Koval: Basically if you look at the effective tax rate in the region, a country like Chile has got the best fiscal regime and it’s 38% to 40% of the rents, if you like to call it that, of a project going to the government.  If you go up to Peru, it’s 45, in that range, and Ecuador’s up around the 50%.  So basically that change from… windfall tax is 70 per cent and a lot of other issues that Ecuador had, Ecuador was probably up in the mid-60s.  The fiscal changes that have been made, sort of made it so that major mining companies – guys like BHP, First Quantum, Anglo American, a lot of New Crest, a lot of other players, have come into the country and are comfortable enough with the fiscal regime to invest. 

Matthew Gordon: Can we just talk about shareholders, please?  I know you’ve mentioned Ross Beaty.  Obviously you’ve been working with him a long time, you guys have made a lot of money for yourselves, but also shareholders.  What’s the breakdown here for Luminex?  Who’s in it?

Marshall Koval: If you look at Page 6, that kind of gives you the stock info.

Matthew Gordon: Sure, but it doesn’t tell me who. 

Marshall Koval: If you look at management and insiders, we have about 24% of the company.  Ross has 15.4% himself.  I’ve got about 4% and the balance is the rest of the management team.  But also we have some institutions that have come into our last financing. 

Matthew Gordon: Who are they?

Marshall Koval: Mainly at the end of the US and also there were some in Dubai.  But basically what we have is a group of friends and family that have followed Ross in the group for quite a while.  So if you look at it from that perspective we pretty much know where probably about 50% of the stock is, is pretty close to the group.

Matthew Gordon: But the rest of it’s Canadian retail?

Marshall Koval: Canadian retail and US.  We just recently listed on the OTC.

Matthew Gordon: Has that made a difference?

Marshall Koval: We see a lot more activity in the US. The US has always been important.  Two of the funds that have come in pretty substantial ways in both Lumina Gold and Luminex are California based.  So that’s an important aspect for us. 

Matthew Gordon: You’ve got to move it up.  You need more volume, you need more liquidity, need more trading, hence OTC I guess, but what else are you doing to get this promoted?  I know when we spoke last about Lumina Gold, you were starting a process.  How are you doing that Luminex?

Marshall Koval: So Luminex, given that there’s about 50% that we know of that’s long-term investors with the group in the story, that doesn’t leave a lot of free float out in the market.  So one of the things we’re doing quite a bit is we’re marketing in Europe, the US and Canada and we’re targeting the retail investors.  I think that’s going to be an important aspect going forward.

Also we’ve seen some funds that we’re buying in the market.  We just completed a financing, and right now we have about $7.5M in cash on hand, so we’ve cash up pretty good to move things forwards.  We’re not out marketing, looking to raise money but we’re continuously… Scott Hicks and myself are continuously working with investors.  We have a large focus on retail investors now, so…

Matthew Gordon: When you say you’ve got a large focus on retail… What does that mean to you?  What are you doing?

Marshall Koval: Doing a lot of town halls. It’s kind of interesting and it’s mainly focused on retail investors.  We’ve got a pretty broad reach.  It’s not just the US, Canada, but we’re seeing investors in Europe participate in these.  We’ve had over a hundred people at a time, and so we’re reaching out continuously like that, we’re going to conferences.  We’re at the spot conference in Vancouver next week and we have a Blue Fair.  We’re really trying to get the story out as broadly as we can because I think we’re still in the early stages here.  Obviously every CEO you’re going to talk to is going to tell you that his stock’s undervalued but I think there’s real… even with the move up into the 90 cent range, we still have a $47M, $48M market in cap, and any one of these projects we have significant success on, will see a substantial move from this point.

Matthew Gordon: Where do you see the value coming in?  You’ve got some big names associated, they’re spending nearest down at $140M on some projects for you.  You’ll still be left with a reasonable chunk of the companies or the projects after that, but how much of this is Ross’ company and how much is the Board actually doing to making decisions?

I look at Anfield Gold.  Obviously that’s gone into Equinox along with a couple of other projects to create a super project, $800M market cap for Ross there and Equinox.  Lumina Gold is sitting at around $170M, $180M market cap today.  Luminex $35M, $40M. Okay.  So is it a case of you take these things through following a plan or, because of the nature of your business, explorer, developer, you’re a little bit more free flowing in that?  It’s a case of are there opportunities to maximise… How do you think about that?

Marshall Koval: I think the value drivers for us in Luminex is going to be exploration success, adding resources and making discoveries.  A good example of that would be the discovery of the camp zone.  It was never drilled. It’s right underneath our camp at Condor.  Geologists from several companies – I mean this project’s been around since the 80s – sampled over the area and we had one of our geologists see some interesting rocks in a road cut and started to focus on doing work.  He did sampling and trenching work.  So it was a brand new discovery.  The drilling was –  also I mentioned to you earlier – we have a discovery in there. Now given the size of it, you could have a potential for a million / two million ounce deposit.

Matthew Gordon: So it does create value, but I’m more interested in the decision making.  So Ross Beaty, big name and reputation.  He’s got access to capital, all that good stuff.  With Anfield, rather than grow it yourself, it was a question of “Well, we could or I can roll it into something over here.”  What do the shareholders of Anfield get out of the Equinox deal?”

Marshall Koval: I’m on the Board of Equinox with Ross and several other Board members.  That was the deal where we had the Curinga deposit and we had some other assets, and at the end of the day Curinga turned out to be a small project that will be a mine some day. But, you know, there’s a management issue.  It takes as much effort to manage a small operation like that as it does a big project.  So the idea there was Anfield was going to be the vehicle we used to build the gold production company.  That’s what Ross wanted to do.  But at the end of the day Ross put a deal together to form Equinox and we had about $50M in Anfield.  The idea there was to take the assets, the Arizona mine which was a brownfield site in Brazil and the Casa Mountain project in California, and advance those.  So Equinox became the vehicle instead of Anfield.  Today we’ve got two producing mines in Equinox.  We’ve got a third mine, Casa Mountain that’s going to be put into production soon. 

So that was the idea and that was the producing story. So if you go back to your question about the Board – we have a pretty sophisticated Board.  Myself and John Wright handle a lot of the technical aspects and John’s the ex-President of Pan American Silver.  He’s a technical guy.  He’s on the Board of Silver Crest and Aero Copper.  And Dave Farrell, for instance, he’s the capital markets guy.  He’s on the Board of Fortuna.  Don Shumka is on the Board.  He’s experienced audit committee guy.  He’s been on the Board of several large mining companies, and then we have Lyle Braaten who’s our attorney and he’s involved in government. 

So basically the mandate of the Board is ‘Let’s try to maximise the value that we have in these assets.  Let’s go out and explore.  Let’s find projects.  Let’s advance those projects.’  That’s measured, advancing these projects by derisking them and moving them along towards the development chain. 

So, if you look at the Condor project, for instance, with this recent discovery we’re planning on drilling 2300 metres here.  We’re having a second drill rig come to site and if that starts to pan out, then we start to look at this thing as a development project and put it on the path towards PEA.  So that’s where value will be created besides just outright discovery.

So then if you look at the copper portfolio, the BHP, the Anglo American and the First Quantum deals, that’s going to be large scale upper porphyry deposit discovery and given the prospective terrains, we think out of those deals you’ll see some sort of major discovery.  At least that’s what we’re hoping for.

Matthew Gordon: So how do you guys pay yourselves?  How do you remunerate yourselves? Incentivise yourselves?  You’ve only got 52 million shares here, so how does that work?

Marshall Koval: So when you look at it, the Board doesn’t get paid.  We get options.  The option grants are pretty modest.

Matthew Gordon: No salary?

Marshall Koval: Not for the Board, no.  Myself and the management team that run the company day to day get a salary, but if you look on Page 6 there, for instance, issued in outstanding shares, we’ve got 52 million after this last financing.  If you look at it on a fully diluted basis, it’s 55 million, and we don’t do warrants.  We’ll do a discount to market financing, so basically there’s not a lot of dilution and like I say we’re tied on options.  So really the upside in these financing… most of the management team participate in the financings and they have all the way through the various ones we’ve done – both in Lumina Gold…

Matthew Gordon: At market?

Marshall Koval: At market along with the other investors. 

Matthew Gordon: This is what fascinates me about some companies.  They just get it right. You don’t have many shares out.  What you’re saying is the cost of your money is cheaper than… You don’t need to do warrants, so you don’t do warrants.  You’ve got contacts. You’re talking to money from Dubai, talking to money from California.  You’ve got the institutions.  They all know Ross Beaty. They know your management team, so you’re not paying more than you need to.  This is really important for funding a company.

Marshall Koval: Let me take that to the next level because we have an anti-dilutive mine set and obviously when you’re an exploration group and you don’t have income from operations, you rely on the capital markets to finance it as you go.  But this last financing, we were over subscribed by more than $1.5M and we didn’t want to go there, so we cut it back.  Our philosophy is don’t go out to the markets and raise any more money that you need.  Given the success of the group and obviously with Ross’s leadership there, we have the ability to finance when we need to.  So we try to minimise shareholder dilution and, like I said earlier, management and Board members often take the financing and Ross is usually the lead order when we do financing. So that’s a pretty strong message to the market.  

Matthew Gordon: It’s a strong message to the market, and then top of that the types of deals that you’ve recently done with obviously First Quantum, Anglo and BHP in terms of funding projects and leaving yourself with a meaningful position at the end of it, that’s also great news for investors in terms of optionality. 

Fantastic on the money and the remuneration side of things.  You’ve talked to us about Ecuador and mining in Ecuador.  Do you think that the retail market understands the Ecuador story?  Most people don’t know it and if I’m looking at the chat rooms, forums, various social media, there’s not a lot of talk about you.  Why do you think that is?

Marshall Koval: So if you look at the Lumina copper story.  Ross took a view back in 2003 that copper at the time was $0.85.  It was going to go to two bucks, so he went out and he acquired ten really solid assets in mining friendly jurisdictions.  So in the initial days it was pretty quiet and they went on and acquired these projects.  We were in a building stage with both Lumina Gold and then we spun Luminex out, so we’ve grown in the investor market at  a bit under the radar as we consolidated things. 

Now we’ve consolidated our land position in Ecuador, the majors have come in and they have to do deals with groups like ourselves because all of the highly prospective properties in the country are in some junior ownership.  So basically what you have is a lot of these companies have to come to us.  So basically we’ve been quiet because we’ve been in the building stage.  Now the story’s changed.  We’ve got our position.  We’ve got the prospects.  We’ve got funding in place.  We put off a lot of exploration risk up in these major companies that are really good technically.  They can move our projects forward.  We can focus on Condor. 

We also have three other projects that are copper plays that we’re continuing to do primary stage exploration work.  We’re in a really good position to move forward and not dilute the shareholders.  If all these JVs go through and $140M is spent on these projects and there’s discoveries, we would have diluted the hell out of our company to raise that kind of company to do it ourselves.

Matthew Gordon: I think its smart.  Obviously mining copper, mining gold have similar skill sets.  You’ve got all the relevant skills set you need in house.  Can you give investors and retail investors, new investors, reasons that Ecuador is a good place to be and why you think the way that you’ve structured these deals is going to work?

Marshall Koval: Ecuador is the last unexplored, geologically significant terrain in Latin America and probably the world.  There hasn’t been a lot of systematic exploration in Ecuador because basically when the moratorium that happened in 2008, Ecuador set up the majority of the super cycle that we went through and basically it was shut down for business.  Now it’s open for business, from a political risk perspective I think the best indication that it’s a viable jurisdiction is that all these major mining companies have started to come into the country. 

There’s two mines that will put into production by the end of this year – Fruta Del Norte is one and then Mirador is the other.  Mirador is owned by Tongling Mining as the operator and a partner.  Mirador is a large copper porphyry deposit and Fruta Del Norte that Lundin Gold has is a large underground gold deposit.  The prospective nature of Ecuador has come to fruition with these projects being built and there’s a significant pipeline of discoveries in the country. The Cangrejos work that we’re doing has a real good project and there’s a lot of interest. 

So Ecuador is now a mining jurisdiction and there’s growing pains that go with it.  Both the government’s learning, communities, dealing with the communities.  We’re educating communities along the way. So that’s part of the story. But geologically it’s great exploration.  I’m an explorationist by training and I haven’t seen as much prospective ground anywhere else in the world that hasn’t been systematically explored. 

So then if you go for the reasons that it makes sense for Luminex within the country – we’ve got $140 million of non-diluted financing coming from our partners and we have four million ounces of gold on the books already at Condor, and we’ve made a major discovery at the camp zone.  And then like you were talking out before, we’ve got a management team that’s been there, done this before.  Our business strategy is to add value to these assets, not be the producer, move them onto somebody to put them into production and then exit. 

So if you look at the Lumina copper story, that’s what shareholders did really well when we exited these companies excessively.  So we’ve got the ability to finance.  We’ve got the technical team.  We’ve got a really strong in country team in Ecuador, so I think we’ll be successful in advancing these projects, and I’m really excited about the prospects in Ecuador.

Matthew Gordon: You need liquidity in the business.  You need a bit more turnover to drive this price up.  What type of investor are you looking for?

Marshall Koval: I think we’re looking for the investors that understand the high-risk nature in Luminex exploration.  I think they understand being patient, that discoveries will reward shareholders.  So I think we’re starting to see a positive goal move recently.  When we went into the country a lot, we’re looking at $1,100 or $1,200 goal.  We’re up in the $1,400 range now.  We haven’t seen junior equities like ourselves move up as much as the gold price recently as a general rule.  So I think we’re still at an early investment stage, but if a shareholder comes in and as we derisks these projects makes more discoveries, we should see upward movement in a positive build it price environment. Plus also we have the optionality on copper.

Matthew Gordon: Do you think liquidity and volume correlate with long term holders?

Marshall Koval:  If you look at the float at the stock, we do have a lot of long-term holders and that’s why you don’t see large volumes.  If we get three hundred thousand shares trading in a day, that’s pretty good.  So the liquidity issue is definitely something that puts a bit of a lid on the upward movement right now.  But positive news, we’re moving the stock and the more we reach out and get the story out to the broader retail base institutions, we should see things improve.

Matthew Gordon: You may have to consider issuing more stocks sooner?

Marshall Koval:  That’s the issue that we’re talking about earlier, that non-diluted mind set, but you’re right.


Company page: https://luminexresources.com/

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Sierra Metals (TSX: SMT) – 121 London Mining Conference (Transcript)

CRUX visited the London 121 Mining Conference and spoke to Sierra Metal’s CEO Igor Gonzales. Hear what he had to say about his South American based Poly-Metallic mines – the Yauricocha Mine in Peru, and the Bolivar and Cusi Mines in Mexico.

Click here to watch the interview.


Matthew Gordon: Hello Igor, how are you?

Igor Gonzales: Hello Matthew, how are you today?

Matthew Gordon: Fantastic. Lovely to have you in London.

Igor Gonzales: Yes it is.

Matthew Gordon: Now, I always start off and I get people to do just a two three minute helicopter view of the business.

Igor Gonzales: Okay. Sierra Metals is a poly-metallic producer that has operations in two very well established mining jurisdictions which are Mexico and Peru. We have one… our largest mine in Peru which produces three types of concentrates. Lead, Copper and Zinc concentrates. It’s the  Yauricocha mine located at 4,700m  above sea level. Then we have two other mines in Mexico. One is the Bolivar mine in the state of Chihuahua. Bolivar is currently at around 3,600t per day in throughput and then we have the smaller mine which is the Cusi mine which is a silver mine essentially and now running around 1,200t per day.

Matthew Gordon: Okay and give us a sort of sense of the size, of the scale of the business

Igor Gonzales: Well we will generate an EBITDA this year in the order of $90M to $100M. Our revenue is in excess of $250M. And our debt is about, our total debt around $65M. And so we generate positive cash flow and we finance all of our capital requirements and with our own cash flow.

Matthew Gordon: Thank you very much for that. You’re obviously here in London. At the 121 Conference. Why are you here?

Igor Gonzales: Well we want to promote our company. we think that we are a growth story.  We’re a success story in terms of exploration results. Growing our reserves and resources, and putting those resources and reserves into operation. We’ve been growing our throughput steadily in the last three years. And so we will want to continue to do that. This year is the largest investment for us in terms of capital requirements. We will invest in the neighbourhood of $83M  just to grow our operations in both in Mexico and Peru.

Matthew Gordon: That’s self-funded?

Igor Gonzales: It self-funded, all funded from our cash flow. We think that’s a very attractive story for any investor because or where we have a solid base from which we’re growing our business which is where we’re growing our resources and reserves and then we’re growing our production plants. And therefore our unit costs will drop as a result of that. And our investors will benefit from that lower cost production.

Matthew Gordon: Okay. You’re listed on the TSX obviously

Igor Gonzales: We are listed in the TSX and then the New York Stock.

Matthew Gordon: New York Stock Exchange. Okay, so those markets at the moment seem quite illiquid. And a lot of companies are coming to London to other parts of Hong Kong other parts of the world looking for new access to new investors. What are you trying to do? Are you trying to get better liquidity because you’re unhappy with perhaps the market cap now. I mean what’s the goal for you?

Igor Gonzales: Yes we would like to have better liquidity. Our liquidity hasn’t been all that great. As we moved from Toronto to New York we improved our liquidity. However we were also looking for other areas where London could be one of them. But one of the issues we will face is that we have a major shareholder that holds 52% of the company. And he has that 52% divided into two soft fund.

Matthew Gordon: This New York fund?

Igor Gonzales: Yeah. Our fund. But one of the funds is due now. And so he will have to deal with that fund eventually and that will bring a lot of liquidity to our stock

Matthew Gordon: New shares into the market. Not new… Shares into the market. And so who are the other major shareholders at the moment?

Igor Gonzales: BlackRock and Ingalls And Snyder.

Matthew Gordon: That’s right. So are you… There’s quite a bit of your shares are taken up with major institutional money. Are you looking to drive interest from the retail market, High Net Worth family office type?

Igor Gonzales: Yes. That’s our target because we think there is a lot to gain from our story and our ability to generate cash and revenue and earnings per share.

Matthew Gordon: Again I think like a lot people you’d say you’re undervalued. And if you didn’t, you wouldn’t be doing your job. So let’s take that as read. What is the growth… What’s the growth actually going to be delivered by for these shareholders? You know your share price is what it is today. You are funding yourselves, self-funding. You’re growing, it’s a big growth story. People look at your presentation which I encourage them to do on your website. There’s a big growth story there. You’ve got three quite good assets. Where’s the upside going to come for new investors?

Igor Gonzales: I think the upside for new investors is based on our growth. our growth is quite steady and the other area where we bring a lot of value to our investors is the way we spend our capital. our capital spent it’s quite with very high ROI’s. And the reason we do that is because we do small increments in capacity to our plants. and we use local talent local engineering firms construction and labour. And therefore we’re very efficient in the use of capital because we’re in two well-known mining jurisdictions. We don’t need to go outside of Mexico or Peru to find the skill we need to grow and that makes the capital we use… it’s quite profitable in the sense that we get a great return on our investment and the for the expansion we’re doing in both Mexico and Peru.

Matthew Gordon: Okay. So in that case your AISC is what it is. How are you going to drive that down if you’re already very efficient? Is that something that you’re trying to do?

Igor Gonzales: As we increase our throughput. Ours are fixed costs which are our operating costs will start dropping round and our net cash flow will increase and that will drive the earnings per share.

Matthew Gordon: So it’s going to be coming from grades?

Igor Gonzales: Grades, higher throughput

Matthew Gordon: So if we look back at 2018, what would you have done differently?

Igor Gonzales: I think we would have done a similar story but faster if we could have.

Matthew Gordon: Yeah. Interesting. Okay. That’s your big learning from last year?

Igor Gonzales: Yes probably. So yeah. And we’ve been slowed down by permits for example. we would have probably applied to permits much earlier than we have and that’s a learning lesson from us where we could have done this faster. Had we applied for permits especially in Peru. Peru it a jurisdiction where there’s a lot of bureaucracy in the permits. And had we applied earlier and moved on those permits faster, we would be…

Matthew Gordon: You’d be there today. OK, so if I look at 2019. People always talk about catalysts and catalysts for growth. How do you balance running a company and all the risks associated with that and driving shareholder value, share price appreciation?

Igor Gonzales: I think we try to balance that by trying to meet our targets in being responsible in our spend. We try to apply the capital where we need it. We try to be very disciplined in our production and our results. and we show that quarter over quarter. and and by doing so then we will represent to any potential investor a solid story a responsible company that will look after the interests of their shareholders by respecting our budget in numbers by meeting our metal production by meeting our costs by meeting our capital requirements by respecting the all the framework that it’s required to operate in the two countries we operate. I think that’s how we show to our shareholders that we’re a responsible investor and someone you can trust and someone you can you can go there and and rely on what we’re saying. We deliver on what we say.

Matthew Gordon: Yeah I think it’s a very interesting story. It’s kind of slow steady growth as opposed to telling people they’re going to get multiple baggers.

Igor Gonzales: That’s right. And with that we have a track record that it’s very clearly proven.  We’ve been delivering on our commitments to the market in a very steady pace.

Matthew Gordon: Okay. And how are you going to manage these new investors coming in, how are you going to manage the stories to them that you’re telling?

Igor Gonzales: I think we’re going to manage them by and continue our path. Of delivering results continue our growth in a more dramatic way. If I could use that word because we were looking at larger expansions in the future. And once we’re in that position and then we can then look into M&A’s and the like. In other words a growth story altogether.

Matthew Gordon: Right well that’s what I want to come onto. But first let’s talk about the markets. You’re poly-metallic, which basically means you’re into lots of things: you’re gold silver copper lead zinc. I think that’s right. You kinda spread the risk but you’re also quite exposed to the commodity market generally at the moment because it’s pretty flat.

Igor Gonzales: Yes it is. It is but at the same time we’re exposed to precious metals and we’re exposed to base metals. And when one does better than the other then we have a natural hedge there. By proves in five different metals. unfortunately we don’t choose whether we could not be a poly-metallic producer because that’s the nature of our resources. But what we can do is we can gauge our production according to the needs of the market depending on the metal. I’ll give you a good example for that. Two of our mines the Yauricocha mine and the Bolivar mine are copper producers that we produce copper concentrate. And if, had the market, had the price of copper would go up we would have the flexibility to increase our throughput in terms of copper for example. And likewise in zinc or in lead, we have some flexibility in our production to try to meet the needs of the current metal market or the metal price for example there is a trend that zinc and silver will… might go up in the rest of the year then we can move into those directions if we need to.

Matthew Gordon: Right. But again you’ve got to be able to produce those efficiently. So how does a poly metallic company operate?

Igor Gonzales: The poly-metallic… What happens in our Yauricocha mine, the truly metallic, poly-metallic is that we have three mines in one. We have one mine that’s truly metallic has all the metal in it. The other some mine of Yauricocha has essentially copper. And then we have lead and zinc on the other one. So we can in our mine plan we can then gauge that according to our needs and put more emphasis in one versus the other. Without of course stepping out of the boundaries of our efficient cost structure.

Matthew Gordon: Right. So you’re spending a lot of time working on efficiency. And therefore margins.

Igor Gonzales: We are. For example putting a lot of emphasis in our planning team we have incorporated in our team very senior planners. Now we have a senior planning team in our corporate office that provides services to all three mines so that the mines do the short term plan and the senior team does the long range planning trying to obtain value from the different attributes that each mine has.

Matthew Gordon: You mentioned the word strategy a few minutes ago and part of that strategy is M&A or M&A potential. So you’re running three assets at the moment you’re optimising those continually, you’ve got a planning team working on that. How do you go about identifying new assets, a lot of competition and not a lot of good assets.

Igor Gonzales: Yes we usually get assets and this… We have this planning team that will go and evaluate these assets and compare to our assets. And of course estimate the potential of growth operating costs location geography infrastructure et cetera. And based on that we’ll say  yes or no to any potential possibility of M&A. We would like to stay in a jurisdiction that we know where we’re comfortable and how are we… We don’t discard other jurisdictions just because of their geography. But we are quite comfortable where we’re operating.

Matthew Gordon: Yeah well I think that’s smart. Yeah very very smart. So running a company is about managing risk every day. There’s always something that can go wrong.

Igor Gonzales: Yes.

Matthew Gordon: Okay. Are you frustrated by the market? Because that’s another layer of risk which you’re having to deal with.

Igor Gonzales: I am, we can not manage the market. We cannot manage the prices. We don’t have control of the prices but we do have control in our own cost structure our operating costs our capital efficiency our ability to deliver our production into the market so that’s what we have the control and that’s where we have to work in. We don’t have to worry so much about copper price because we don’t dictate the copper price. But we have to be as efficient as possible in our copper output per unit cost.

Matthew Gordon: And you think compared to your peers, you’re achieving that

Igor Gonzales: Yes we are. We’re competitive.

Matthew Gordon: Okay. So big question to finish with. Is mining still a relevant investment class?

Igor Gonzales: The world is going to continue to grow and there is many countries that still have not fully developed. and those countries will demand metals. For the long run.

Matthew Gordon: And you’ve got the right metals.

Igor Gonzales: And we have the right metals. We have the industrial metals and we have the precious metals. So as far as the grow the world grows we have I think in mining a reliable industry that can sustain that growth for both the industry and the humanity.

Matthew Gordon: What do you think the mining industry or even your company needs to do better to explain to new investors coming into this space with some spare cash. What do they need to do?

Igor Gonzales: Mining has been seen as an industry that is not friendly to the environment. What I can say to new investors is that mining can coexist with environment as a matter of fact we do that. There are farming areas right beside our mining operations today with the available technology. You can work hand-in-hand with the farming hand-in-hand with animal raising at hand-in-hand with other industries. Give you a prime example. All of the water that leaves our properties in Peru for example are all treated to water quality standards so the farms or the users down the road cannot complain and then we’re monitored by third parties by the authorities we get audited and everything else. So I think the technology has made mining a much more friendlier industry than it was in the past. Yes we do move earth from one place to the other but underground mines are friendlier than open pit mines for example in that sense. But nevertheless all the waste rock facilities now are monitored they have drainage they have water contention they have water and they have canals that divert water from entering into those facilities et cetera. So the technology is there. We have continuous monitoring of all of our effluent including the camp effluents and everything they all have to be treated.

Matthew Gordon: I think that’s a great point. Igor Gonzales thank you very much for coming and seeing us.


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Lumina Gold (TSX-V: LUM) – Turned $175M into $1.5B for Shareholders. Doing it Again With Ross Beaty (Transcript)

CRUX sits down with Marshall Koval, CEO of Lumina Gold. A precious and base metals exploration and development company focused on it’s Cangrejos project in Southwest Ecuador. This team is replicating its success of Lumina Copper.

  • It’s backed by Ross Beaty and several long term investors that have been with them through the Lumina Copper story.
  • Amazing assets in Cangrejos, Ecuador. Still has the potential to grow significantly.
  • Made returns for investors in the past with Lumina Copper, which raised about $175M to return $1.5Bn to shareholders. We think that the opportunity for large returns to shareholders still exist in this story.

Click here to watch the interview.


Matthew Gordon: Hello Marshall, how are you sir?

Marshall Koval: Great Matthew. Thanks for having me on.

Matthew Gordon: Pleasure is ours. So Marshall we’ve been wanting to hear your story for a while. So can you give us a two-minute summary of the projects? Elevator pitch if you will.

Marshall Koval: So Lumina Gold Corporation is an offshoot of the Lumina Group. And you’ll know the Lumina Copper story from the past. Ross Beaty developed that company. So it’s the same group and it’s the same basic business model as Lumina Copper. Basically adding value to projects,  de-risking them. These are generally large projects. The Cangrejos project that we have in Ecuador is a large Gold Copper porphyry system and from the Lumina Copper story we’re pretty good at porphyry systems. So the idea here is to add value, de-risk it, do the technical work we need to. But these type of projects are large-capital-costs projects. So ultimately, we’re an explorer-developer and we’ve advanced the Cangrejos projects since 2014. We’ve completed a PEA study on the project and now we’re in the field doing all the field work: drilling, engineering related to a pre-feasibility study, should we decide to move forward with one.

Matthew Gordon: Thanks for that summary. I guess it would be pertinent to start with understanding a little bit about you, your background and how you got involved the project.

Marshall Koval: Sure. So as far as the Lumina Group goes I’ve been involved since 2014, been a business partner in all of the Lumina Group endeavours. Personally I’m a geologist by profession. I’ve got 40yrs experience in the industry. A lot of it has been with major mining companies, engineering companies and prior to joining the Lumina group I was president of Pincock, Allen & Holt, which is an engineering company that did a lot of work on project finance as an independent engineer for banks on major projects like Los Pelambres. So my background is more in engineering development. I’ve been involved in building mines. So that’s kind of the thumbnail sketch.

Matthew Gordon: Okay, Marshall, so tell us a bit about the board. There’s some pretty big names associated with it – Ross Beaty, obviously. Who put this thing together?

Marshall Koval: So this was a Lumina Group effort and Ross, and then we have quite a few long-term investors that have been involved with this story: Rick Rule, Asif Sharif. Management owns quite a bit in the… Ross and management own quite a bit of the company, about 27.5%. I’ve got about 4% of the company myself. So we’re really well aligned with shareholders and that’s been kind of the philosophy of all the Lumina Group companies.

Matthew Gordon: And who are the active members in terms of the project itself?

Marshall Koval: So I act as the CEO, Scott Hicks is V.P. of Corporate Development. Martin Rip is the CFO. Martin has been involved with the Lumina Group companies for quite a while. In country are Vice President and Country Manager Diego Benalcazar. He’s our senior V.P. Diego is an Ecuadorian geologist with substantial experience in Ecuador and internationally and he’s been a key-player. And then on government, corporate affairs – John Youle, who’s been with the Lumina Group for quite a while. Leo Hathaway is the key guy as far as geology goes. He’s been with Ross and myself since 2004. So we have a senior management team that’s worked together on quite a few of these projects, both through Lumina Copper and today.

Matthew Gordon: How do you deal with local issues? You spend a bit of time in your deck talking about that. Obviously, it’s a fairly new mining jurisdiction, so how does that work?

Marshall Koval: Yeah, I mean basically, I’m directly involved myself a lot with the government relations and actually in the field with the communities as well. Diego Benalcazar, country manager is really key. He’s based in Ecuador. John Youle  our V.P. of government affairs is down there every couple of weeks. And so basically, we’ve got a pretty robust corporate social responsibility team focused on community relations and we’ve got quite a few people in the field in our camp. Good relations with local communities. We don’t have indigenous communities in the area and the closest community is about 7km-8km away. We have a lot of programs with several employees and it’s primarily agricultural areas. So a big focus of the company is on CSR and community relations. As I mentioned.

Matthew Gordon: And given the team has been together for a while, this is a long-term play, in terms of getting this thing through to production but that’s not necessarily your end-game. And so can you explain what your business plan is?

Marshall Koval: Right. So basically when we acquired the asset in 2004, we were an early-mover in Ecuador. We saw things were changing. We did a lot of work compilation and put a big portfolio together. And then, you probably saw last year in August, we split Luminex Resources out of Lumina Gold and that was more earlier-stage Copper projects and subsequently Luminex has deals with BHP that we’re working on now with Anglo American and with First Quantum. And that’s more of an early-stage exploration play. So the philosophy with Lumina Gold is that this is a development project. It’s on the development pathway. It’s large. Right now we have four drill rigs in the field and we’re drilling, we’re doing exploration drilling. We have a new discovery area called Gran Bestia. That’s separate from the main Cangrejos deposit and I can give you a bit more details later. And we’re doing the geotechnical, hydro-geologic environmental work. Also doing a pretty robust metallurgical testing program and we’re supporting all that with these four drill rigs. So far this year we’ve drilled about just shy of 8,000m. And it’s been divided between Gran Bestia deposit, where we have about six drill holes and +200m of drilling. And that’s really exciting because it’s got the potential to change the whole project, make it even bigger. The PTA had about a 400Mt project that we have identified. So it was roughly a 16yr mine-life and there’s a lot of things beneficial to the project. In Ecuador, it’s close to the port facility, it’s close to infrastructure, power, roads, that sort of thing that’ll help the project. So back to the start of your question, the idea here is to continue to understand the magnitude of the project, to de-risk it ethically, socially, environmentally and then move the project on to somebody that would build it. We’re looking at initial capital cost on the project of over $800M and then an expansion in Year 5, that would require another $400M roughly. So it’s a big-dollar project and we’re a one-asset company, a junior developer, so it’s logical that a major or mid-tier producer would take it on and build it.

Matthew Gordon: So if I just understand that, obviously, the management, the board, friends and family have got about 27.5% of the business. Who holds the rest?

Marshall Koval: So Ross and the management own the 27.5%. And then I would say friends and family beyond that, but as a close to 50%. We have a lot of long-term investors that have followed the company. The Lumina Group, the Lumina Copper and it’s a pretty strong investor base in Canada, the US and Dubai. That’s been a lot of the history of the people that have followed us.

Matthew Gordon: And in that context they’re high-net-worth’s or they’re retail?

Marshall Koval: There’s a bit of both. We also have some funds involved. You know, we have a couple of funds out in California and in Canada and New York that are following us. But we do have a retail base. We just recently listed on the OTCQX in the US to try to get a broader investor base in the US. So I would say there is a mix of all of the above.

Matthew Gordon: The reason I ask about the shareholding and the type of shareholders is… The plan, the business plan as explained by you, it seems to be ‘we’re gonna drill a whole bunch more and sort of work out the size of what we’ve got’. But how do you put that in the context of explaining to existing shareholders or new shareholders coming in what the plan is for creating value?

Marshall Koval: So, you know, I mentioned the Cangrejos deposit and we still haven’t totally defined that.  That’s the main deposit for the project and we’re drilling it now. So basically there’s an opportunity for that main deposit to grow but Gran Bestia, which is about a kilometre to the North-West isn’t included in our resource that we used in the PTA. And we’ve got some really long drill intercepts that are above the cutoff grade that were included in the mine plan and the PEA. So it looks like we have either a satellite deposit that’ll be a new starter pit for us, or to add mine life to the projects. So basically, if you look at the PEA resource we had about 8.5Moz of Gold and a 1Blbs of Copper. So this thing is really large-scale. And it’s growing and it’s got the potential to bring the Gran Bestia deposit. So if you look at where we’re at in the market as far as share price, we’re trading at a really high-discount to NAV. And there’s a lot of upside and we haven’t unfolded the whole story as how large this deposit is. And this was formerly a Newmont project, so what we would anticipate is, as we start to understand the larger nature of this and de-risk it, that there’ll be a lot of upward movement in the share price potential, with the Gold price environment that’s increasing. And we did the economics of the project at $1,300 Gold and $3.25 Copper. So that’s roughly where we’re trading in the market today and there’s a lot of optionality to the projects. So, if we go up to $1,400 Gold, for instance, the project gets a lot bigger. So the upside is being able to come in now and at a low-point in the market or relatively low -point. We moved up a bit since last year. And then as we add value and de-risk this, the potential to move up and, ultimately, just positioning the company with a buy-out.

Matthew Gordon: You touched upon a couple of points there. You’ve put the numbers in there at, well $1,400 on page seven, $1,300 on page eleven on the Gold and as you say, the Copper price is also quite well-priced, considering today’s pricing. Why have you shown the numbers using those high-prices, do you think it’s justified?

Marshall Koval: Well, basically, the study was done back in mid-last year and at the time those prices… We looked at analysts estimates, we looked at consensus, and looked at pricing going forward and that seemed like a good place to be. At the time when we released it, Gold was about $1,350. And then when we did most of the work and then when we released it, it moved down towards $1,300 and then a bit below.

Matthew Gordon: Will you be releasing an updated PowerPoint with slightly more discounted Gold and Copper numbers or are you going to stick with what’s in the deck?

Marshall Koval: So what I think we would do in the current market is be right in the same ballpark in… Our plan right now is to update the resource in the second half of 2019 and then we’d have most of the field work done, and the metallurgy, and basic engineering that we can move to a pre-feasibility study. And that would roughly take another year beyond the release of the resource estimates. So you know, my view-point is the current Gold price would make sense at this point in time to do the next study.

Matthew Gordon: But I think sort of generally you’re peers with the share price around $1,100-$1,150 in the deck, I just wondered why you hadn’t. And again with the PEA, do you feel that that’s quite an aggressive number or you feel that’s fair in relation to what you’ve got?

Marshall Koval: No, I think it’s a fair number. Basically, a lot of engineering backup went into this. I mean, you see a lot of… You know, my background is running engineering companies and serving as independent engineers for banks on projects. So, the way we look at a PEA, it’s a full industry scoping study. We do a lot of engineering backup to support it, and then we extract the results from the PEA and results from the scoping study and put those into the PEA.

Matthew Gordon: Right, okay. Because again, you know, the IRRs at the moment using a high Gold number, a PEA, which, typically, with my investor hat on, I’m gonna go plus or minus 30%. You know, the IRRs right now, they’re not complementary to what you feel you’ve got. Is that because, again coming back to, we need to be thinking as investors, we need to be thinking there’s a long term play?

Marshall Koval: Basically when you look at large projects of this sort of scale, you get a project like this up to, say a 20% IRR, which we show in the deck and I believe it was $1,400 Gold price roughly. There’s very few large-scale projects like this that end up with those kind of IRRs. So we feel pretty good and, obviously, we’re trying to de-risk it and improve the economics with the work that we’re doing, with the target to move up towards that 20% IRR range, with the discount rates as we showed them in the PEA.

Matthew Gordon: Right. So I guess I’m trying to get the balance between getting in early with some potential upside as you build out the resource, because you’re talking it’s a very large district-wide body you’re working with here. This is not a small company or a small asset because there are more attractive grades out, there are more attractive immediate, seemingly immediate returns with lower-costs associated with them. I mean, how are you selling this to people? When you’re talking to investors, what are you saying to them?

Marshall Koval: I mean it’s still a growth story as we speak right now, like I mentioned earlier with the exploration works on. And like I say, Ecuador is evolving and it’s becoming a premier mining destination and the sovereign risk related with Ecuador is going down substantially. I mean, we’ve seen in the time that we’ve been in the country, the royalty rate… the windfall tax disappear, the royalty rate reduce, the tax risk fiscal tax regime reduce, so that you attracted majors, like I mentioned earlier, BHP, Anglo, First Quantum, Newcrest. So basically it’s one of the last systematically explored jurisdictions in Latin America and probably the world. So basically the upside for investment, investors are participating in the early-stage of the project. The project has enough legs that will likely build this mine in the future and we’re doing all the work we can to identify the scale of it, which looks like it is growing at this point. De-risking in, putting in place the permitting, and if you compare it to a lot of the… Let me just scroll through the deck here for a second. This is kind of important to go to page 14. Basically what we did here was we looked at Gold producing projects that have the potential of over 250,000oz/yr. And on this slide what you’ll see is projects in blue and then projects in yellow. So basically Cangrejos is the fifth-largest global development project, controlled by an independent developer. And all the blue ones are majors and mid-tiers. And if you look at how it stacks up, the project is significant. I mean we have about 373,000oz of Gold production a year.

Matthew Gordon: What are the assumptions that that’s based on?

Marshall Koval: That’s based on the PEA study and that’s the economics that we did in the PEA study. So basically, if you go, let me scroll around a little bit more here, the slide number eleven. Let me just walk through the PEA metrics real quick and you’ll get a feel for it. So on the bottom left on page eleven we’re looking at the initial production of 40,000tpa. Initial capital cost there is $831M and then in year five we would finish the expansion to 80,000tpd. That’s another $406M of initial capital. And then the life of mine – 16yrs. So there’s another $271M of sustaining capital. And then if you go up to the production scenario, in the first 5yrs you get 270,000oz of Gold a year and 25Mlbs of Copper. And then at the expansion, starting in Year 6 through 16, that’s 421,000oz/yr for the overall average of 373,000oz. And the other aspect that the project has in its favour is low operating costs. So if we look at C1 cost, we’re looking at $523/oz. And then if you look at AISC on Gold, we’re looking at $569/oz and then, because it has Copper, if you look at Gold equivalent, our cash costs are $706 C1 cost and then $741 AISC. So that gets us down to the pre-tax IRR of 15%, in the NPV – $920M and that’s at $1,300 Gold. Now one of the interesting aspects of this is we did this on the 5% royalty rate and the government has just changed the scale on the royalties that you negotiate with an investment contract. So if we were to go to 3% of the bottom grade and then… The government did this acknowledging that some of the projects, like Cangrejos don’t have the high grades that say a Lundin Gold, Fruta del Norte does. So the government, if we could get 3% that would bring the post-tax NPV up to a billion dollars roughly. So we’ve had initial  conversations with the government and we need to continue to move the project along to get an investment agreement in place. So you know there’s upside in that context.

Matthew Gordon: But just again for investors new to you, new to this part of the world, explain to them what large-scale low-grade mining involves.

Marshall Koval: I mean basically long mine life and I think it’s in economy of scale type project. So for instance Ecuador has low power costs, it’s about 6 cents per kWh. It’s a diesel-producing country in its oil sector so diesel is relatively inexpensive. The project itself has a low stripping ratio. So when you look at all of these aspects from an operating cost, when you look at whether this project will be feasible and during production will it throw off generate good, free cash flow. Really it comes down to two things. It’s not so much the sustaining of the initial capital, it has more to do with the operating costs and the Gold price. So we can’t control the Gold price environment but we can, with the scale of this thing, be very effective in the operation of it. So there’s quite a few things going for it. That’s why you see on page 11 that it’s got favourable cash costs. And when you benchmark it against a lot of other Gold projects in the world and if we go over to slide number 15, for instance. When we start to look at average Gold production versus all in sustaining costs, Cangrejos ranks really well compared to its peers. And that even includes Fruta del Norte that’s quite a bit higher grade. We’re producing a similar amount of Gold every year. And then if you look at the mine life versus the U.S. dollar capital per ounce of mine, the capital efficiency, as you would say, it’s sort of $250/oz. So that benchmarks well with peers as well. So Cangrejos, compared to other independent developers, is a long-life, low-cost asset. And if you go back and you look at page 14 again, you can see a lot of the high-capital cost projects or a lot of the blue projects to the left of Cangrejos, a lot of those projects are looking at quite a bit higher initial capital to operate.

Matthew Gordon: Yes. Again help us understand this a bit better. So this all have been based off a PEA, which is a very, well, includes in the name, preliminary document. But in terms of the team’s experience of moving projects from PEA stage, you know the assumptions you’re making… Tell us why you’re confident of being able to get through to a point where someone would want to take this off your hands because the economics are delivered as you are forecasting them here.

Marshall Koval: If you look at our history with the Lumina Copper story – and that’s the best way to compare it – the first major project that we advanced and it’s a mine today is the Caserones mine in Chile and it’s a large upper Porphyry mine. We took the same approach, we went in and explored, tried to fully define it. We went ahead and de-risked the project and it was acquired by Pan Pacific. So the key to that was really good solid engineering exploration work. So that project was de-risked. And then we moved on, I was the CEO in Northern Copper and that project was acquired by Chinamin metals and Jiang Xi Copper and what we did there is we did a PEA, real solid engineering work and we were at the pre-feasibility stage and it was acquired for $550M roughly. Then we were involved in the religio project which is a project today in Chile and that project, we had a resource estimate, we were still doing exploration drilling, very similar to where we’re at with the Cangrejos project and check acquired that Project. And it’s in the development pipeline today and when tech required and they did a lot more exploration work and it’s a much larger project. Now the ultimate one that we sold was talk and talk. The first quantum. And that project we did at the PEA level. We took major risk areas like the pre-strip, metallurgy, water and we advanced that word to a pre-feasibility level and First Quantum acquired the project and that’s next in their Q after coming into Panama. So that’s going to move into the development scenario. So I think as far as an exit goes, basically the level of work that’s being done now should give most companies comfort that this project can move forward and be economic in the future. And obviously, a lot of that depends on the Gold price, Copper price environment. But there’s very few projects out there with this sort of scale, particularly ones that are in independent developers’ hands. So I think that the potential for a major or mid-tier to come in, probably before we even complete the pre-feasibility study exists, and then, ultimately, if we have to continue to move towards pre-feasibility study, we’re doing all the work right now to continue to advance the project.

Matthew Gordon: Okay. So I’m hearing it’s a large project. We’ve seen it before, we’ve done it before and we’ve delivered for investors before.

Marshall Koval: Exactly. Exactly. And I think just to highlight that in the Lumina Copper scenario, we raised about a $175M and returned about $1.5B to shareholders and, I guess, maybe the best way to look at that is if you flip over to Slide number 17. You can see the tombstones for all the different companies that have been part of the Lumina Group and the senior management team and Ross have been involved in all these companies and that’s been our business plan, our model and we’ve been very successful at it. And very few companies have done that. I guess on another note, the Enfield Gold asset that’s shown there, that was merged with track and with Newcastle to form Equinox Gold, where Ross is the chairman. So we have a long history, we have access to capital, we have the ability to execute tactically, and we have the wherewithal socially, environmentally to navigate difficult jurisdictions and Ecuador is evolving in a really positive way. And we feel that we’ll be successful in Ecuador as well with Lumina Gold.

Matthew Gordon: Yeah. We heard the Equinox story earlier this month. Great story there. Do you think that the Ross Beaty factor always helps, because you said it just now. You feel confident about being able to go and raise capital for the next stage. So on the money front, you’ve got $14M in the bank. Now you’re going, what are you going to deliver in 2019 with your cash?

Marshall Koval: Basically that cash gets us through the year and the bulk of the money is going into the ground in Ecuador right now, related to the drilling programs, the engineering work, the metallurgical work. All of that is where the majority of that money is going. We run a pretty thin corporate overhead. So most of the money is in the ground and it’s going towards de-risking and further understanding the extent of the project, particularly understanding the new Gran Bestia area where it could be a project changer from the PEA.

Matthew Gordon: Right. And are you raising any more capital this year or you’re good?

Marshall Koval: We don’t anticipate it at this point, no. Basically if you look at the history of the Lumina Group, we’ve just got six holes into Gran Bestia. Newmont drilled five holes. We just finished a hole that was some 800m deep and we had mineralization through it and we’re in the process of really getting into the Gran Bestia area. Now if we continue to have good success there, we may bring more drill rigs in. And that’s the history. If you look at the talk and talk project, we started with one drill rig and ultimately ended up with 10 drill rigs. So that’s the only thing, continued success there that could change the spend for the year. And if that happened, we would evaluate where we the set cash flies, and determine if we need to go back to the market.

Matthew Gordon: Marshall, our investors want to know how you’re going to make them money. How can you answer that question?

Marshall Koval: Yeah I think basically one of the main ways to look at that is, we still haven’t discovered the full scale of this project and I think what I want to do is direct you over to Slide number 10 in the deck. And I think this really shows you the upside here, which isn’t realised in the market at this point. And basically if you look at the right side of Slide Number 10, that is the Cangrejos deposit. And basically what you see on this slide is, the pinkish colour is all of the Gold equivalent grades between 0.35g and 0.85g. That’s all above the cutoff grade that would go into the mine plan in the PEA. And then the hot red colour there is over 0.8g per Gold equivalent. And what you can see in this slide is that there’s a significant deposit in the Cangrejos deposit at the right, where the majority of those drill holes are. And about a kilometre to the left of that is the Gran Bestia project. And basically what you see there is five of the Newmont holes and two of our holes. Subsequently we drilled four more holes and this thing is holding together.  What we don’t know is if this is a true satellite deposit, if the two deposits are connected and are one deposit. So if you look at that slide, there’s this red outcrop at the surface which is 4.8g/t Gold and 2.3g/t Silver. Basically, there’s some other intercepts around 10g and this is all at the surface, on the very edge of that which is that grey outline. And if these two things are connected and we’re going to drill in between, we’re going to fully understand the size of Gran Bestia, which looks large at this point. If these two things are connected you’ve got a really large pit, which would totally change the scale and the economics of the project. So as we have it right now and the PEA, just the deposit at Cangrejos on the right is included in the PEA. Everything to the left at Gran Bestia is not, so that’s going to be new resources added. And if the two are connected, it’s a substantially larger deposit. So there’s upside on the scale of the project. The number of Gold ounces.

Matthew Gordon: And potentially the grades are… they seem higher at the surface, why is that?

Marshall Koval: The outcrop on the surface that could be a little bit of secondary enrichment from the oxide near the surface. But we do have good Gold grades. For instance the best Gran Bestia  Gold grade was, I believe was hole number 99, was 208m of 0.91g/t Gold and 1.16g/t Copper right from the surface. So like I said earlier we’re looking to see if Gran Bestia will be a higher grade near surface starter pit or if it’ll just add resources to the mine life for the project, so there’s some real upside in the scale of Gold ounces that could potentially be discovered here. So that’s a big upside for investors.

Matthew Gordon: Thanks for pointing that out. And do you think there’s any, I mean, what else do you think the company is going to be able to do this year to, again, just drive that market cap, drive the share price. How are you promoting this for instance?

Marshall Koval: Yeah, you know, it’s kind of been a story that for quite a while we’ve sort of been flying under the radar. We were consolidating our land position in the district. Now we control 100% of the known mineralization at Cangrejos and Gran Bestia. And really until we put out the PEA last year we were pretty quiet. We had some press releases on it. Now we understand the scale of this thing is real. And we’re more active getting information out to the public, generating more of a project definition and I think there’s a couple other aspects of the project that are really positive. If you look at a lot of candy and Copper and Gold project they’re high elevation in Peru and Chile. Cangrejos, the highest point on the projects is 1,300m, we’re 40km from a deep water port where you could export concentrates. We’re looking at developing a couple of different concentrates – a Gold concentrate, that could go to Europe or the US, and then a Copper concentrate with Gold and that can go to China. So the transportation operating costs, related to the proximity, the infrastructure, the low strip ratio that I mentioned earlier, all bode well for the project. And so I think it sets itself apart from other Andean projects because of the proximity to this good infrastructure, low elevation and it is a high-rainfall area and that can all be managed. But if I look at the project layout, we’re doing some other things also, on page number 12 there. We’ve got the open pit. You can see in the upper right-hand side, it goes to primary crusher down the plant and we’re looking at Dry Stack Tailings Facility. And basically that’s really positive from a water-management perspective and environmental perspective. There’s been a lot of issues out there with tailings failures, particularly in Brazil. So there’s a lot of scrutiny raised to that. And the other thing too at the PEA, it anticipates no use of Cyanide in the project. So from a permitting and environmental perspective the PEA project plan looks pretty positive in that regard. Now we’ll continue to evaluate whether we know what the process flow sheet is going forward. But things look good for the project in that context.

Matthew Gordon: Perfect. Well thanks for running through some of the technical aspects there. What are the top five reasons why we should invest into your company?

Marshall Koval: The team has a track record of success. It’s backed by Ross Beatty and several long-term investors that have been with us through the Lumina Copper story. We have an amazing asset in Cangrejos. It still has the potential to grow significantly, we’re exploring it now. We have access to capital to execute and de-risk this project and put it in the position that a major and mid-tiered company can move it forward. We’ve been there, we’ve done this. I mean, we’ve had high-returns for investors in the past. The Lumina Copper story, which is the same group here, raised about $175M to return $1.5Bn to shareholders. We think that the opportunity for large returns to shareholders still exist in this story.

Matthew Gordon: Okay well that’s great. That’s our first time hearing the story, we’d love to catch up with you in the next couple of months and sort of see how things progress with the drilling.

Marshall Koval: Okay. Appreciate it Matthew. Thank you.


Company page: https://luminagold.com/

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

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

GoGold Resources (TSX: GGD) – Long Track Record of Making Money for Shareholder (Transcript)

We interviewed GoGold CEO Bradley Langille to get an introduction to the company. The team has a long track record of building and selling companies, which cannot be understated – they are company builders. They are at the bottom of the cycle but they have the cash and a strong balance sheet, as well as ramping up their production. Hear what he has to say.

Click here to watch the interview.


Matthew Gordon: Hello Brad, how are you?

Brad Langille: Good. Very good.

Matthew Gordon: Fantastic. Where are you speaking to us from?

Brad Langille: I am speaking to you from Halifax Nova Scotia, Canada.

Matthew Gordon: Well thanks for taking the time out to tell us your story. We’ve been through the PowerPoint so I guess maybe just kick off for people new to the story. Give us a two-minute elevator pitch.

Brad Langille: Well the group and myself and the companies I’ve led over the last 25 years have all been based in Mexico. Our success has been on the technical side and very, very competent team in Mexico. We’ve had a lot of success in discovery. In Mexico, we have a good network of…in the business community, the government, in the mining sector. We’ve typically found projects that are a bit off the radar. Usually private individuals have owned these. We’ve been able to bring the capital markets to the projects. We finance equity over the last 15 years for our projects about a $1Bn including some very large loans as well through banks such as the Bank of Montreal Scotiabank in the hundreds of millions of dollars. Where currently I built 4 mines myself in my career. And strong technical team, strong finance team that we’re able to get these things done. So we’re currently one mine operating in this company GoGold and we’ve just done an acquisition of exploration development project in Polisco, Mexico.

Matthew Gordon: I mean your presentation doesn’t make a lot of the fact that you guys are deal makers, in the sense that, you buy assets, you sweat them, you sell them and you you’ve got a good track record of making money.

Brad Langille: You know we have. And obviously we’re in a cyclical industry. I mean… it goes up and down in the cycle and right now we’re pretty much at the bottom of the cycle, I believe. It’s been a long winter in the Resource business but I think we’re going to come out of this in the next 18-24 months now. Reminds me an awful lot of the first project that we had which was the Ocampo project and a company called Gammon Lake. And that one was started at the bottom of the cycle as well. It was literally started in the grouch in 1997 in 1999 went into that project we acquired it from private family we paid $15M for it and at the top of the cycle were $2.2Bn market cap. We built two mines there that the eventually the mind was sold to Carlos Slim for $75M0. Also the mid in the cycle, we bought another project called the Accubo project. We bought that for $20M from private family. We invested $45M in a shell right out of the gate with the Bank of Montreal. That was Mex Gold. It was sold three years later for $375M. That asset the Accubo asset ended up in the Endeavour Silver and sold to them after about another seven years of production for $250M. So we’ve been able to bring capital which is obviously very important this business. It’s a very capital-intensive business. And you combine that with a country that’s mining friendly. Expertise in the development of assets. And yes, we’ve been able to turn tens of millions into hundreds of millions, sometimes billions.

Matthew Gordon: There are cycles, some commodities come in and out of fashion. Sometimes it’s easy to raise capital than other times. In this case, for your project today, how are you playing this? How are you going to create value?

Brad Langille: I think as a non-technical, generalist, family office, high net worth… if you want some exposure to the sector, what you should be doing is looking for management teams. This is a business that’s very capital intensive. I see companies that are either all promotion, especially in the good part of the cycle, and maybe lacking in the experience in the technical depth. Or the other extremists that I see companies that are very, very technical but can ever put together the capital. So I think, with our group, what we’ve been able to do is combine that technical knowhow. By education with geologist, but really, I’ve spent a lot of my career in the capital markets raising money. So I have very strong technical team which I can talk their language I can understand what they’re doing, but I’m also able to go on the street to you know London New York and raise the capital. So I think when you can combine those two you have a winning common combination. You know the the mining sector from from my opinion for an investor you should have some exposure. I mean really in the Gold business and it is very cyclic right now the generalist market is booming. Who knows how long that will last. But this is almost insurance. When you know we’re inverse to the general market when the general market typically is down. That’s when the investor run for Gold. That’s when we typically do well. Right. I like to say you know our timing is perfect if you’re there all the time eventually it’s perfect. And what I mean by that is that this is this is what we do. We you know I’m not bothered by a whole bunch other public companies. I only ever do one public company and mining sector at a time, typically. And and we’re very, very focused on Resource.

Matthew Gordon: There’s a few things in there obviously that you’ve covered off so you know people can look at commodities, they can look at Gold, and you can argue the case of what type of Gold investment you should have. Equities, physical, ETF etc. But coming back to you. And yes people can be contrarian and so forth in terms of their investment strategies. But for you coming back to your company what what do you how are you going to play this? I mean how are you moving the company forward? Because if I look at your share price, it’s obviously down, as is everyone’s to be fair but you know you want to sort of see some uplift there before you even contemplate raising money to do anything else. So what what’s your plan for this year?

Brad Langille: The plan for this year. First of all. Perfect company for me in this market is a company that can generate cash, and then where do you redeploy that cash. So really in this business the value is created in the Exploration Development. or a lot of the value, in that phase Exploration Development to Production to Construction Production. So here in the goal for us right now, is first of all was to have Parral working well which it’s doing now. And we just had the best quarter ever. As far as production we just really said we see the quarter that we’re in right now. We better than last quarter where we’re targeting a number that’s 500,000oz. So that would be substantially, for one quarter 500,000oz Silver equivalent ounces, would be substantially better than we’ve ever done at the mine in the past. That will generate enough money obviously to pay all the expenses in the company, and generate money to deploy into our new Exploration development capital project. That’s where the. That’s how we’re going to play it. We’re gonna have Perral where we have developed an expertise in retreating these old tailings. These old mine waste. It’s not what you call a sexy mining project but it’s a cash generating mining project. So what do you do with that cash? So that’s the next phase. That’s a parallel track. We do what we’ve done in the past. We find these off the radar projects like Ocampo in Gammon, which we turn into billions. Or like our latest Los Ripos which is Exploration Development and it’s going to be developed to a stage, we feel when the market starts coming back which I think we’ll be the next 18 24 months, our ducks in a row. We have a district here where we’re doing basically the same thing that we did Ocampo. There was an old high grade mine where they took out the heart but they left behind what they would have considered non-economic back then. But today in an open pit bulk mining scenario. And that’s what we’re going to drill off first. That is potentially 2g/t material which is bonanza for us in an open pit. So we’re drilling that off. And then we have this property which has tons of potential over 35km of structure, where we’re going to make new discovery. So production so we don’t have to dilute the stock. A lot of the other juniors right now in the Exploration Development business and that’s where the real value is created, have to go in print shares to get capital. We don’t have to do that as you mentioned we have a strong balance sheet and starting to generate cash and mine. Redeploy that cash into the part of the business from our experience over the last twenty five years. That really generates the equity growth.

Matthew Gordon: A couple questions there. You talk about the market. You think the market is coming back the next 18-24 months. You’re under no illusion about what 2019 is. A lot of people have a very bullish about the price of Gold this year because of the political geo-political turmoil. You’re taking a slightly longer more pragmatic approach to this? Is that right?

Brad Langille: I am you know I and what I know is building mines and finding Gold. I don’t claim to be an expert on when the next up cycle is. That being said we’ve raised a lot of money over the last 15-20 years and we know a lot of these institutions. And every time I’m in a meeting with one of these institutions I ask them what they think. As a investor, especially the the mining focused investors, and what I’m hearing from them is 18-24 months that they think we’ll be firmly into the next up cycle. So I don’t think anybody can predict for sure when it will be but for us we’re in a good position. We’re a strong balance sheet, we’re a strong technical team. We have the assets in place that where we want in this particular one we’ve been followed for several years. So we’ll get all our ducks in a row. We think from the response from the investment community, the focus mining investment community, it’s gonna be 18-24 months. But today we’re at a market cap of $40M and we have our ducks in a row as I mentioned so we’re ready to go. So we’ll be there ready when the market comes back and I think we can even in this market we can generate some real returns here over the next 6-12 months with what we’re doing.

Matthew Gordon: You think investors looking at you should be looking at this as a two year, three year timeline summer. I’m just looking at your PowerPoint. You talk about how long you have assets for. You work them up to a point where you’re maximising their potential and their value and then you exit. That you’re not looking to create a kind of cash flow machine for the next 10-20 years. You get in and out when the value is there.

Brad Langille: Yeah I think you have to look at our track record and what we’ve done. But it’s important when you have an asset that you technically develop well, you created real value where the premium major mining companies like EnicoEagle are willing to pay you tens of millions or hundreds of millions of dollars. To do that, you have to do the work. But I’ll tell you something if you put the for sale sign on an asset, you’re not going to get the best price. You have to as part of your track record that you have the ability to build the mines and that you will build the mines. That you can put together the hundreds of millions of dollars to build the big mines. And then you’ll find that people want to pay. So that has always been our strategy. And we can build the mines. Ocampo was at 250,000oz producer and it was a large pit with a large deep Leach and a large underground mine. So. But I feel that the real value created for the shareholder is in our Los Ricos this project from where it is today or the next 24 months. I just want to point this out in a down cycle. You take the Sandafortutos project. That the project had been sitting there for years, in a little junior, trading at a $1.5M market cap. So in 2014 first we did a lot of due diligence, but six months of due diligence, on the project. We were able to acquire. Once we jumped in there, we got a lot of competition from some other juniors but we got it for $9M. We spent another $11M. We’re in for $20M three years later. We sold it for $80M. We retain a relative 2%. We’ve realized $12M on that royalty, half cash half shares. Those shares have gone up by about 70%. So even in the bottom of the market, we generated some value for the company. What can we do the value? We paid off all our debt. Now we have a minus generating cash and it’s debt free with cash on our balance sheet. My point is even in this down market I believe over the next 6-12 months, we’re going to generate some real value for our shareholders in what we’re doing.

Matthew Gordon: There’s some triggers that are potentially for investors to look for. Obviously you don’t put the for sale sign up. You just don’t do that if you want to maximize the potential of the offer. What are what are the other little triggers that.. the things, the signs that people should look for?

Brad Langille: I think you know when a company has to go to the market again it’s tough to be into the market right now.

Matthew Gordon: So cash is king!

Brad Langille: Cash is king for just one other point. Just what I mean they’re both you know throwing up the For Sale sign. It doesn’t really matter. The roadmap to building a mine or the roadmap to selling an asset is the same roadmap. So we just go into a project and we say we do the right systematic work towards building the mine. And if somebody comes they come. So that’s that’s what we do in the asset side. But for us right now it’s all about cash is king. Strong balance sheet, strong strong technical team. A country that we know extremely well. And the ability to move things forward.

Matthew Gordon: So lots of optionality when you’ve got cash! And just asset a generic one. How do you think you did in 2018 and what would you’ve done differently?

Brad Langille: In 2018 what we’ve done differently? We would’ve had Los Ricos  sooner. But we couldn’t drill that. We it was it was a process and it took as long as it took. In 2018, you know the end of 2017 we we sold our our asset Fortudos. We made a lot of money on it. But I’ll tell you what at that point we had a lot of debt. So the ability to move that asset gave us a strong footing. I think that I would say that our producing mine of all the four mines, I believe was probably the toughest. We did something new there. And sometimes is overlooked. We created some really new technology. We took these old tailings, we did something that nobody’s ever done before. We heap leach these tailings. So we do have that as well. It’s not a sexy mining project but there’s hundreds of millions of tons of these in Mexico. And nobody’s done that before. And we’ve developed the knowhow around that. So never never say never. We may do one of those again and just to generate more cash.

Matthew Gordon: And do you have the ability, one to identify additional assets and then option them because of your connections and the fact you’ve been working there for 25 odd years and is that part of the strategy going forward? I know it’s not right now but is that what you’re thinking?

Brad Langille: You see what opportunities come to you. We do have a lot of projects that come to us. We look at an awful lot of projects. I would say that we’re a very focused team though and really the focus right now is that Los Rico’s project. Maybe there’ll be some more consolidation around it but the focus is that project and we’ll keep the team very focused on that. You know there is some people have mentioned that you look at you know our where we trade the market as far as market cap. You look at some similar companies, you say we’re all trading at a 0.3x NAV, net asset value, is there is there money to be made in M&A? I think there’s far less money to be made in M&A than there is in what we’re doing right now. If we built a lot of a lot more market cap in the rest of the market is still really depressed, you know we could revisit that. Obviously we’ve been long and we’ve said this publicly we looked at a lot of M&A opportunities. I just think there’s way more money created in the development of this Los Ricos project.

Matthew Gordon: Can I ask then say this year I think you’ve sort of explained what you’re going to be… the process of kind of going through this year and probably next as well, so five reasons people should get interested in and believe in your operation and look at potentially investing in you as well.

Brad Langille: A few reasons why they should it is because 1. Is cycle. So cycle, we’re at the bottom of the cycle. And so there are other companies obviously at bottom the cycle as well. So what differentiates us. We have cash. We have a strong balance sheet. The last thing you want to be doing is going to the market raising equity at bottom in cycle. 2. Second thing is that we have a track record. We have generated literally billions of dollars of value over the last twenty five years in a country that we know very, very well. Well on the political governmental and mining business in Mexico. I think the other thing is that we look where we’re positioned right now besides a strong balance sheet we’re going to start generating cash. We have a mine that we’ve been mining now going on five years. It was a little bit difficult to start up, but it’s working really nicely now. You’re gonna see production growth over the next couple of quarters. So when you have production growth you have strong balance sheet and then we have Los Ricos. Now we’re back in our wheelhouse. Our wheelhouse is drilling like we did and Ocampo. We’re just drilling around an old high grade or sheet. That’s where we’re starting. That’s basically drilling for resource. But we have 35km  there and we have other targets that we’re starting to trench. We’re gonna have some news about some of those results. Those targets are going to be the Exploration Development, we hope we find ore shoots that have never been discovered before. And when you look at what was there and was mined in the 1920s, and you say what would it look like today with the heart still left. I mean it looks great sitting there as a bulk target. It’s going to be one of the hopefully real the high-grade that mines. But you say well what about finding one of those where nobody found it before and all the heart there. Then it’s going to be a real bonanza. So we have that opportunity. So I don’t know if a given five reasons. But I’ll tell you, it’s cash. It’s experience. Technical team, knowledge and we have the right project now. So those are gonna be the drivers. We’re gonna have a lot of news coming out over the next six months. And we have catalysts that are gonna drive that stock. We’ve been down for a while like everybody else but we’ve got the now we have the tools in the tool box here to really start greatness about.

Matthew Gordon: And just one thing…the team have got. How many shares do the management board hold?

Brad Langille: Well I’d be the second largest shareholder. So I’m about 10% of the company. Management and insiders have about 30% and then…we’ve had good, even in this market, we had some good institutional support and see some of our institutional shareholders there as well.

Matthew Gordon: Are you primarily focused on institutional capital coming through when you when you need it or do you look at the retail to drive that kind of liquidity and volume component?

Brad Langille: You know I think really this market is going to… the up cycle is going to start with some retail interest first. I think we need to work and generate some more retail following our company. Traditionally, we’ve had a lot of institutional support. Right where we are in the market, it seems that a lot of the institutions have gone away. But I think that will change over the next 18 months. So we’re out there where we were… now we have something to talk about with this new project and the mines working well and the balance sheet. So we’re out there on the road and we’re telling our story and it’s a really good story. So I think we’ll get some interest.

Matthew Gordon: Fantastic Brad. Thanks for your time. I’ve enjoyed listening to the story and I wish you well.

Brad Langille: Thank you.


Company page: https://gogoldresources.com/

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

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