Energy Fuels: I need your clothes, your boots, and your uranium mill.

A picture of the face of the Terminator, Arnold Schwarzenegger, who wears sunglasses and holds a gun up.

If, like me, you are a budding investor, you likely spend hours each night scouring the internet for the latest and best opportunities to make money. From economic revolutions instigated by futuristic technology, to trade embargos plummeting the prices of certain commodities, the world of investment is a complex minefield, which incites fear and excitement in equal measure.

In recent days, a commodity that has captured my focus is uranium; certain American economic news regarding it has intrigued me, in addition to the international surge of attention towards climate change. Following national news coverage in the last few weeks, it has been impossible not to notice seething commuters warring with Extinction Rebellion protestors. What could possibly cause smartly dressed commuters to devolve into a primitive mob? The answer is the increasingly intense climate change debate.

A colour photo of a crowd of colourfully dressed Extinction Rebellion protestors holding a large green banner stating: 'REBEL FOR LIFE.'

This event was one of many occurring in England’s capital in recent months. Additionally, Greta Thunberg’s damning climate change speeches have navigated themselves into the centre of international discourse. An individual wouldn’t be nominated for the Nobel Peace Prize unless their cause was especially relevant.   

One of the key components of the raging debate is nuclear energy. Nuclear-based electricity production avoids carbon dioxide and other greenhouse gas emissions. However, it has been suggested radioactive gas can cause health issues to workers and individuals from communities surrounding power plants. Furthermore, the disposal of nuclear waste is an even more controversial subject, and if one so much as utters the words ‘nuclear weapons’ they can expect a flurry of opinions to be launched at them more explosively than the warheads in question.

One of the primary materials involved in nuclear energy production and military use is uranium. In the wake of a tsunami striking a nuclear power station on the shores of Fukishima, Japan, the energy sector held a review on reactor designs and safety procedures. The resulting financial and psychological tidal wave had a detrimental effect on the industry, one which it is only slowly recovering from. As a consequence, despite offering vastly lower energy costs, uranium seems to have reached a political and environmental impasse and demand has plummeted. When combined with a lingering sense of distrust generated by incidents in Chernobyl, Ukraine (1986) and 3 Mile Island, U.S.A. (1979), and its association with nuclear proliferation throughout much of the 20th century, I was beginning to view uranium as a commodity too contentious to consider investing.

A colour photo of the dilapidated Ferris Wheel in Chernobyl's infamous abandoned playground.

However, after conducting my own research, I have concluded it is an area that can bring big returns to patient investors. The macro story is positive and encouraging. There are billions of USD being spent building new reactors across the world. New technologies mean small, more mobile reactors are being commissioned by countries who previously would have found themselves priced out. High profile individuals are vocal in their support, from Bill Gates to Elon Musk, and the vast scientific community adds additional endorsement to nuclear power being critical to the energy solution. Our current energy sources are not sufficient to cope with a rapidly increasing population and I feel nuclear power can be a green, affordable solution. 

…many of the world’s largest uranium mines are in care-and-maintenance mode.

The Uranium Cycle: I’ll be back.

Uranium is fundamental to the production of nuclear energy. However, current uranium spot prices remain far below what is economically viable to mine and produce ($23.90 as of 31/10/2019). Such market activity has depressed investment. Most of the (≈50) remaining uranium companies are struggling to stay afloat; many of the world’s largest uranium mines are in care-and-maintenance mode (1). These cold, hard facts lead prospective investors to one conclusion: why on earth would I want to invest in uranium? The answer remains the same as any other investment: it can make you money if you play your cards right.

I have studied numerous articles detailing different investment approaches to goods experiencing a low equity price. To me, the most attractive attitude towards uranium investment is the contrarian approach. After recognising where uranium is in its cycle, and the potential for an uptake in the future, this method seems prudent.

However, I can’t exactly go out and buy large quantities of uranium for myself; I wouldn’t want MI5 knocking on my door in the early hours of the morning. A wise investment will require choosing the right companies to invest in.

From an investor’s standpoint, there are 3 crucial elements a company requires to instil confidence in me, or any other investor. If any of these aspects are missing, I think the company is likely to falter and investment should be avoided. 

Investing in uranium: the secret recipe

The three ingredients are as follows:

  1. An experienced management team who have a proven track record for every process: mining, refinement and sale.
  2. Sufficient liquid assets to enable the company to survive until prices take an upturn.
  3. A genuine asset(s), not something purported to be an asset (such as a licence) that in reality is more restrictive to a company than beneficial.

Energy Fuels, the leading U.S. producer of uranium and potential producer of vanadium, has all three, but, perhaps most interestingly of all, it has an ace up its sleeve that is likely to be a real game-changer.

An Experienced Management Team

Uranium is an incredibly complicated commodity to work with. From permits, licences, safety, legislation, regulation, transportation to refinement there are numerous difficulties, not to mention the difficulty of mining itself. The sale of uranium is also far from straightforward, because the buyers are utility companies with long buying cycles and complex purchase criteria. If a management team has not already been through this process from start to finish, they are learning on the job with my money.

A colour photo of Energy Fuels CEO, Mark Chalmers.
Energy Fuels CEO, Mark Chalmers

Energy Fuels has a management team with an impressive résumé. Their CEO/President Mark Chalmers has been involved in the uranium industry since 1976. His vast experience would impart confidence to most investors. As a company, Energy Fuels has been operating since the 70s, and has nearly 40 years of experience mining and refining uranium. I find Energy Fuel’s established industry-related relationships and experience with uranium production/sales impressive.

Sufficient Cash

The brutal nature of the current market has created a tough environment for uranium companies. Murmurs from funds surround the need for price discovery: the spot price for uranium will need to start increasing before they will invest meaningful cash into companies again. It seems clear to me that utility companies have complete control of the timescale of any potential uranium price uptake. In the meantime, if a company lacks the cash to maintain their facilities, they will not be able to survive.

Handily, Energy Fuels has $40-45 million to see them through until uranium prices rise.  In a recent interview with Crux investor, Chalmers expressed a reason for investors to be hopeful of a price increase in the near future.  Energy Fuels and Ur-Energy are hopeful their petition to the United States Government under section 232 and the subsequent announcement of a 90-day Working Group may bear fruit.   

If the group’s report is favourable to the nuclear industry, it is possible President Trump could subsidise U.S. uranium companies via tax breaks and other federal financial boosts, thus allowing prices to rise and profit to be made for investors who climb aboard while prices are still low. However, despite Chalmers stating he would be “shocked” if the government doesn’t rule favourably towards the uranium sector, the judgement currently resides in a realm of definitive uncertainty; the group’s report may not be completed this year as other events take centre stage on the U.S. political platform.

Genuine Assets

A company’s assets are an excellent indicator of if my hard-earned cash will be worthily invested. Energy Fuels have a portfolio they regard as ‘truly unique.’ (2). They have ‘more production capacity, licensed mines and processing facilities, and in-ground uranium resources than any other U.S. producer.’ Energy Fuel’s 100% ownership of numerous promising mines across Arizona, Utah, New Mexico and Wyoming gives them an excellent list of valuable assets.

Furthermore, in an interview with Crux Investor at the WNA, Chalmers explained the versatility of Energy Fuels. The company tries to ‘diversify,’ to ‘keep a strong balance sheet’ and ‘protect shareholders.’(3) The quantity of projects being undertaken by Energy Fuels helps reduce the risk of investment, as if one goes horribly wrong, there are plenty of alternative options to steady the ship.

The diversity of Energy Fuels is further exemplified by their status as the largest U.S vanadium producer. Vanadium has a variety of uses in engineering and redox flow batteries to name but a few. They also provide ‘low-cost environmental cleanup and uranium recycling services, including potential involvement in the EPA clean-up of Cold-War-era uranium mines.’ Investors can find their risk reduced because the company is clearly not a one-trick pony. Energy Fuels is not completely reliant on uranium.

The Game-Changer

When first mined, Uranium isn’t functional for nuclear energy or military use; it needs to be enriched to ≈20% for power and ≈85% for military use. The enrichment process requires the mined uranium ore to be processed in a mill. Energy Fuels own the only ‘fully-licensed and operating conventional uranium mill in the United States.’ (4). This means in the event of a uranium price increase they are the only company ready to go into production immediately. It also means that any competitor will be restricted at their leisure; companies will have to pay Energy Fuels for use of their mill, or face expensive shipping expenses to mills in foreign countries. Energy Fuels will also have control of the timescale of other companies’ uranium production. Chalmers has positioned the company strongly with an undeniable leg-up on the competition.

A photo of three nuclear cooling towers in action against the backdrop of a clear blue sky and a woodland area.

An Option I Could Seriously Consider

Upon conclusion of my research into the world of uranium companies, I have reached the conclusion Energy Fuels would be a potentially sensible investment. I don’t think any other American uranium producer comes close when the management team, business model, cash and bonus mill of Energy Fuels places them in such a commanding position. In the near future, I am likely to invest. I feel my money would be much better served waiting to grow with the sleeping giant of uranium than comatose in a bank account with less interest generated than a taxidermist’s dating profile.

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


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

The Next New Copper Producer in the United States : Excelsior Mining

  • TSE: MIN
  • Shares Outstanding: 238.66M
  • Share price CA$1.18 (15.01.2020)
  • Market Cap: CA$281.62M

Why invest in Copper?

Copper demand is growing. Its main use is electric wires and as we consume more electricity we will need more and more Copper. Total electricity consumption in projected to grow by 60% in the next 20 years.(1) Besides growing energy consumption, we need more Copper because renewables (solar & wind) are extremely Copper intensive. EV’s also require more copper than traditional combustion engine vehicles.

But the main story in Copper is the supply side. In the last commodity cycle the Copper industry spent over USD$100Bn exploring and has almost nothing to show for it. Permitting is becoming more and more challenging and the average time to get from discovery to production is now +15 years (2). The average grade has also been falling steadily from c. 1.65% in 90’s to c. 0.9% today (3). The Project pipeline is even worse. Way worse. For the pipeline to become economical, Copper prices have to rise. With current prices, supply will drop by 3%-4% pa.

Short-term recession will change things and push the crunch further, but according to Wood MacKenzie we will see a 10Mt deficit before 2030 (3). Advances in Technology will make it more economical to mine low grades, but 10 years is a short time. I don’t think we will see peak Copper, but I feel confident enough to predict a bull market in Copper in 20’s. And I want to position myself for that bull market.

The Asset: Gunnison Arizona

Gunnison is a wonderful asset. It’s not a Tier 1 asset size-wise (4,500 Mlbs proven Reserves & 5,000Mlbs Measured & Indicated Resources), but it has ridiculously low production costs and low capital intensity. Based on Excelsior’s Feasibility Study (FS) it has AISC of USD$1.23$/lb making it one of the lowest cost Copper producers globally. Gunnison has a unique geology that allows in-situ leaching (ISR/ ISL) as the mining method. ISR uses leach solution to extract Copper directly from the ground via wells. It’s basically pumping Copper solution from the ground using wells. ISR mines tend to have extremely low operational costs combined with low initial CAPEX. Those familiar with Uranium know that the cheapest production in the world is ISR production (4). ISR has also been successfully used to “mine” Copper in Arizona.

Excelsior [is] extremely cheap on paper.

The mine will be built in 3 Stages. In Stage 1, 2 and 3, Gunnison will produce 25Mlbs, 75Mlbs and 125Mlbs of Copper pa respectively. Stage 1 is fully funded and on schedule. Production starts at Q4/19.

Funding was a combination of new shares, a Royalty and a Copper Stream (majority). Excelsior didn’t need to raise any debt. CAPEX for Stage 2 will be $146M and for Stage 3 $230M. Gunnison has an NVP of USD$807M with an IRR of 40% and a life-of-mine (LOM) of +20 years. Copper companies often prefer to use $3/lbs sand 5% discount rate in their assumptions. Excelsior uses a way more reasonable $2.75/lbs as Copper price and a 7.5% discount rate.

For a company with a market cap of US$195M these are robust numbers and make Excelsior extremely cheap on paper. In fact, looking at the corporate presentation (5) you will notice that at full production the project will be generating more EBITDA pa. than Excelsior’s market cap.

From Stage 1 to Stage 3

Back in the real-world, project level feasibility numbers do not necessarily equate to company economics. Gunnison also has two Royalties and an off-take agreement that are not taken fully into account in the Feasibility Study (FS).

I think that Stage 1 will look like this:

Stage 1
Low CaseMid CaseHigh Case
Production (Mlbs)252525
Copper (Cu) Price @ $2,75$2,00$2,50$3,00
Cu Price to Triple Flag$0,50$0,63$0,75
Tripple Flag Stream16,5%16,5%16,5%
Revenue (USD / M)$43,81$54,77$65,72
Greenstone Royalty %3%3%3%
Altius Royalty %1,625%1,625%1,625%
AIS Costs ($1,23/lb LOM) Stage1$1,45$1,45$1,45
SG&A Total$8,7$8,7$8,7
Other Costs$2,0$2,0$2,0
Taxes under Trump @ 20%$0,0$0,0$1,7
Taxes under Democrats @ 40%$0,0$0,0$3,5
Net Income (Trump)-$12,2-$1,7$7,0
Net Income (Democrats)-$12,2-$1,7$5,2
OCF under Trump-$2,2$8,3$17,0
OCF under Democrats-$2,2$8,3$15,2

LOM AISC is $1.23/lbs but in Stage 1 AISC will be higher even though they would use high-grading. Numbers might not look great but for me the key is that even with extremely depressed Copper prices Gunnison will be generating positive operating cash flows (OCF) in Stage 1.

Based on the ramp up plan, Excelsior wants to move to stage 2 in 3 years. This will require $146M. Out of this sum Excelsior might be able to fund ⅓ internally. This means they need another $100M. This would probably be debt.

With 7.5% interest rate they should be able to start generating a meaningful OCF in Stage 2. With $2.75$/lbs, I think USD$45-$54M could be in reached (USD$35-$40M with $2.5/lbs).

Stage 3 follows 3 years after stage 2 and requires USD$230M in CAPEX. If Excelsior can fund USD$100-$150M of this out of cash flow and pay the rest with debt, in 2025-2027 Excelsior would have a debt load of USD$200M and USD$106-$130M in OCF (USD$75-$100M in net profit) with $3/lbs of Copper.

Stage 1 Stage 2 Stage 3
Year 1 2 3 4 5 6 What If” Scenarios
Production (Mlbs)252525757575125125125125
Copper Price$2,50$2,50$2,50$2,50$2,75$2,75$2,50$3,00$4,00$5,00
Triple Flag Stream16,5%16,5%16,5%5,8%5,8%5,8%3,5%3,5%3,5%3,5%
Revenue (USD / M)$54,77$54,77$54,77$179,41$197,36$197,36$304,30$365,16$486,88$608,59
Greenstone Royalty %3%3%3%3%3%3%3%3%3%3%
Altius Royalty %1,625%1,625%1,625%1,50%1,50%1,50%1,50%1,50%1,50%1,50%
AIS Costs ($1,23/lbs LOM)$1,45$1,45$1,45$1,35$1,35$1,35$1,20$1,20$1,20$1,20
SG&A Total$8,7$8,7$8,7$16,0$16,0$16,0$25,5$25,5$25,5$25,5
Other Costs$2,0$2,0$2,0$5,0$5,0$5,0$6,0$6,0$6,0$6,0
Net Income (Trump)-$1,7-$1,7-$1,7$21,3$35,0$35,0$55,3$101,8$194,8$287,8
Net Income (Democrats)-$1,7-$1,7-$1,7$16,0$26,2$26,2$41,5$76,3$146,1$215,8
OCF under Trump$8,3$8,3$8,3$40,3$54,0$54,0$85,3$131,8$224,8$317,8
OCF under Democrats$8,3$8,3$8,3$35,0$45,2$45,2$71,5$106,3$176,1$245,8

What impresses me with this asset is that we don’t need to see a Copper bull market for Gunnison to make sense. But let’s say, just to amuse ourselves, that we will have a Copper rally and Copper goes to $5/lbs. Excelsior could be making close to USD$300M in profit.

And this is the thing with resource sector. There will be bull markets followed by long bear market. Mining is hyper-cyclical sector. I’m willing to say that we will see $4-$5/lbs of Copper in 20’s and when that happens I will be selling while the investing herd will be stampeding to buy the deficit story.

Management Strategy

Excelsior’s management has proven that they can build a mine.

I say “I don’t know” way too often to sound smart. But when evaluating management teams in mining “I don’t know” is more often than not the truth. There are terrible management teams, cheaters, liars and lifestyle companies. There are also good people who are just incompetent. There are also superstars like Ross Beaty. And then there are a lot of ordinary management teams.

Excelsior’s management has proven that they can build a mine. They also have operational experience (although not directly related to Copper ISR). I feel confident enough to say that they can run the operations at Gunnison successfully. The fact that Greenstone Resources, Altius Minerals and Triple Flag are also backing the project also leads me to believe this.

But to be able to know whether or not they are the right people in the right place, I’d need to know what happens next. They will ramp up the production to >100Mlbs in the next few years and that will be the main focus but then what? Thing is that after reading through MD&A’s, annuals, presentations and after listening to every interview the CEO Stephen Twyerould has given (and that I was able to find 2012-2019) I can’t tell you what their strategy is.

This is a rant in part but…if Excelsior pays 100% of its income in dividends, investors will think the management is competent. But if they are thinking of making themselves into a midcap Copper company with multiple producing assets then investors need to know what they are thinking and the roadmap to get there. M&A, exploration, no dividends, dividends as a fixed % of their profits, or maybe they are thinking of acquiring some nickel assets to make themselves a diversified miner. I get that this lack of strategy is the modus operandi in mining, but this lack of clarity makes it difficult for investors to make intelligent investment decisions.

Does Excelsior have a great management team that can successfully execute a growth plan from a single asset junior to a midcap? I don’t see any evidence for that. Besides a super-low-cost producer usually has to acquire higher-cost projects which will change the economics of the whole company.

I have reservations about the chairman of the Board Mark Moribato – namely whether his focus and contribution to Excelsior is sufficient. (6)

Besides being involved with Excelsior, he runs a merchant bank called King & Bay West Management Corp (K&B) and is also Director, CEO, chairman etc in multiple mining (and one jet) companies.

“King & Bay West provides administrative, management, regulatory, accounting, legal, corporate development and corporate communications services to the Company.”

In 2018 Excelsior paid $532K to K&B for: (7)

Alderon Iron Ore Corp. (Morabito is chairman) paid $532K to K&B for: (8)

Canada Jetlines Ltd. (Morabito is chairman) paid $887K to K&B for: (9)

Voleo (Morabito is chairman) paid to K&B for: (10)

There’s nothing wrong with these kinds of arrangements. Example in Excelsior’s case the Corporate Secretary works for K&B and K&B charges Excelsior for these and other services provided (the same person also works as a Secretary at K&B, Corporate Secretary at Xineoh Technologies Inc. and as an assistant Secretary Corporate in Canada Jetlines and Alderon Iron).

But I think that these kind of setups raise questions and make it hard for an owner to judge if they serve the company, especially when it seems that every company that Morabito is involved in buy services from his company.

Voleo (Morabito is the Chairman) is also an interesting story. Morabito was the CEO of Logan Resources, a gold explorer in 2017. According to his 20 Jan 2017 Proactive interview “the downside risk in Logan, at the current share price of 10 cents Canadian, is almost nothing and the upside is somewhat unlimited” (11).

Alas like with so many explorers’ things didn’t work out, so in 2019 Logan closed a business combination with Voleo (12) and is now “The first and best social stock trading app for investment clubs”, already with negative equity and a loss making business.

He also seems to have use his buddy Peter Grandich to promote his companies. This occurred at Silver Quest Resources, Alderon Resource, Crosshair Exploration, Excelsior Mining Corp and Santa Fe Metals Corp.

Example: Ridgemont Iron Ore Corp granted “monthly fee of US$2,000 and will grant 200,000 incentive stock options to Grandich”. Again, Morabito was the guy signing the papers. (13)

After listening to many of his interviews, he seems like a smart guy. But having reviewed Morabito’s track record, my concern is in making sure that the decisions he makes are in the interests of the shareholders. When it is not, he needs to be held accountable.

CEO Stephen Twyerould “moved Reliance Mining from junior explorer to producer in 3 years (Market cap $5M to $100M)” (14)

This refers to Beta Hunt, now owned by RNC. Based on what I gather (and if I’m wrong please correct me), Reliance bought the property in 2003 for AUS$11.7M. Reliance was acquired by Consolidated Minerals for AUS$76.5M in 2005.(15 & 16) Maybe the market cap went to $100M, but I have a problem in the way this is presented. I’m good with AUS$76.5M (which back then was USD$57.5M). Just keep it at that. By saying $100M I believe they purposefully gave the wrong impression, and I also feel it was misleading to using “USD$” instead of “AUS$”.


This year is pivotal for the company and what I expect to see is heavy insider buying. This has not happened…

Top holders include Greenstone Resources (47.7%), Triple Flag (5.8%) and Altius Minerals (1.2%). I respect these companies and when they come in, they do heavy technical DD. The fact that these entities are involved is a vote of confidence.

Management owns 4.4% but from what I can see this is largely due to options. After going through the insider trades from 2011-today, it’s mainly just insiders exercising options and selling some shares in the open market (though I must give credit to Morabito for buying lots of stock during 2012-2014). This year is pivotal for the company and what I expect to see is heavy insider buying. That has not happened as you can see: (17)

In a 2012 interview, “A few minutes with the CEO” (18), Twyerould said, “I mean to get this project into production in 2015”. That didn’t happen. This is not a problem in and of itself. Mining is a tricky business.

My problem is that the management gave themselves a large amount of options during that time (2010-2012). These options had expiration dates from 18th December 2014 through 31st December 2015, with strike prices from CAD$0.5 to CAD$0.73. In 2013 Excelsior Mining announced that it “will re-price 5,147,333 incentive stock options issued to Directors, officers, employees and consultants of the Company. The options were originally granted between October 2010 and February 2012 at prices ranging from CAD$0.50 to CAD$0.73. The new exercise price for these options will be CAD$0.30 per share.”. (19) In 2014 Excelsior Mining “intends to extend the term of a total of 5,829,667 stock options (the “Options”), which are currently scheduled to expire on 18th December 2014, 5th May 2015, and 14th October 2015. The Options were issued with an original term of five years and the term will be extended such that their new expiry date is 31st December 2018.” (20)

In my opinion the management (CEO) sold a promise to their owners “mine in production in 2015” (18) and gave themselves options that basically payoff if they achieved the goal. They didn’t. For shareholders this means dilution and lower IRR. For the management this means 50% lower exercise price and four years extension for their options. I’d say their IRR stays the same.

Everything I have described above is way too common practice in mining and the things I have pointed out about Excelsior are mild compared to some, but no less excusable. Investors must pay attention to the detail and be vocal. If the Management Team acts to protect their own interests and not those of the shareholders, they must be called out. Or investors can vote the Board off, or vote with their feet and walk out.

Bottom line

I think there’s an extremely strong fundamental case for Copper. In 20’s we will see a much higher Copper price which should lead to rising equity prices for Copper companies. When in 20’s you ask? I don’t know. But I can position myself for the long-term. There might be a recession before we see a meaningful bull market in Copper and it might take time, but it will come.

 Excelsior Mining is a great way for investors to position themselves for the long wait.

Hence, I want to have a pure-play, low-cost, low-debt and long life-of-mine (LOM) asset which is located in a great jurisdiction. Gunnison, in my opinion, is an asset that meets my criteria and no matter how I play with Excel, it is on the cheap side. I’d also love to have a great top-notch management team. That is my current concern. So is the lack of vision and clear and understandable strategy for the future. But even though I have pointed out the short-comings of the management team, I don’t think that they are necessarily all bad either.

I’m concerned that they cannot articulate what they plan to do. An average Management team can ruin a great asset with a bad strategy and execution. Luckily it will only take the next 4-7 years for them to ramp up the production, and that is something I can wholeheartedly support.

All in all, I see Excelsior Mining as a great way for investors to position themselves for the long wait.

I own shares in Excelsior Mining.

  1. IEA Energy, World Energy Outlook 2018
  2. World Bank, From Commodity Discovery to Production 2016
  3. Wood Mackenzie, Global Copper long-term outlook Q1 2017
  4. WNA, In Situ Leach Mining. KazatomProm 1H19 hand out page 16 shows how the lowest quartile of production is ISR.
  6. Excelsior Mining 2019 Annual General Meeting, Information Circular
  7. Excelsior Mining, Annual Report 2018
  8. Alderon Iron Ore Corp., Annual Report 2018
  9. Canada Jetlines Ltd., Annual Report 2018
  10. Voleo Trading Systems Inc., Consolidated Financial Statements YE March 31, 2019
  14., Excelsior Mining, Corporate Presentation
  18. “A Few Minutes with a CEO” interview, 19 april 2012
  19., Excelsior Announces Stock Option Repricing October 31, 2013
  20., Excelsior Provides Marketing Update and Extends Stock Options August 7, 2014

Pan African Resources (AIM: PAF) – A Dividend Paying Gold Producer

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

We don’t tend to like investing in Gold producers as they rarely perform for shareholders. But we like this one, a lot. The CEO is brutally and refreshingly honest. He spends lot of time pointing out the difficulties in mining and operating in South Africa.

However, they make it work. They have a long track record of producing Gold and paying dividends. Last year they suspended the dividend payments as their debt borrowing for the new plant was the focus, however, they are planning to pay a dividend (subject to shareholder vote in November). The Audit Results are out today. The numbers are extremely encouraging and show a tremendous growth across the company. Cobus Loots talks about how they have done it and what the growth targets are in the short term. We were impressed about the way they think about capital allocation. Investing in their assets, they want to repay the debt on balance sheet, paying a dividend and how to deliver growth.

They still have a lot to do but we think this team is rigorous in its planning and methodical is how it delivers its projects.

Interview Highlights:

  • Overview of the Company
  • Audit Report: Great News?
  • Safety & Why It is Important to Pan African Resources
  • Productivity & Production: What Numbers Are They Looking At? Can They Lower Their AISC?
  • Paying a Dividend: Why Now?
  • Mining in South Africa: Benefits and Risks
  • Company Financials and Share Price: What’s The Outlook?
  • Future Plans for The Company

Click here to watch the interview.

Matthew Gordon: I’m looking at your executive officer statement. We had a chance to quickly scan through this. Some great numbers on there, you must be very pleased.

Cobus Loots: We are quite pleased. And I think this was a great improvement on pretty much all fronts.

Matthew Gordon: Definitely. Give us a one-minute summary of the business for those new to the story to start with.

Cobus Loots: The company is Pan African Resources PLC. We’re a UK company, but with a South African base, with all of our operations currently in South Africa. We have two large gold mining complexes. The first being Barberton Mines. Barberton Mines has been going for almost 130 years. So, gold mining started in Barberton in 1886. We’ve made some major improvements in recent years at Barberton. So, we have the underground mine that we’ve been mining, and will continue to mine for quite some time. And then we also have a tailings plant that produces ultra-low-cost ounces. The other complex is Evander Gold mines. The largest operation that we have now as part of the Evandar is the Elikhulu plant. That also produces very low-cost and low-risk gold ounces. And then we have an underground operation that we are also in the process of developing further at the moment.

Matthew Gordon: Can we talk about some of the growth stories that I’ve been reading about, eg: Egoli and Royal Sheba. But let’s start with these numbers. You’ve produced some exceptional numbers there. What stands out for you?

Cobus Loots: What stands out is the fact that we improved our safety performance at the year past. That’s critical for us on a number of fronts. If we can’t produce safety, we cannot produce. I’m very happy to report that all of our safety statistics have come down in terms of incidents in the last year. That’s a result of principally the Elikhulu tailings plant, which inherently is just a lower risk operation, but then also a massive focus on safety schemes, safety initiatives across the group. The safety box is never ticked. We have to continue to work on safety, but it was a good performance. Operationally we exceeded our production guidance for the year past. That’s obviously quite a positive. Actually, from all operations we had an improved performance. On the cost side from an All In Sustaining Cost (AISC) perspective we reduced our costs quite substantially. I’d like to say we are the lowest cost producer in South Africa as a group, certainly amongst the lowest cost at the moment. But not only that, we also internationally very competitive. So, AISC came in at $980 an ounce. The international benchmark at the moment is just over $900. So, $980 versus $900. Not bad. And there is potential for us to bring down that cost further in the year to come. So overall, good performance. I’m also very pleased by the fact we are proposing a dividend for approval at the upcoming AGM. And that’s positive. We had to suspend the dividend last year as a result of obviously gold price. What was happening at Evander, the substantial capital we were incurring on the construction of Elikhulu. So, I’m quite happy that the dividend is back. We’ll be at a more modest level, but it’s still to 1% yield is not to be frowned at.

Matthew Gordon: Good news it seems to me, but not without a lot of hard work from your team. And I noticed the first thing you focused on there was safety, which again is unusual. People usually to stick that at the back of the presentation. Why is it such a big deal for you guys?

Cobus Loots: If you analyse it coldly, the world is changing. If you can’t produce gold safely, it makes it very difficult to produce. Our people are our primary asset. That’s an addition to our ore bodies and all of our other infrastructure. So, we need to take care of our people from a health and safety perspective. Safety first, health also very important. So, without our people, well, we can’t achieve what we’ve achieved in the last year.

Matthew Gordon: Good. Nice to hear. Let’s talk about productivity. You’ve increased your forecast, so you’re going to be producing at what level by the end of next year?

Cobus Loots: We’re guiding 185,000 ounces for FY20, which as going to you said, is quite a be a big improvement on the 172,000 that we did last year. So that’s off the back of a number of projects. So, 1. Elikhulu will produce now for a full year. We commissioned Elikhulu in September 2018. So, we really only had the benefit of nine months of production from Elikhulu. You obviously ramping up also. So now you’re looking at a full year of production from Elikhulu which includes the enhanced or increased capacity via the ETRP. It’s a tailings block. So, we’re saying 65,000 ounces from Elikhulu. We’re saying 20,000 ounces from what we call the Evander Pillar project at the Evander underground, and then 100,000 ounces from Barberton. So, that makes up of our increased production guidance of 185,000 ounces.

Matthew Gordon: That puts you firmly in the mid-tier producer range. And if you look at what gold price is doing in the last couple of months, you’ll start to see the benefit of that in terms of margins, because of the amount that you’re producing. I make that point for investors, because there’s an assumption because gold is up that the junior explorers and developers will benefit. And they don’t. It’s the producers who will benefit far more quickly because of sales. You talk about the lower AISC, which I thought was interesting. You are striving to drive towards that $900 mark. You’ve clearly made some headway into that. What do you attribute that to and how are you going to continue driving the AISC lower?

Cobus Loots: The first contributor to the reduction of AISC has most definitely been our tailings business. We commissioned Elikhulu in the last year. It’s quite a large plant. It processes 1.2Mt of tailings p/m. And that’s where we get our 65,000 ounces of gold for the next year. The great thing with Elikhulu is it produces at an exceptionally low AISC. We should be at $650, if not lower. We then have the Barberton tailings retreatment plant (BTRP) that does also 20,000 ounces. So overall, we have 85,000 ounces that are what we like to call ultra-low-cost production. This provides a stable base load, for our portfolio, and allows us to survive pretty much in any gold price environment. And it brings down the groups AISC quite significantly. Those are the tailings businesses. There’s quite a lot of optimization happening underground at Barberton. We’re simplifying the infrastructure. We’re doing a lot more development which allows us further access to high-grade ore bodies. We’re looking at the marginal side of the business to see if we cut some ounces and reduce costs? There are a number of initiatives also ongoing to further reduce the AISC for the group.

Matthew Gordon: But that does tend to suggest that the Barberton costs are quite high.

Cobus Loots: If you look at our results presentation, Barberton underground actually has put different shafts with different cost structures. The flagship underground business is Fairview. Fairview has been going for many years. It’s an incredibly high-grade ore body. It’s on average more than 10g/t, but we get pockets of +100/gt. The principal ore body that we mine at Fairview is the MRC. It has a life currently of 20 years. And we’ve been doing a number of improvements to infrastructure to ensure that we can continue to mine successfully, safely and profitably in years to come. So, Fairview by itself is still a fairly low-cost producer. Then we have a more marginal ounces at Sheba and at Consort. So those are the answers that we have to focus on and reduce that all in sustaining costs.

Matthew Gordon: With regards to Sheba, what’s the chances of that making some kind of contribution this year?

Cobus Loots: Sheba has certainly contributed in the year past, but the focus is increasing that contribution. It’s a project that we’ve been speaking about for some time. We want to get the first gold out of Royal Sheba in the year to come. Sheba should do better this year.

Matthew Gordon: Let’s talk about dividends. But you’ve announced that you’re going to pay a dividend, it’s got to be voted for. I’m assuming the shareholders will accept. What made you do that?

Cobus Loots: It’s a modest dividend versus what we’ve paid in the past. It’s still in effect a yield versus having your money in a bank and in some jurisdictions earning a negative interest rate. I think that makes it attractive. If you consider the way that we think about capital allocation. 1. the first is investing in our assets. We have to continue invest in our assets, otherwise we will not be able to continue to generate returns. 2. is balance sheet, because of the project Elikhulu that we constructed in the last year, our balance sheet is highly geared, certainly more than what we’d like to see. So, in the next year, we’d like to repay quite a lot of the debt we have sitting on the balance sheet. 3. it is providing a cash return to our shareholders in the form of dividends. 4. once we’ve taken care of those we also look at growth.

Matthew Gordon: Mining is tough. Mining in South Africa is really tough. But your track record of bringing projects online is good. We talked previously about doing business in South Africa and what it was like. And you said, ‘yeah, it is tough, but we deal with it. We’re used to it’. Tell people about that conversation because I thought it was fascinating.

Cobus Loots: Well, I’ve concluded that gold is so precious because it’s so difficult to mine regardless of where you are actually doing your mining. South Africa has a fairly negative perception internationally and some of it is justified and some of it potentially is not. We have a long history of mining, certainly gold. More than 50% of all the gold that’s been mined in the world has come from our country. We have great infrastructure. We have access to power. We have access to technical skills. We have a good constitution. We have a good legal system, etc. But then you’re faced with the con’s also. You have unemployment. The economy is not doing great. There’s uncertainty in terms of mining legislation. We have power challenges, electricity issues. So, that sort of makes for an interesting mix. But as you point out, we’ve been able to mine successfully in South Africa for many years. We’ve been able to bring great projects online in South Africa in recent years which demonstrates that we have the ability to operate. One thing that’s certainly come to the fore in the last year is that Africa generally is a difficult place to do business. You look at regulatory issues in Tanzania. You look at terrorism in West Africa. You have to accept that mining in Africa does come with challenges and you have to equip yourselves and skill yourself to be able to deal with us and be successful and operate successfully and sustainably.

Matthew Gordon: You bring up points which most CEOs try to avoid discussing, which I appreciate. It’s also on page 7 of the presentation whene you talk about the underlying risks and how you’re dealing with them. It’s quite attractive when a company is refreshingly honest about the issues that they are dealing with. What it is hard to argue against is your track record of continually delivering the answers. What’s also important is driving that share price up. You have had your share price affected negatively. So what are you doing about it?

Cobus Loots: Well, if a share price does badly and we continue to sort of fret and worry about the share price, that it doesn’t really get us anywhere. So now we have a saying that ‘we focus on those things we can control and then the share price will take care of itself’, as it has done to some extent. I don’t want to speculate about the future, but now we’ve repositioned ourselves as a low-cost producer, even in a global sense. We have a long life. We have great projects where we can further increase production with fairly benign investments. I think we’re well positioned. We are safe producer. We are investing into our communities. We’re making a difference where we operate. All of that makes for a good mix. And if we deliver pretty much what we said we will do, the share price should take care of itself.

Matthew Gordon: As a producer, you’re benefiting from a higher gold price. Certainly, next year’s numbers will should, if it continues, benefit from a higher gold price because your margins are quite good. They’re definitely improving. I want to see them continue to improve. And I’m sure you do too. Let’s see what that looks like in the next the next few months. The one thing which I look for when I’m analysing a company is an understanding its financial health. You have debt at the moment. Which project are you using that for at the moment?

Cobus Loots: Well, that was the $130M Elikhulu project this last year. The project-based testament to what you can get done in South Africa. So, to put $130MIL into the ground in 12 months is not insignificant. This plant can cheat 1.2Mt of material a month. We currently produce for 65,000 ounces at an ultra-low AISC in the year ahead. So that’s to demonstrate that you can get things done in South Africa.

Matthew Gordon: And have you got more plans to raise any more money for capital expansion programs or are you done?

Cobus Loots: We are funded as far as the existing projects are concerned. So, there’s no need for us to go to market. I think the shareholders want to see us deliver on what we said we would do. 2019 was a first or second step in doing that and 2020 should be more of the same.

Matthew Gordon: So, margins are improving. Cash flow is starting to improve, are you starting see the benefit of it now?

Cobus Loots: Well certainly at the current gold price we are definitely seeing the benefit. That’s another positive around being based in South Africa. We have generally a Rand cost base, which is our local currency, which means that inflation is higher than what you’ll find in U.S. dollar terms. Wage inflation is higher than what you see in dollar terms. Electricity inflation is higher than what you’d see in dollar terms. So that’s sort of generally then puts a squeeze on margins. Where there’s a benefit is when you find a local currency, the Rand, blow out a little bit more to the dollar. What it’s done in the last months. So, then you see the margins actually go up quite a bit more than what you would find in dollar terms for your African producer. You can look to hedge. But what I’m saying is that the negative on cost inflation is offset when you find a large depreciation in Rand, which is what we have seen in the last month. So, $15,000 gold price is good for us, 700,000 Rand per kilo gold price, which is what we look at is even better for us at the moment.

Matthew Gordon: And then there’s just one other aspect – you’ve covered off safety and you’ve covered off the CSG component, but there have been some disturbances in-country. One of your sheets talks about arrest rates. Why declare that one? What’s that got to do with your ability to mine?

Cobus Loots: Well, illegal mining is a serious issue, and not only in South Africa and the rest of Africa. But you do find the guys being in South Africa quite militant, aggressive, armed. It’s meant that we’ve had to up our game a little, to professionalize further. We’ve spent a lot of money on security in the last year, more so than in years past. And that’s to protect our assets and to make sure we can continue to mine safely and sustainably into the future. So, yes, it’s endemic in South Africa. The fact that you have really high rates of unemployment. That’s going to create discontent. It’s going to create sort of people that have nothing to lose. And hence are desperate and that’s understandable. And so, we do what we can. If you look at our operations, contractors and employees combined, we employ 3,500 people. So, rule of thumb each of the workers and contractors look after up to 10 other dependents. So, 35,000 people that’s depended on our business. So, that is a big responsibility for us and it’s also a big responsibility for government to make sure that we can continue to operate. And we have been seeing the support from government, both nationally and locally, in terms of making sure that we can continue to operate.

Matthew Gordon: It is not just restricted to Africa either. We’ve been speaking to some companies in South America also struggling with illegal workers and all the issues that brings. You’ve got to be sensitive, but you also need to be able to continue to mine. If I may finish off with what you’ve done with your current assets, you’re sweating those assets and working them hard. And that’s reflected in the numbers we see. We look forward to seeing some guidance as to what that is looking like during the course of the next 12 months, obviously. And the final question is always, so any plans for any acquisitions?

Cobus Loots: We continue to look at acquisitions. It’s always a good thing because it teaches you. I always say in looking at other people’s businesses, you learn quite a bit about your own assets and what you can do differently. So, to some extent we’ll be busy with Royal Sheba, as a product of us looking at assets elsewhere. So, it’s not a priority for us. If we only sweat our own assets and we develop as we’ve set out in our plans for the year ahead, you should see a nice appreciation in the value of the business. So, an acquisition is not an imperative for us. So, we’ll continue to look, but we are certainly by no means desperate. And we’ve always said if you can develop your own portfolio, that really is first prize. Elikhulu being case and point. Egoli potentially also part of Evander, being a second example of what we will look at in the year ahead.

Matthew Gordon: And I’m guessing, given you’ve got experience in underground mining and tailings, if you were looking, you’d be looking for some similar kind of setup that would be optimal for you.

Corbus Loots: I think generally it’s difficult for us to justify going out of Africa. Southern Africa in a way makes more sense because it’s close, it easier to manage. Well, I wouldn’t want to limit the company by only that. So, you know, does it make sense a risk adjusted return basis. That’s what we would look at.

Matthew Gordon: Cobus, thanks very much. I know you’ve got a really busy day today with these numbers out and you’ll be speaking to lots of people. Thanks for making the time for us. Appreciate that. Please stay in touch, because I think you’ve built, or you are you continuing to deliver on your track record. Refreshingly honest.

Cobus Loots: Great. Thanks for having me.

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

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.

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

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

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

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

Some highlights:

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

Click here to watch the interview.

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

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

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

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

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

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

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

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

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

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

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

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

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

Christian Milau: There you go.

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

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

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

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

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

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

Matthew Gordon: Why was that?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Christian Milau: 5%.

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

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

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

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

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

Christian Milau: No they do have a board seat.

Matthew Gordon: Oh they do, sorry.

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

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

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

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

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

Matthew Gordon: What are you today?

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

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

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

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

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

Matthew Gordon: I saw it, yeah.

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

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

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

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

Christian Milau: Yeah that’s the hard part.

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

Christian Milau: For the US it isn’t.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Christian Milau: Thank you.

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Superior Gold (TSX-V: SGI) – Getting Back to Basics, Chasing a New System for Improved Grade

We interviewed Superior Gold’s CEO Chris Bradbrook. He says that they are getting back to basics which will help them deliver a lower All In Sustaining Cost (AISC), and they are chasing a new system to make Superior Gold cash positive again.

Click here to watch the interview.

Matthew Gordon: Hello Chris, how are you?

Chris Bradbrook: Morning. I’m good, thank you and yourself?

Matthew Gordon: Not too bad. Where have you come in from?

Chris Bradbrook: Where have I come from? I was coming from Perth. I’ve been in London since Saturday.

Matthew Gordon: Jet setting life you lead. You’re going to tell us a little bit about Superior Gold. Why don’t you give us a two-minute elevator pitch on the story just to set things up and we can, perhaps, dive into it.

Chris Bradbrook: Well we bought this asset in October 2016. And essentially what we saw, what I saw, was an asset that’s been in continuous production for almost 30yrs. So, it’s not like we were showing up and saying, ‘we’re the smart boys in the room that know how to run it’. It obviously was a stable mine. It had been in Barrick for a number of years and they’d sold it to Northern Star, so it had kind of been buried within a bigger portfolio. The price was right. It was only AUD $40M. The infrastructure to replace would probably cost you about US $2.5Bn in today’s dollars. So, anything you did to grow it, it was all we could be quick, low capital intensity, had a large resource base. It was a sixth or is the sixth largest historic gold producer in Western Australia. So, I saw a tremendous asset with great opportunity that basically had been unloved. There’re so many examples where companies have taken an asset like that, and that’s what matters to them, and they work, and they make it into a success. So that, fundamentally, was why I like the asset, and a first-world location.

Matthew Gordon: You bought into a producer with existing assets in place. At a price you felt was reasonable.

Chris Bradbrook: Correct.

Matthew Gordon: Yeah, fine. Let’s deal with last year first. So, what happened? Almost a year ago today your price is about three times what it is today. There’re a few things that happened, why don’t you talk us through that?

Chris Bradbrook: Well, if I may, I’ll go back to the year before, first – 2017. So, our first 15mths of operation, we were putting about US $2M into the bank every month. So, we were running it as a business, making money. That was the philosophy. That’s what we wanted to do. And then in 2018, we started hitting a bit of a wall and we really struggled with the operations. And the grade dropped. We were trying to figure out what it was. And ultimately what it turned out to be is that the previous management had been essentially harvesting what Northern Star had left us, but not replacing it. So, there was no ability once we used up what was already planned out to… with flexibility.

Matthew Gordon: This must have been part of the data set which you inherited?

Chris Bradbrook: Yeah it was but, of course, you assume your management are replacing what they mined, but they weren’t. So basically, we had to pull everything apart last year to figure out what it took to do it. We changed over management. We put in more technical people.

Matthew Gordon: You’ve got a new COO.

Chris Bradbrook: Yes. So that, I would say, that was the final piece of the puzzle. Even with those changes it still wasn’t happening. So, we sent Keith Boyle, who is now our COO, down there for three months. So, I said ‘look, tell me what is going on?’

Matthew Gordon: What did you discover?

Chris Bradbrook: Well first question I asked him was ‘is it the ore body?’ Because if it’s the ore body then you’re out, game over. He said, ‘categorically it is not the ore body’. He said, ‘you’ve got the right people’. He said there’s…. you need to basically focus on a basic operational thing, it is absolutely fixable. And as a result of that, he spent six weeks, three months and he liked what he saw. So, when I offered him the job, he’d done his due diligence and said, ‘Yeah I want the job’, so I think that’s really a testament to the asset. And the deal is he’s based out of Toronto but for the next six months he’s living on site. He’s not coming home until he’s got it back on the track.

Matthew Gordon: So, let’s come on to him specifically in a minute and get back to what he discovered and what he thinks he sees in this. He’s looked at the operations. Your costs are quite high, the AISC is quite high. Certainly the 2019 numbers look quite high. I mean, is he looking at optimising that or is that something you think needs addressing or is it something more fundamental than that?

Chris Bradbrook: Well I mean in terms of the cost it’s all about grade. Because for the first 15mths we all running an AISC at about a US $1,000. So, we were making $200-$300 an ounce margin.

Matthew Gordon: But still, you know, mid-level rather than what …

Chris Bradbrook: It’s not the cheapest mine, but it’s not the most expensive. But really what drives it for us, is our unit costs are already low. So, it’s all about grade. You get the grade back to more like a 4g/t stope grade. That’s when you’re going to make money.

Matthew Gordon: So, when you said the unit cost, what do you mean by that?

Chris Bradbrook: Well, you know, what it costs you to move a ton of rock. We’ve got a very stable handle on those. We’ve got them low. So, what then drives it is how many ounces per gram are you going to get per tonne.

Matthew Gordon: But you can move volume of dirt efficiently and with the equipment you’ve got, and no need to change that. You just need to get higher grades.

Chris Bradbrook: Correct. And if you look at the ore, what I can say for the first 15 months we had a good solid plan and we were mining around 4g/t grade and making money. When that plan, the long-term plan kind of evaporated, for want of a better word, we basically had …go to the easy stuff, which is like 2.5g/t to 3g/t. And there’s loads of that. But it’s not making you the money. So basically, one of the first things Keith has done, is he’s gone ‘OK, let’s put together a life of mine plan (LOM). Where are the gaps?’ So, you actually now can… don’t mine that grade, mine that grade, because that’s going to make us money. So, it all sounds probably very simple but often these fixes are. You just need someone to come in with a fresh set of eyes and say… and I was just down there for five weeks. So, between me and him, we were basically worrying everyone to death. Just saying ‘look this is what we got to do, let’s get it back’. And it’s not like we’ve not done it, that’s the point. It’s not like we’ve had this for 2.5yrs and we’ve never made it work. We did. We did make it work. We just have to go back to what we did. And we’re already beginning to see the changes and it’s that’s simple.

Matthew Gordon: So, tell me about those, so you’ve made some quick fixes.

Chris Bradbrook: You know a quick fix is really getting people focused on the plan and maximising grade.

Matthew Gordon: So, what were they doing before?

Chris Bradbrook: Well as I said it was because they were, I think, they were so frantically trying to get stuff through the mill, they just go to the easy stuff. So there never was that long-term planning going on. And so, we’ve instituted that. For example, one of the things you want in an underground mine, you want three months of developed stopes laid out ahead of you. So, if something goes wrong with your plan, you’ve got an option. We didn’t have that. In the time Keith’s been there, we’ve already gone from no stocks, to a month’s worth of stocks. So, we’re already seeing that change. Then we found out that because they were being a bit, I guess, frantic with their efforts, they were diluting the ore. That was amplifying the grade issue. So, all these things we’ve been put in… just basically forcing the guys to basically run to a higher standard. And I guess you’d always like to think that people just do that. And initially I kind of wanted to run the company lean. And for a single asset, I was thinking ‘well why do I need a COO?’ Well it turns out, you know, when things aren’t working you do need someone like that, that can step in and say, ‘okay this is what needs to be done’. And at some point, when we’ve got this back on the track, we will be looking at other assets and you need a COO for multiple assets.

Matthew Gordon: Again, let’s come back to M&A as an option in a bit. So again, what are the other kind of quick fixes? He’s looked at the plan and he said, ‘here’s what we need to focus on’, is there anything else?

Chris Bradbrook: No. I mean when you say it out loud, it always surprised me how basic it sounds but often things in life are like that. But it is all about having the plan, stick into the plan, having the flexibility, so if something doesn’t work… So, in other words, you say ‘OK if this goes wrong, how are we getting it back on track?’

Matthew Gordon: Right. Any other new hires that you’re thinking about, having learnt that a COO is quite important to you?

Chris Bradbrook: Well no, not really. Because we’ve got all the people we need at site. Keith has made a difference, a big difference, no doubt about it. And we’re looking at the… what I was saying, the dilution. I mean that’s a big thing. But that…

Matthew Gordon: Dilution of?

Chris Bradbrook: …basically we’ve taken too much of the waste. So, we’re mining it more efficiently, see you mine to the grade you planned. Because that’s, you know, obviously, if you mine… if you’ve got 5g/t stope plan and you dilute it to 2.5g/t. I mean you’re not going to make… you might take more ounces out, but you’re not going to make as much money.

Matthew Gordon: So, you haven’t been sold a dud in this instance?

Chris Bradbrook: Oh no, not all. I mean, like I say I think one of the things to remember is, this is an asset that’s always been in production. Some assets…

Matthew Gordon: But have they mined the good stuff out of it? I guess that’s the question people are asking.

Chris Bradbrook: They’ve mined the easy stuff. But I think also part of the thesis was that we could make money with what we know is there. But there’s something else there. I mean I’m absolutely convinced of it. There’s got to be another…. it’s a big system. So, we will find more.

Matthew Gordon: So, what are you doing in terms of identifying this new system or potential new system?

Chris Bradbrook: Well I think part of it is really pulling apart what the asset is. I mean you’ve got a drill database that’s all digitised. And if you were to drill those holes today it would cost you a US $1Bn. So, it’s an incredible exploration tool. So big a big part of that is pulling that apart, figuring out.

Matthew Gordon: Who’s doing that?

Chris Bradbrook: Well we got our geologist at site and consulting geologists. And we are probably going to give the database to, there’s a group in Toronto called Gold Spot. And they do big data mining. And I think ours is a big-enough set, they’ll probably be useful for that approach. And so, we’re doing what we can because that absolutely is our best exploration tool.

Matthew Gordon: So, let’s talk about some of those longer-term strategies. You mentioned M&A as a potential, but do you feel that you’ve got to sweat this answer first, or can you concurrently look at potential M&A activity?

Chris Bradbrook: Well you need the currency right. I mean we’re so beat up we just don’t have the wherewithal to look at things.

Matthew Gordon: Can I ask how much cash you’ve got?

Chris Bradbrook: Well we got US $15M. Our enterprise value is US $20M. It’s insane. So, I mean the bet anyone would have to make is, OK if you believe what I’m telling you, that the fix is there. We are so ridiculously cheap that it is a really good opportunity. Right now, the market’s pricing is as though we’re going out of business, which just is not going to happen.

Matthew Gordon: Well I guess that’s why you’re here today, to answer those questions about what the future looks like. So maybe talk to some of those things. So, you’re going to sweat the existing data and try and see what you’ve got there and optimise all that activity. M&A is that a realistic opportunity for you, got US $15M of cash, where I guess it’s allocated towards current activities.

Chris Bradbrook: Yes, we’re very focused on the asset. However, when people show us stuff, I mean, you’ve got to be prepared. So, you’ve got to learn about what’s around so that when you are ready, you’re ready in terms of your knowledge. So, we definitely look at things and turn stones over. But our focus is the mine. But absolutely, I mean one of the things we learnt from this is, if we’ve been a multi asset company and we started hitting these issues, we could have pulled people from other operations to help us out. So that has showed us, just from that point alone, having multiple operations is a good thing. And investors are obviously asking for it. They don’t like… you know, you live and die by what happens at your one asset. And investors generally get uncomfortable with that.

Matthew Gordon: Would it make you nervous, I mean given you’re, you say, undervalued, that’s a claim I think most people make.

Chris Bradbrook: If a CEO doesn’t think his company is undervalued, he shouldn’t get out of bed in the morning. But we are.

Matthew Gordon: You are the one? Great. Does it worry you or make you nervous about the cost of raising capital in this market with your current situation to do M&A activity, would you feel that you would look at optioning stuff, deferred payments. I mean, how would you tackle an M&A process?

Chris Bradbrook: Yeah, I mean you’re right. I mean, where we are right now our cost of capital is high. But like I said we’re really viewing M&A more now as we just want to know what’s out there, so that when we are in a position to do it, we’ve already done our background work. We’ve already talked to potential partners. But the first thing is we’ve got to get this sorted out. Get the market believing it. Get a share price that reflects it and allows us to actually go do stuff.

Matthew Gordon: Okay. Right. So, you’re looking at optimising the current processes, operations, hope for higher grades. Being able to identify higher-grades. Reduce that AISC down. You feel with this new COO, you’ve got the right leader for the technical team in the country. And we should be positive about the future. Is that the correct message?

Chris Bradbrook: Correct. Absolutely. But yes, totally focused on fixing the operation right now.

Matthew Gordon: Let’s talk about the team. Just tell me a bit about you. What’s your background, relevant to the operation?

Chris Bradbrook: My background?  Well technically I’m a geologist by training. It’s been a while since I’ve actually done geology, so I worked in the industry from 1980 to 1995 and then I was an analyst for about six or seven years. And then I went back into industry. I was V.P. Corporate Development for Goldcorp, but this was when all they were was the high-grade Red Lake Mine. And then when I left there, I formed New Gold. Which was a very different company to what it is now. It was just the New Afton Mine or deposit at the time. So, we raised the money to build that. And when I left there I started up a company called Crocodile Gold. Which really kind of led me to all my knowledge base in Australia. But that became Newmarket Gold, now part of Kirkland Lake Gold and the Fosterville Asset, which drives their valuation, was part of Crocodile Gold. And then when I left there, I was looking for something else to do. And ultimately this was what came out, Superior Gold.

Matthew Gordon: So, you don’t sound very Canadian.

Chris Bradbrook: No, well, I’m a Canadian technically because I’ve got my citizenship there.

Matthew Gordon: Okay. So, you’re based over there. From the U.K. originally. But with an asset in Australia.

Chris Bradbrook: Correct. Yeah, I like first-world assets. I really like Canada, Australia and certain parts of the States. So that is really our strategic focus.

Matthew Gordon: There’s a new COO on board. You told us a little bit about him in terms of what he’s done, so what is his background?

Chris Bradbrook: Well, the press release outlines this. He’s worked for small and large companies. North America, internationally.  He’s done everything from operating as an underground manager, to a general manager, to a COO to feasibility studies, raise money. So, he’s got an MBA too, he’s is a mining engineer. So, he’s got lots of strings to his bow. He understands all the various parts that matter to a public company.

Matthew Gordon: But you’ve got him focused on cutting costs and finding ore?

Chris Bradbrook: Well you just look at the problem in front of you and say this is what we need to do. So, and again like I say, he spent six weeks at site knowing full well what I needed and still said ‘you know there’s a tremendous opportunity, I want to be part of it’.

Matthew Gordon: Okay. And so, who else is on the team? If we look at these constituent parts for companies of your size. Technically you need to know what you’ve got. Whose looking after the financing and finances of the business?

Chris Bradbrook: One of the financiers is our CFO, Paul Armstead.

Matthew Gordon: What’s he’s charged with doing? What have you asked him to do?

Chris Bradbrook: Well quite simply, is make sure you know where the money is. Don’t do anything stupid with it. And if we are in a situation where we need money, give me the heads up well in advance. In terms of actually raising money, we’ve had to do it, that typically will fall to me.

Matthew Gordon: Tell us a bit about that. So, your shareholders are what, institutional at the moment?

Chris Bradbrook: Largely institutional. Canadian, some US. One or two in Europe but basically, it’s a North American shareholder base.

Matthew Gordon: Any names in there that we’d recognise?

Chris Bradbrook: Yeah, I mean well, Northern Star, our biggest shareholder.

Matthew Gordon: That’s presumably part of the deal?

Chris Bradbrook: Part of the deal it was. Century Select which is now CI Investments. They are a large shareholder. Donald Smith.

Matthew Gordon: They’re a Canadian promoter.

Chris Bradbrook: Donald Smith’s out in New York.

Matthew Gordon: Sorry, I meant the CI guys…

Chris Bradbrook: Well I wouldn’t say a promoter. I mean they’re a big blue-chip Canadian fund. I’m sure they be a bit worried that you called them a promoter. So those would be some of the big shareholders. We had BlackRock at one time. RBIM. So, we’ve had actually a pretty good list.

Matthew Gordon: How big is your retail following?

Chris Bradbrook: I would say it’s reasonably big. I would say we’re probably about 10%-20% retail.

Matthew Gordon: Again, mainly Canadian?

Chris Bradbrook: And North American and Canadian. Yeah, I mean every now and again I’ll meet someone from Europe who has picked the story up.

Matthew Gordon: Is there much liquidity in the stock at the moment?

Chris Bradbrook: It’s better. When we first start out, I mean, we were, because of those bigger shareholders, there wasn’t a lot of big float. So, liquidity early on was tough, but it’s better now. I mean we’re not trading millions of shares every day but a few hundred thousand usually and then every now and again you’ll see some blocks.

Matthew Gordon: And those are clearly the institutions trading in and out. But what’re the retail guys doing for you in terms of… do you think people understand the story?

Chris Bradbrook: Yeah, I would. I mean because, I’ve done this a few times, I’ve always valued retail. I mean, one of the challenges of retail is making sure they understand what you are by. I think from the questions I get from retail investors, they do actually understand.

Matthew Gordon: What questions do they ask?

Chris Bradbrook: Well they ask the same things you’re asking, which says to me they’re not off in some strange place asking questions that aren’t relevant. They absolutely understand what matters to us. They ask the same questions institutions do. Which is the same questions you’re asking, because it all boils down – there really are two or three key questions for our story.

Matthew Gordon: Absolutely and that people need to believe you can deliver against those.

Chris Bradbrook: Oh absolutely. I think I’ve got a decent track record of doing what I say. And I am actually totally confident that we are fixing this.

Matthew Gordon: Fantastic. So, who else is on the board that we need to know about in terms of active members of the board.

Chris Bradbrook: It’s a very small board and it was done deliberately. We’ve only got five people on the board. And I think with… you know at this basic level the board’s job is based and make sure I do my job. Or management does their job. But I think with a smaller company you kind of want people on who are willing to roll their sleeves up and help you. Because we just don’t have the numbers of people. So, our chairman is Marc Wellings who is former investment banker at GMP. He ran the London office for a few years as well. We’ve got Tamara Brown who is a V.P. Investor Relations at corporate development for Newcrest in the Americas. There’s myself. There’s Rene Marion who was chairman of Richmond. He was former Barrick and Erico. Really good mining engineer understands capital markets. Well, he was the chairman of Richmond when it got sold. It went from $30M to a billion dollars. So, he’s seen this movie before. And he worked for Barrick on this asset. So, he knows the asset.

Matthew Gordon: So, but is he an active participant?

Chris Bradbrook: Yes. Yeah, I talk to all of them regularly because I use their expertise, like Rene. I mean very important for us as an operator. So early on when I was trying to figure out what was going on, I said well, what would you do? And actually, Keith Boyle came through a recommendation by Rene, when I said well ‘who you know out there who would be a good person to take a look at this’. And then we’ve got one nominee from Northern Star.

Matthew Gordon: Yeah. And are they, I mean, they obviously must know a lot about this asset. And the fact they’ve stayed in says something.

Chris Bradbrook: I think they’d like to see us grow.

Matthew Gordon: Right. And it wasn’t just like option money … we’ll just do a deal, take a piece of shares.

Chris Bradbrook: We could have raised… we raised enough money, we could have just paid them out cash. There were a couple of things. I think they like the opportunity in the business model. They thought they could make more money. They saw that we could be a building block, I believe. And selfishly for us, I knew that the number one question I get asked was, well why would Northern Star sell it. So, having them in with someone in the Board.

Matthew Gordon: So, go on then. What’s the answer?

Chris Bradbrook: What’s the answer to that? Well I mean, you got to look at… because this what we’re doing here is really kind of what they built their business model on. But within about three months they bought four mines. They bought this one. A mine called Jundee in Australia, a mine called Canonabell in Australia, and mine called Candana. The three of them they got running the way they wanted them very quickly, so this became a bit of a head-scratcher for them. So, they decided to run a process…

Matthew Gordon: In the sense of what?

Chris Bradbrook: It just wasn’t going where they wanted as quick as they wanted to. But they actually gave us the entire operating team that we needed. So, the team that made a success for us when we took it over were the people that had been working for them previously. So, they were very important to us in getting it working.

Matthew Gordon: Thanks for that. So, let’s talk about last year in the context of, how do you think it went? What would you have done differently? I think you’ve answered some of these questions already. Can you try and summarise that for us?

Chris Bradbrook: Well look, I gave you the reasons why it didn’t go the way we wanted. So, what would I have changed? Well I guess like, as in all these things, you say well you know, early when it first started going wrong, we probably should have been more dramatic in trying to fix it immediately. But you sort of think the next quarter wasn’t bad. Okay maybe now we’re back on track and then late last year, you could see it was beginning to go off the rails again. So yeah, I think, if I really knew what I know now, I would definitely have moved faster.

Matthew Gordon: Hindsight mining…

Chris Bradbrook: Well yeah but, you know, we were asking all the right questions. I had the board involved. And we were, ‘well what is this, what do you need’. And yeah, you know that really is hindsight. I mean it’s just like you’re peeling away layers of what it takes to get there.

Matthew Gordon: Okay. And again, you’ve dealt with this slightly, this year what should shareholders be looking out for in terms of what you’re doing?

Chris Bradbrook: Well quite simply, on a quarter by quarter basis, they just need to see that we’re improving how we’re operating. We’re back to making money. That is simple as that.

Matthew Gordon: So, making money or cash flowing?

Chris Bradbrook: No, making money because, I am all about free cash flow. And like I said when we had the asset going the way we wanted, we were making money, and I mean making into the bank US £2M a month.

Matthew Gordon: Get back to that as quickly as possible….

Chris Bradbrook: Yeah. And you know we built a second mine, an open pit mine, all internally generated. We’ve never raised money since we went public. So, we must be doing something right.

Matthew Gordon: Debt free. So, there’s no kind of funky financing, sitting in the background, looking to clobber you?

Chris Bradbrook: No, and if you look on the balance sheet, you’ll see a small number for debt. It’s because we’ve leased financed the equipment. And then it just shows up as an ongoing cost.

Matthew Gordon: Very normal. So, give us your five reasons why you think investors should be looking at you and investing?

Chris Bradbrook: Well look. First world, that’s a start. Your first world location. A substantial asset where there’s tremendous exploration potential. 100,000oz producer with an enterprise value of US $20M. We will be going back to free cash flow. We’re one drill hole away from a discovery. At some point we will…. we’ve already expanded the Reserves and the Resource. But if we find something new high-grade. I mean there was an ore body there at one time. That’s part of our mineralization called Timaur. And it was a 1Moz of 0.5g/t. So, if we found another one of those. Yeah, we’d be happy. But that’s…but this is what happens with these assets. I mean Fosterville, I mentioned before, Kirkland Lake Gold. That was 3yrs ago a refractory ore body at 4g/t and everybody ‘knew’ it was rubbish. They drilled some holes and now they’re mining 50g/t. I’m not saying we’re going to find 50g/t but I’m just saying that’s what happens to these systems. If you try and understand them, you drill in the right place, there will be extensions. They don’t just end. And then this system, this is an immense system. It really is.

Matthew Gordon: Okay. I appreciate your candour and honesty in dealing with these issues. To put your hand up and say ‘we’ve had issues. We acknowledge that, and we know what they are. And we’ve put things in place to fix those. The investors should bear with us and look forward to what we’re gonna try and do this year.’ I think that’s quite a positive message.

Chris Bradbrook: Yeah. We’re telling them they should do something, clearly, it’s up to them. But I look at our share price and it’s been a downward trend since last April (2018).

Matthew Gordon: You think there is some upside there?

Chris Bradbrook: Well US $20M enterprise value for the story I’ve just told you, usually you get those valuations because people think you’re going out of business.

Matthew Gordon: You’d get that for the equipment, wouldn’t you?

Chris Bradbrook: Oh yeah. I mean look. You’d sell it… if we sold the asset today, you’d sell it for more than that.

Matthew Gordon: Right. Well look Chris, thanks for your time. I appreciate that. Do come back and keep us abreast of the story as it develops with the new plans, especially with the data mining element. That sounds very, very exciting to me. Thank you very much.

Chris Bradbrook: All right. Thanks a lot.

Matthew Gordon: Appreciate it.

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Bushveld Minerals (AIM: BMN) – Interview with CEO Fortune Mojapelo

Crux Investor had the pleasure of interviewing Fortune Mojapelo, CEO of Bushveld Minerals (AIM: BMN). He tells us about his journey in the mining space as well as telling us about the strategy of the company.

  • Vanadium has excellent fundamentals and a solid outlook.
  • Largest High-Quality primary Vanadium Resource in the World.
  • Brown Field capacity, allowing them to hit targeted production volumes quickly and cheaply.
  • Management team with a depth of technical expertise in Vanadium.
  • Operation with a natural hedge towards a Multi-Billion Dollar Market opportunity.
  • Substantial capital growth ahead, with possibility to start paying a dividend to shareholders.
  • Vanadium Redox Flow Batteries (VRFB).

Click here to watch the interview.

Matthew Gordon: Well why don’t you start off, for some of the people new to the story, by giving us a two-minute overview of the business.

Fortune Mojapelo: Well what we are, we’re a Vanadium focused company. Vanadium is the commodity we focused on. And our vision, our ambition is to build it into one of the most significant lowest-cost, vertically integrated Vanadium company. Bit of a mouthful but basically what it means is, we want to combine our large primary Vanadium Resource base which is high-grade open-cast Resource base, across three deposits. The largest primary Vanadium Resource base of anybody in the world, combined with processing infrastructure that allows us to process this Vanadium into final product. And that processing infrastructure is centred around two key primary plants that we have in South Africa. The Vametco Plant, which we acquired in 2017. And Vanchem which we recently announced. So that gives us a platform to produce low-cost Vanadium at large scale. And the integrated piece of the business is how we take that Vanadium further downstream into the Energy Storage market, where we essentially plan on being one of the largest, one of the more significant Energy Storage companies through Vanadium Redox Flow Batteries (VRFB).

Matthew Gordon: The Vanadium spot price. If you look at it, it’s all over the place. It’s been a crazy ride.

Fortune Mojapelo: Yes.

Matthew Gordon: Tell us a little bit about where Vanadium sits in the market, its uses and applications?

Fortune Mojapelo: Yeah, it’s been a very volatile commodity. And when you look at its price profile it’s quite interesting to see. It can put some people off. But we think that in any commodity, your number one goal should be looking for that project or that production base that is cheap low-cost. If you’re the lowest cost producer, you won’t have much to worry about the volatility in the price.

Matthew Gordon: You’ve got a good margin. You’re one of the lowest quartile producers of Vanadium. But even so in terms of predictability, being able to plan ahead, it must be difficult?

Fortune Mojapelo: Again, I mean it depends how you structure your business.

Matthew Gordon: Tell us about that?

Fortune Mojapelo: For example you structure your business with a lot of debt, which is predicated on Vanadium coming in at a certain price. You got a problem if the price doesn’t realise there. But I think if you have a low-cost producer, and you’ve got a good capital structure, you should be okay. All right. We all want a stable Vanadium price. Make no mistake about it. But we think the first thing is make sure you’re a low-cost producer. And for us, it is one of four key pillars in the projects that we get involved in. Overall though, we think that as a commodity, Vanadium markets’ outlook is actually very good.

Matthew Gordon: Is this coming to your Redox Flow Battery (VRFB) component.

Fortune Mojapelo: But even before that.

Matthew Gordon: Describe Vanadium uses today and we’ll get onto what they could be.

Fortune Mojapelo: About 90% of the world’s Vanadium today is used in steel making. 8.2% of Vanadium to a ton of steel, you double its strength. And so it’s used in construction steel whenever you’re building infrastructure and it’s you know tensile strength in the steel…

Matthew Gordon: The rebar?

Fortune Mojapelo: And rebar. And so that’s been the traditional kind of space for Vanadium applications. And I should add that even if that was all that was to Vanadium consumption. That’s been the bedrock for a century plus. And I think it will continue to be, given its unique place in that space. In countries like China, where you got regulations that are being put in place to regulate the types of rebar that is produced, China is moving away from low-quality grade to rebar, to grade three, grade four rebars.

Matthew Gordon: China resetting the quality of the rebar did have an impact on the Vanadium price. And therefore, the knock on effect. Was that a big impact on you?

Fortune Mojapelo: It has an impact on Vanadium. I think the new standard in China, it’s estimated that if and when fully implemented, just to meet that standard, it should raise the demand for Vanadium in China domestically as much as 30%. Now given the China control about 50% of global Vanadium consumption is taking about a 15% uplift in the demand. That impact hasn’t really come through yet, because we believe that the enforcement of that standard hasn’t been as strong yet, but we believe that there will be… the government will start to implementing the inspections, and that in the second half of this year, we’ll see the enforcement of that standard increase. And therefore that demand upside will start to come through, from then on. And that’s of course just one part of the demand story. There is the Redox Flow Batteries, you talked about earlier on. And timing couldn’t be better, in terms of what’s going on in the world around higher energy electricity generation. The push for cleaner energy et cetera. So the use of Vanadium in Energy Storage, we think is going to substantially increase the demand profile of Vanadium, through these batteries called Vanadium Redox Flow Batteries.

Matthew Gordon: How long you’ve been with the company now?

Fortune Mojapelo: I have founded the company together with partners. Which stretches back to 2008. We enlisted in 2012 on AIM but we started essentially Bushveld Minerals, as an early stage exploration project, which we were developing from as early as 2000.

Matthew Gordon: You’ve gone from junior Explorer into Producer. You’ve obviously done quite well in terms of establishing yourself. So tell us about that journey?

Fortune Mojapelo: It’s been an interesting journey. I think we started our journey in the junior space at an interesting time, because it’s about the time that the global financial crisis was setting in. And as you know when that happened, risk capital becomes scarce because people are less willing to take big risks and the casualty of that is actually endeavours such as junior mining and Exploration. I partnered with three individuals in South Africa, two twins. Identical twins, both Professors of Geology. Maurice and Richard Filion and Anthony Filion is Richard’s son. And essentially, we started life with a view that you know these two gentlemen are doyen of geology in Africa. They know the Bushveld complex inside out. They’ve advised many people to find new deposits. Let’s create a business where we leverage that IP and we do it and we build projects and that’s how we started life and we started looking for Exploration projects that we can build up. And our journey grew from there.

Matthew Gordon: Are you a geologist?

Fortune Mojapelo: I’m not a geologist. I studied actuarial science and I worked in strategy consulting for a little bit.

Matthew Gordon: When you start it’s all about equity. Raising equity to be able to do what you needed to do.

Fortune Mojapelo: Look when we started, my interest was to do principal investments. I was looking for opportunities in Africa where there is scope for scale growth. And I’ll be honest with you, a year before that I didn’t know about anything called Junior mining at all, until I met with the Filions. And I think from there and we gelled. And we started finding projects, we started developing the projects, and were fortunate to get Baccus who backed us early. And you know one project led to another project, until we got Bushveld Minerals listed in 2012, on AIM.

Matthew Gordon: It’s interesting when we talk to a lot of CEOs, it’s not all plain sailing. It’s not smooth lines.

Fortune Mojapelo: It never is.

Matthew Gordon: So what are the important things for you, given you weren’t into junior mining when you first started. What are the things which stand out for you, what are those moments where there was a significant change in your understanding, or indeed the business?

Fortune Mojapelo: You’re always learning as you go. And I think for me starting point was that when you’re working with a technical team, in a technical field, that is exceptional, that it’s distinguished, who know what they’re talking about, is a good starting point. You know they will tell you that everything starts with geology and mining, and I tend to agree with them. And then the second thing is, your early deals there’s a general thing your early deals are always going to be the most expensive. But what’s more important is proving yourself and making money for your investors that give you capital to do what you want to do. And with time as you develop and as you prove successful. You can get a bit more leverage in your conversations with investors. So our very first project, was an expensive project from a financing point of view. But it gave us a platform to develop more. And that’s how we’ve developed ourselves. Even after we listed, we faced what every junior company faced. It was hard to raise money. We had projects that we were comfortable with, that they are solid projects. And we had a guiding philosophy, which we believed in, which I think has stood as very well. And we were fortunate that we had good projects. And from about 2013, after seeing our share price come down, or maybe it can come down since listing, we did what I think was pivotal, which is we decided to focus on Vanadium as a commodity. And it is really there that I think our inflection point started. We were still very small but we got our scoping study on our flagship project that we had done quickly. We did a Pre-Feasibility Study (PFS) and we developed a conviction about this market, that we’ve carried since then. And we believe it’s a market that is really for us to participate in.

Matthew Gordon: How much of the Vanadium market… you’re world number one?

Fortune Mojapelo: Well the largest in terms of the Resource base.

Matthew Gordon: In terms of the Resource base…in terms of production?

Fortune Mojapelo: In terms of production, we not the largest producer. There is at least two primary producers, that produce more than we do. Largo Resources and Glencore Rhovan operation in South Africa. But after their position that we did that we just announced a Vanchem between Vanchem and Vametco, from just a potential point of view, we have the capacity to become the largest primary producer, yes.

Matthew Gordon: What are you supplying in terms of world production now?

Fortune Mojapelo: Currently just under 3%.

Matthew Gordon: Just under 3%. And after?

Fortune Mojapelo: When we’ve gone through the refurbishment of Vanchem and we’ve got Vametco operating at full capacity, we’re targeting just about 10% of the global market.

Matthew Gordon: So significant. You have – Bushveld Minerals, Bushveld Vanadium, Bushveld Energy. Are those eventually going to be three different companies or are those just brands with the overall group?

Fortune Mojapelo: Bushveld Minerals is the listed holding company. Underneath that we got Bushveld Vanadium which essentially houses our mining and processing assets. So, it’s is the Resource platform. Mine it as cheaply as possible. And process it and produce Vanadium units. Bushveld Energy says let’s take it a step further and take a position in the energy storage market.

Matthew Gordon: I want to see if that gives us a clue or sense of where you want to go. Because if you’re creating those brands now, will they be separate entities at some point?

Fortune Mojapelo: I think you want to always retain flexibility around that. So we structure our companies always in a view, in a way that allows us that flexibility. Is it foreseeable that Bushveld Energy could be a standalone company in the future as possible. It’s not something that’s we definitely do. The reason we created it that way however, is that it is focused on a specific sector which is the energy market, and the energy storage market to be specific. If for example, we wanted to attract investors that are particularly interested in the energy market only, we have the ability to do that through Bushveld Energy. So we like that.

Matthew Gordon: But right now they are on the same P&L?

Fortune Mojapelo: Yes.

Matthew Gordon: Different team? Same team? Different skillset that’s for sure.

Fortune Mojapelo: It’s a different skill, especially if you look at the Bushveld Energy team is headed up by Mikhail Nikomarov, who’s got extensive experience in the energy markets. And his team includes people who have been involved in energy project development. So it is, you’re right, a very specific skill set that is required there.

Matthew Gordon: There’s Energy, and then there’s Energy. So again we’ll probably come onto it, but just to finish off with the recent acquisition. You made a recent acquisition! Why did you do it? What you’re thinking and what are you trying to fix?

Fortune Mojapelo: So our strategy that we’ve spelt out, the best route to developing are our projects is through targeting Brownfield assets. In fact if I step back. I mentioned earlier on that there’s a guiding philosophy to our projects. It talks about four key elements. 1. You want a commodity that is good sound fundamentals and good outlook from a price point of view. 2. You want to project all cost proposition will put you in the first or second quartile of the cost curve. 3. You want to have projects that you can reasonably bring into production, in the foreseeable future, without requiring massive CapEx. 4. And then the fourth one is you want scalability.

Matthew Gordon: Or it looks cheap or non-dilutive CapEx?

Fortune Mojapelo: Because if you need billions of dollars, where you gonna raise the money right? Especially if you’re a junior. 4. The fourth point is you want scalability. Vanadium ticks all of those boxes for us in South Africa. It’s a commodity with good fundamentals, as we talked about earlier on, from a demand side, from a supply side. In South Africa we really well located there.

Matthew Gordon: Well you are. But again, there’s a perception in the market in terms of country risk. Because there have been problems at various points in South Africa.

Fortune Mojapelo: I can come to that. But if I may for a second. I think you’ve got a commodity whose supply outlook is concentrated, mainly between three countries; China, South Africa and Russia. With South Africa having the largest high-grade primary Resources. We always say if you want high-grade Vanadium Resources, you’re going have to come to South Africa. Because that’s where we’ve got the combination of scale and grade. But also, the distribution of Vanadium Resources globally, and the distribution of the production Vanadium. It’s such that in our view, if you look forward to see where does new supply come from. If you don’t have grade that allows you to build a primary plant like we have in South Africa. You have to build a steel plant, which requires billions of dollars. Which is why you see most of the production in China and Russia, being of that nature, co-production steel plants which are expensive to build. New supply in our view is not going be dominated by the steel plants or big iron plants. It’s going to come from primary producers. But if you’re going to do primary production. You’re going to find grade.

Matthew Gordon: I think that’s true of a lot of commodities. I agree with you. Where are you’re selling your production?

Fortune Mojapelo: +50% of our production goes to the US.

Matthew Gordon: Goes the USA.

Fortune Mojapelo: But it’s predominantly the steel sector at the moment. And yeah. So you were we were talking about this philosophy and how we go to brownfields. So when we focused on Vanadium, and with our project in Mokopane, we did a scoping study, we did a Pre-Feasibility Study. What that showed us, we’d a project that required $300M. It was a high-grade Vanadium Resource. $300M CapEx to build mine & plant. Gives a good IRR of 25% assuming a Vanadium price, we’ll call it $33Kgs. Very nice project right.

Matthew Gordon: What’s it been averaging the last five years?

Fortune Mojapelo: Look I mean when prices have gone as low as $13.50 and gone as high as $127… So I couldn’t tell you exactly what the average is. But I’ll tell you that at $33, we’re comfortable we have a project that is good. All right. But the point I’m highlighting here is that, if you’re a $20M market cap company, or £20M might be coming market cap company, how are you going to raise $300M? Even though with a project that is solid, it is at that point for us where the epiphany of brownfields here, which is if I can find existing facilities, that I can convert into primary production for Vanadium, that a cheap and I can do it cheaply, then fantastic. And South Africa is unique in some respects in terms of Vanadium, because historically a lot of our industry was built on a vertically integrated basis. They didn’t just have mines, they’d in mines and processing plants. But what happened over like a 30yr globally, a shift upstream. So, your BHP’s, many of these companies they decided to focus only on mining. They saw the Pilbara expand capacity though just mining and ship it to China. Let China process it. It left a number, that kind of migration, left a number of facilities, downstream facilities, underutilised, in some instances not profitable et cetera et cetera. That is for us the opportunity when we talk Brownfield. It is can I acquire a facility that is either not being utilized or underutilized, and combine with my Resource base and produce Vanadium cheaply. The acquisition we did of Vametco was as a result of that of that strategy. We acquired it initially for $16.5M in partnership. It’s a plant which just last year, delivered a $107M in EBITDA. All right. And it’s a low-cost producer. And it’s a plant which we are now scaling up in terms of its production throughput. The same thing when you think of Vanchem. We thought okay. What are the plants out there that we can get our hands on? We’ve got the Resource base to supply them. We’ve got the logistics infrastructure to link our deposits with the plants. So Vanchem was the next one, where we did Vanchem. And between the two of them we create processing capacity that would have cost us many times over to build on a greenfield basis.

Matthew Gordon: I understand the financial logic. But in terms of a strategy for the business. We’ve touched upon briefly, in terms of what your plans are in terms of the energy space as well, but how do you describe your strategy? I mean you’re… logical, methodical about this. Would you describe yourself as aggressively confident about the way you do things?

Fortune Mojapelo: Maybe it’s part of a function of my upbringing and my learning. We tend to be very fact driven. Very analysis driven.

Matthew Gordon: Where does that come from?

Fortune Mojapelo: I studied Actuarial Science. I worked in a firm like McKinsey & Company, and there’s this sort of stuff that we did. And when we decided that Vanadium was a market we’re going to focus on, we bought Vametco at a time when Vanadium prices, this is when we agreed the deal, Vanadium prices were about $13.50. And yet we thought even if we have to subsidize this plant for another two years, it would still be worth it. What gave us the conviction, was a lot of work that we had done around the market structure, to come to the conclusion that this is a market in a structural deficit. A deficit that will continue for a while. A deficit that quite frankly, to close it, is the opportunity of primary producers, who have existing production capacity. And it was hard to convince people, so the deal wasn’t easy.

Matthew Gordon: By people, you mean the then owners?

Fortune Mojapelo: To convince financiers. But in the end, we got it done. And I think we’ve been proven right in respect of that. Another part of our strategy… so the brownfield strategy is a very clear strategy, that says Target Brownfield assets, and make sure that you invest in them. You refurbish them as necessary, and you maximise your throughput through them. Second part of it was that we realised 90% of the Vanadium demand is coming from the steel sector. What other sources of demand are there?

Matthew Gordon: What don’t you tell people about the VRFB which is Vanadium Redox Flow Battery. Start with that. What’s the difference between them and Lithium ion?

Fortune Mojapelo: Both of them are batteries which means that they store energy. And you charge them, and then you discharge them when you need energy. Vanadium Redox Flow Batteries (VRFB) essentially store that energy in Vanadium Electrolyte. Vanadium is one of those… 

Matthew Gordon: So it’s liquid?

Fortune Mojapelo:  It’s liquid. Vanadium can exist in four different oxidation states. It’s quite stable. So the concept of Vanadium Redox Flow Battery really is a reversible oxidation reduction reaction, between Vanadium and different oxidation states. So from two plus to three plus, from four plus to five plus. The charging and discharging, is the movement of ions between the different oxidation states. But what’s good about it is that it’s one element you’re using, so you don’t have the risks of cross contamination. Secondly what’s good is the fact that the way you store the electricity in these tanks, you can scale them up to the amount of energy you store by just increasing the size of the tanks, without duplicating the entire system. So they’re flexible, they’re scalable, they’re intrinsically safe.

Matthew Gordon: So less risk of fire or overheating?

Fortune Mojapelo: Never heard of any Vanadium battery catching fire. They can operate in fairly robust ranges of temperature and they’re long lifespan.

Matthew Gordon: So that’s less degradation?

Fortune Mojapelo: No degradation.

Matthew Gordon: No degradation?

Fortune Mojapelo:  And you can run this for 20 years plus.

Matthew Gordon: So uses for something like this… You’re talking about the much longer life.

Fortune Mojapelo: Yes.

Matthew Gordon: Larger.

Fortune Mojapelo: Yes. Safe.

Matthew Gordon: Safer.

Fortune Mojapelo: And scalable.

Matthew Gordon: Scalable so different applications to Lithium Ion.

Fortune Mojapelo: Lithium advantages are typically, its high energy density. And Lithium is cornered, mainly, the mobility space. You’re not going to put a Vanadium battery in a car. And so mobility, your cellphones, your laptops. That’s typically its space. In the stationary, when you took stationary storage, Lithium still plays in that space, but it’s typically are in the short duration space, like frequency regulation for example. Once you gain long duration, and long lifespan, that’s a space we believe flavors Vanadium Redox Flow Batteries.

Matthew Gordon: So how much of Vanadium Redox Flow Battery would be Vanadium? What’s the potential size of this market, have you done any work?

Fortune Mojapelo: Yeah we’ve done a lot of work. And in fact, on our website, we’ve got a webinar on the ‘Energy storage 101’, which does a deep dive into…

Matthew Gordon: What’s the URL?

Fortune Mojapelo: or Both websites will give you access to it. It’s worthwhile, because it’s quite a deep dive into this, into the applications of stationary energy storage. So maybe just to explain on a very high level. You use, if you’ve got a utility, and your load in a country for energy is not flat. You’ve got peak periods, and you’ve got off-peak periods, and you’ve got another peak periods… in South Africa for example, typically morning and evening peaks, afternoon off-peak. So how do you design your generation to meet that? Typically you go with what is called base load. Which is not designed to be at the peak level and then you supplement during the peak periods, with peaking capacity. And these are typically other gas plants or diesel generator plants et cetera. What energy storage allows you to do, is it can help you to flatten in off-peak periods you can store the excess energy and you can supplement during peak periods. Equally as you introduce more renewable energy to the grid, you need to smooth that entrance of that into the grid. Energy storage can help you with that. Thirdly in some markets like South Africa, you’re generating… peak, your peak generation capacity for solar is during the day, off-peak. If you’re able to store that power you can make it available in a more flexible way during peak periods. And there are few other things like, your transmission CapEx deferral. When you’ve got a transmission infrastructure. Think of it like a highway. If you get a freeway that gets clogged in the morning, and gets clogged in the evening, you got four lanes. You don’t build half a lane. You’re going to build two lanes right. Or three lanes extra lanes. But if that same four lane freeway, during the afternoon, is virtually empty. Building an extra two lanes is not quite efficient. So what if you could distribute that traffic more regularly during the day? The result of that is that you don’t have to build that extra lane. So your CapEx for transmission expansion, you can push it out more. So the world over utilities are recognising the value of stationary energy storage. It’s so big a market. It’s expected by 2027 to be in the order of $50Bn+.

Matthew Gordon: Globally?

Fortune Mojapelo: Yeah. So you’re talking about something like a 100,000 megawatt hours of new energy storage deployments per year. Now there’ll be different technologies to take a share of that market. We estimate that if Vanadium Redox Flow Batteries (VRFB) captures only 10% of that market, you will need about 55,000t of Vanadium to support that. That’s more than 50% of last year’s total production.

Matthew Gordon: But there’s ifs and buts in there? If being gets to that. So that VRFB style of battery is not there yet. Is there… Well you tell me… is there much of a take-up?

Fortune Mojapelo: What do you mean?

Matthew Gordon: I mean Lithium ion everyone’s gearing up Lithium ion and there’s a few other options, that people around that, but where is this design today?

Fortune Mojapelo: So what if I tell you that today, the biggest battery installed with more than +4hours storage capacity in the world is a Vanadium flow battery built by Sumitomo, 60Mw hours, 15Mw for 4hrs in Japan. The biggest battery being constructed in the world today is an 800Mw hours. 200Mw for 4hrs storage. Vanadium Redox Flow Battery is being constructed in China. It’s not a technology that’s in a lab. It is a technology that is in commercial deployment.

Matthew Gordon: Sorry there’s one-off batteries to sort of see what sort of scale they can get to, because they are going to…You mentioned some pretty… Sumitomo- big name, a lot of money. So are they planning to roll this out? Are they going be manufacturers or is this just like you say…

Fortune Mojapelo: There are several companies there are manufacturing Vanadium Redox Flow Batteries today. And the point I’m making that they are in commercial deployment today. They need to scale up of course. But what’s going to drive this scale up is more uptake of the various systems. Right now, we are seeing signs of that growing momentum. So I’ll give you an example, in South Africa our utilities announced that they’re going to be procuring 1,400Mw hours of battery energy storage. Funded already.

Matthew Gordon: Have they decided on the technology for that?

Fortune Mojapelo: It’s batteries. Multiple batteries will bid in that space. It’s long duration type. We believe that Vanadium batteries have a very strong proposition there. Not to mention a strong local content proposition there. The World Bank has announced a program for 17,500Mw Battery energy storage by 2025, in low and middle income countries. And they’ve committed a $1Bn to mobilise another $4Bn towards this. It’s a terrain which will be occupied by multiple technologies. So I’m not saying that this is going to be solely Vanadium’s terrain. But the numbers I told you, I said, if VRFB’s were to capture even 10% of that market. This is what it means. The point about it is that it’s such a big deal for Vanadium, that the entire Vanadium industry, in my view, should be doing everything they can to support the VRFB opportunity: the technology is there, the scale-up is what is required. And what we did in setting up Bushveld Energy is precisely to drive that going forward. 

Matthew Gordon: You’ve adapted your strategy since 2012 to understand what’s coming down the line. But you’re… what you’re saying is, you think there’s a big bet to be made on the Battery technology… 

Fortune Mojapelo: I think there’s a big low-risk bet. Let me tell you why low risk. Because our demand is anchored in steel-making. If Batteries never existed, we still have a fantastic story, anchored in supplying to the steel market with a low production cost basis. Two, it’s low-risk because the capital expenditure required to play in that space is much, much smaller relative to the capital expenditure incurred in building mines and processing infrastructure. I’ll give an example of that. To build a processing… a chemicals electrolyte manufacturing plant, capable of delivering 200Mw hours worth of Electrolyte a year. That will cost us $10M. Debt / Equity included, $10M to build. And that will use about 1,100 metric tons of Vanadium. To build a mine and a plant that supplies 1,100t of Vanadium. If I just do a ratio, simple ratio. You’re talking about a $100M. So the capital intensity down there is very, very low. And if you take that into account, for us as a company, it’s a no brainer to say, let’s do everything we can to support this emerging industry, which is not only attractive for its demand strengthening proposition. Commercially we think it’s potentially x10 as big as the commodity market.

Matthew Gordon: Okay so tell me, we’re going to bring this back to your company right. We’re talking about the market here. So, where’s Bushveld going to sit in this? What precisely are you doing? You’ve got the Vanadium. You’ve got energy division, we’ll call it. What are you going to be actually doing?

Fortune Mojapelo: So, there are two things. The first one is Bushveld Vanadium which is developing a large Resource base. Developing processing capacity. We have two processing plants producing Vanadium, low-cost high-quality. With good margins in case…

Matthew Gordon: For sure, I bought that, big tick.

Fortune Mojapelo: Tick. Second part of it is Bushveld energy. Which is there to promote the Vanadium Redox Flow Battery (VRFB) opportunity for Bushveld minerals. There are three things we do there. One is to manufacture electrolyte for the industry. Two is we engage in market development. It’s project development. What I mean by that is a team of people that understand the energy industry. Those are regulated market. Those are structured in markets. You need to know where the structural levers are to unlock them at large scale. So it’s individuals, who know the energy markets. We go we secure mandates for large-scale energy storage deployments. That’s the second thing we do. So for example bidding into the Escom program, the World Bank program. The third component to the business is partnering with Vanadium Redox Flow Battery companies. And we don’t need to reinvent the wheel there. We partner with the existing players…

Matthew Gordon: So, break that down, because that’s about the future. The future value of your company is inextricably linked to this. If you think the market’s going the way it is. So, I get the bidding bit, that’s a real skill. It’s tough. It’s hard. But in terms of these JV’s, these partnerships and linking with existing Battery technologies and manufacturers. What would that look like for you in real terms?

Fortune Mojapelo: Suffice to say there are several of these companies that have a good product. That have good management teams. That need to solve two things: Security of supply of Vanadium. And the need to solve for the price volatility of Vanadium historically. Two things which we can work on…

Matthew Gordon: Would it work on a contract basis in terms of forward purchase?

Fortune Mojapelo: No.

Matthew Gordon: No, it would be always spot.

Fortune Mojapelo: No, we’ve got a solution for that, which I’ll talk to. And then they need to scale up. For us it’s a case of saying, let’s partner with these guys. And partnership takes many different forms. And whether it means equity partnerships, whether it means JV’s, or whether it means just a simple relationship of supply of Electrolyte into their systems.

Matthew Gordon: Well you need certainty too. What they want is very important. But what you need is important too?

Fortune Mojapelo: But we can do a lot about that. That’s why we’ve got a project development arm so we go secure the mandates. So, I can come to someone and say, “I’ve got a partner”. Let me give an example. We’re doing a mini-grid at our mine. A 4Mw hour battery, 2.5Mw of solar. So for me to go to battery companies and say, I have the opportunity to build batteries, to supply into. I will supply the Vanadium into that. Can you give me a solution? And can we put together a solution which is ‘bankable’, which provides a solid business case to our mine. And in the case of the mini-grid the answer is absolutely. And we’ve had a number of responses from companies, and we’re in negotiations at the moment. And we are going to appoint somebody, and news of that we will publish.

Matthew Gordon: That would be interesting. Well I think there would be a few other miners knocking on your door at that point.

Fortune Mojapelo: At least it will provide a good model that others can… that combination of solar + storage can be a viable source to their energy requirements. I had mentioned that we’ll help them solve for the cost piece, the supply piece. The question is how do we do that? On the supply side, that’s why we’re scaling up our production capacity. I mean you’re talking about more than trebling production from 2,560 last year to about 10,000Mt. On the cost side, what we tried to do is to say, let’s take out the price risk of Vanadium from the CapEx decision that needs to be made about a Vanadium flow battery. And because the Vanadium, as we talked earlier, doesn’t degrade over life. And that at the end of the life, I can take it out of the battery without destroying the battery. And I can use it in another battery or I can convert it into pure Vanadium and sell it into the Steel market. It’s got residual value. And that allows us to actually rent the Vanadium into battery systems. And they’re of such a scale that a single contract can allow me to deliver enough Vanadium and it’s secure. And while it’s sitting in that battery, it’s earning yield and it’s still sitting on the balance sheet. So we think that by combining innovations like this, we’re able to solve for the two main hurdles that Vanadium flow batteries may have faced in the past. And we think that is going to support their deployments globally.

Matthew Gordon: Could you give us five reasons why they should be thinking about your company as an investment proposition.

Fortune Mojapelo: Five! I‘ve got seven. First one is that we have a commodity of Vanadium with excellent fundamentals as I said earlier on it’s in a structural deficit its outlook is really solid. Two, we have high-quality high-grade primary Vanadium Resources. The largest primary Vanadium Resource base of anybody. And three, we have Brownfield processing capacity, which we’ve put together, which we’re going to be scaling up, which allows us to hit the kind of production volumes that we are targeting very quickly and much cheaper than it would cost us on a greenfield basis. The fourth point, I would mention is that through the way we’ve gone about it. We’ve also acquired and inherited management teams with depth of expertise in Vanadium. South Africa has been doing Vanadium for decades. So we understand Vanadium from a technical point of view. The fifth point to highlight is that, the integration we have into energy storage. We have an operation that has got a natural hedge. Well if Vanadium prices come down, energy storage solutions such as Vanadium become a lot more compelling. Right. And also that gives us access into what we see as a multi-billion dollar market opportunity for the company. Then finally, not finally, second but not least, is that we are operating in a South African jurisdiction. The Bushveld complex, which is host to the largest high-grade primary Vanadium Resource base in the world. And with the story that we’ve put together today, with the growth that we have, our proposition then to shareholders is even just on a production growth basis, we’ve got substantial capital growth ahead. When you look at the downstream integration into energy storage that’s significant capital growth proposition. On top of all of that, we believe that being a low-cost producer we’ll be generating sufficient cash to look after our growth. And also, at some point to start paying a dividend to shareholders. So, in a nutshell that the proposition… 

Matthew Gordon: That’s a magical phrase that. We like that. You’re sitting on a little bit of cash at the moment. I think you’re looking at building that up… you seem to know where you’re going with the company. It’s been fascinating listening to you today. Thank you very much for coming in and we look forward to seeing you soon.

Fortune Mojapelo: Thanks for your time.

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