Excellon Resources Inc.
- TSX: EXN
- Shares Outstanding: 112M
- Share price C$0.52 (17.03.2020)
- Market Cap: C$61M
Interview with Brendan Cahill, President & CEO of Silver producer, Excellon Resources (TSX: EXN).
We’ve seen some great turnaround stories in recent times; RNC Minerals springs to mind. Excellon Resources is something of a more long-winded story, with the share price falling for much of the last 5yrs, albeit in erratic fashion. Well, they did choose to be Silver after all.
Excellon Resources looks to change things around with an aggressive M&A strategy. Cahill talks to us about creating wealth. Shareholders are in two minds though. On one hand, perhaps Excellon Resources should focus on and fix the assets that have. On the other hand, M&A is usually a sure fire way of changing the status quo. Cahill talks us through the logic and strategy for this change.
Excellon Resources is Mexico’s ‘highest-grade silver producer’ with one small producing mine and multiple exploration opportunities in Mexico. They have also option a Silver Exploration asset in Germany. So country diversification, but not commodity diversification. The commodity diversification comes on recent news, February 24, 2020, of the proposed acquisition of Otis Gold, a gold development project in the United States, to its portfolio. The acquisition is remarked as an ‘initial step in Excellon becoming a larger multi-asset precious metals producer.’ Cahill comments that we are currently at a gold:silver of 90:1, and the historical norm is 60:1.
There are also some issues surrounding production; the majority of silver companies are producing a concentrate, and the lead and zinc by-products have seen a large increase in treatment charges in recent years. The management team has a solid track record in terms of mineral exploration and M&A. To us, the M&A feels like Excellon Resources trying to diversify, and take less of the impetus off silver, given it has let the company down.
Diversity brings leverage to multiple commodities and a greater set of options; however, investors will know that focus is extremely important in the world of mining. Excellon Resources may have a “simple plan” on paper, but the reality seems more complex. A management team can only chase value through M&A for so long before they need to generate more substantive growth through profits. Spreading a team thinly across multiple jurisdictions with multiple commodities could be a concern for investors. Cahill states that evolving optimised economics at projects within Excellon Resource’s portfolio could be a game-changer, but will the market agree?
The company has not been generating cash flow for the last few quarters, but Cahill is confident these projects will operate much more efficiently in the future. Excellon Resources has c. C$5M left to play with because C$4M of Excellon Resources’ cash is committed to exploration in Mexico and a further $1M to Germany. What does that mean for the newly-acquired project, Otis Gold? Cahill says that cash flow will help, but this is not expected until the end of 2020. Listing on the NYSE could Excellon Resources gain more investors, but will Cahill be able to communicate this complicated turnaround story effectively to prospective investors? 2020 should be a very interesting year indeed. We will keep our eyes on this story as it develops.
CLICK HERE to watch the full interview.
2:00 – Company Overview
2:46 – The Background: Plan and Issues Solved
6:49 – Share Price Volatility: What Was Happening?
8:54 – Team Experience
11:26 – The Future: How are They Raising Their Value? Is M&A the Way to go?
13:09 – Mexico: Happy With What They Have? How Much Will Need to be Spent to Bring it Back From Plateau?
19:27 – Germany: Jurisdiction, The Asset and Costs
30:55 – Acquiring Otis: Why Did They Do the Deal? What’s There & How Much Will it Cost to Monetise it?
43:21 – Big Shareholders and Their Positions
47:37 – How is the Market Expected to React to Otis’ Acquisition?
49:24 – Listing on NYSE: What Will it Do?
Company page: http://www.excellonresources.com/
Matthew Gordon: Hello Brendan. How are you, Sir?
Brendan Cahill: Very good. How are you?
Matthew Gordon: Not too bad. Not too bad. You’re getting ready for PDAC, are you?
Brendan Cahill: Yes, gearing up for it. Yes. Great weekend. Definitely need some mental preparation beforehand.
Matthew Gordon: Oh, I know. Did it for too many years. I am fortunate not to be going, but I wish you well. I wish you well. A lot of people there. Why don’t we kick off? Give us a one minute overview of the company for people new to this and we’ll pick it up from there.
Brendan Cahill: Okay, great. Excellon is Mexico’s highest grade Silver producer. We’ve been in production since 2005 and we’ve been in Mexico since 1996. Really interesting announcement out, where we’re proposing the acquisition of Otis Gold, which is a company that’s been active in Idaho for a number of years and they’ve got two very interesting Gold projects up there. The key one being the Kilgore project, which has a resource of just under 1Moz. It’s a heap leach operation or proposition, but with a huge exploration potential. So I’m very excited to talk about that today.
Matthew Gordon: And we will, but I want to start off a bit earlier than that because I need people to get to know you, get to know what you’re capable of. Okay. You’ve been there seven, eight years now. What was the plan when you came in? What did you see and what were you tasked with doing?
Brendan Cahill: Yes. So I joined it in the middle of 2012, and really when I started, the company was in a turnaround phase, and that’s what we were working on for a number of years. But really to go back to the beginning, because it’s really important to understand our roots. We got Platosa, so around 1995, 1996 and Peter McGaw, you know, one of the world’s great geologists, chief exploration officer at Mag Silver, he brought us the project. He was going through the town of Bermejillo, in the state of Durango in Mexico, and he saw all these gypsum crystals in the shops. And you can see behind me, this is actually a big gypsum crystal there which comes from the Platosa mine. Now, knowing that these crystals are really associated with carbon replacement deposits, he staked the ground, rolled it into Excellon and we made the discovery a couple of years later.
So that became the highest grade Silver deposit in Mexico. The first resource of 2,700g/t Silver put out in 2003 or so. But nobody cared about Silver back then because it was, you know, after reacts and the market was just getting turned around and it was really at the dawn of a new precious metals bull market back then. But Excellon, you know, got the money together, put it into production in 2005 and started being a producer. The trick was that you know, starting a very small mine on a small resource, only 60,000t at the time. Not everything was done perfectly, right? It’s kind of a story in the mining industry, you know, trying to have the capital and the time, balancing that against your investor’s interests of getting things moving, making it to cashflow. So, hydrogeological testing wasn’t perfected. Community engagement wasn’t perfected. Labour engagement wasn’t perfected. So when I joined, there was a series of these issues that were really coming home to roost. You know, there was some social issues at the time, which we resolved some labour issues, which we resolved. Too much water coming into the mine. We resolved that issue in 2017 and went from there to very dry mining conditions, a great little operating mine and that’s kind of where we are today.
Matthew Gordon: Okay. So you used the phrase there which was; it’s been a turnaround story up until about a year ago, okay. And yes, we’ve seen this scenario before where companies need to kind of shortcut the process because of investor pressure on them, share price pressure on them. And are you saying to me that you were kind of fixing a few problems caused by short-cutting in the process or just natural mining? The difficulty of mining; because mining is tough, right?
Brendan Cahill: Definitely. Yes, it can be interesting, challenging at times, but yes, I mean, it was really just, you know, dealing with the rock when you get down there. Dealing with changes in the jurisdiction that you’re in, so you have to really take the time to understand the chronology of why things are where they are. And then, you know, putting in the changes to make things better. And the most important part of course, which I didn’t mention was that, you know, of all the turnarounds we did, it was bringing in a really exceptional group of people, you know, upgrading our board, upgrading our management; top to bottom. And that’s what really allowed us to address these challenges that we saw. And certainly, you know, the management before me were dealing with a whole other set of challenges. Everybody in mining is always dealing with a turnaround story, right? Whether it’s an exploration project; where is the discovery? Or whether it’s running efficiently, or whether you’re in production, and then it’s just a whole host of you know, day to day opportunities for improvement.
Matthew Gordon: Yes. So this is the bit I find interesting. It’s like sometimes, even when things are going well, you’re in the middle of a turnaround process because markets change. No market better demonstrates that than the Silver market, which is typically, and you know, most notably quite erratic. And if I look at your share price last year, fairly erratic: you’ve had big highs, big lows, but you kind of ended up sort of where you started off. Was that caused by some of these legacy issues that you’re talking about or these ongoing mining issues, or the new team coming together? I mean, what was the cause of that?
Brendan Cahill: I think that actually the Silver market right now is quite interesting; particularly over the last 18 months or so. When you look at our peer group, you know, as you said, it started at A, bounce around, and then ended at A And you can look at many of even the big companies in the peer group and they haven’t kind of seen that almost stratospheric increases in share prices that many of the Gold companies have seen. And when you look at Silver over the course of time that it is kind of the way things go. Right now we’re at a Gold -Silver ratio of 89, almost 90:1. And the historical norm is between 55 and 65:1. So we’re in a very challenging place for Silver right now. The other aspect of Silver that has been tricky over the past little while is most of us are producing a concentrate, you know, so we’re not producing doré, some of us are, but a significant portion aren’t. We’re producing Lead and Zinc along with the Silver, and treatment charges for that Lead and Zinc, particularly on the Zinc side, have increased significantly over the past couple of years. So that’s added another economic challenge to the business, and something that’s affecting the entire peer group area.
Matthew Gordon: Right. So this brings us nicely on to the business plan. Okay. So; Silver company, you’ve got assets in Mexico, one which kind of three me – Germany. And obviously now you are, and we will talk about Otis in second, we will talk about Otis in a second, which is obviously Gold and so you’re looking at different ways to mitigate the ongoing risks involved in mining and Silver mining in particular, obviously. So, you made a point in mentioning this team that you’re building up, I mean, can you give me a sort of sense of the track record of the people involved? I do want to talk about some of the shareholders in a minute, but what have your people, what have you done, which has created value for shareholders in the past?
Brendan Cahill: That’s a question that my wife has asked me at times as well. So you know, I came from Davies Ward in Toronto, which was one of the eminent M&A firms in Canada, and then I went into mining around 2008, or explorations specifically. And actually I started at a company called PlanGeo Mines, which acquired the Detroit Lake deposit back in the late nineties. Ingrid Hibbard was CEO, she has just joined the board of our Kirkland Lake actually, and I won’t go through the whole details, but an amazing transaction at the bottom of the market for $1.5M acquiring the Detroit Lake deposit.
So we spun that into Detour Gold around 2007, and through a series of transactions ended up merging part of PlanGeo back in with Detour. And the returns that we saw from that, you know, I bought PlanGeo stock when I was a student; I think paid off my student loans and at 10 cents, right. And by 2000, and that was probably around 2002 and by 2011 it had returned 11,000%. So that’s kind of where I came from.
We went from there, that transaction to doing a series of acquisitions in Ghana, West Africa, making a number of discoveries and seeing our return to shareholders increase further from there as well.
On the rest of board and management, Ben Pullinger, our senior VP geology was at Roxgold. He was with me at Plan Geo as well, so we saw those returns and then went over to Roxgold; high-grade success story in West Africa, bringing you know, exceptional asset, Yaramoko from an inferred resource through to production from 2012 to 2016. Great success story there Anna Ladd-Kruger, our CFO was at Kinross and then was at Trevali from the very early days, USD$50M market cap all the way through to the billion dollar deal with Glencore. So saw huge returns for shareholders there.
Matthew Gordon: Beautiful. That’s great.
Brendan Cahill: I could go on.
Matthew Gordon: No, I guess that sounds like you could, so let me stop you. I think that that gives us a flavour. So there’s a real mixture there of finding value in the rocks, the geology. I like the rocks story particularly. I think that’s a great business model as well. I’m a big fan of John. You’ve also been doing it through M&A, which is what you’re doing here. So is that the plan going forward? Do you know, is the plan to gain or get shareholder value gains through acquisitions? Is that the plan or are you also going to be looking at the rocks?
Brendan Cahill: We have a really simple vision; it’s almost embarrassingly simple. It’s just to create wealth, right? That’s it. Great wealth. I mean, anybody in business should be looking to do that.
Matthew Gordon: Tell me how, tell me how?
Brendan Cahill: So you know what we’ve got in this industry in particular, right? You really have to be involved in the entire growth pipeline because markets change, commodities change, investor sentiment changes, access to capital changes. So we have production now with the acquisition of Otis Gold, we have development; Gold development in particular. And we have a significant exploration portfolio. And, you know, the way this portfolio, our entire portfolio or growth pipeline is organised, we have immediate leverage to metal prices: Silver Lead and Zinc. Silver being better than Lead and Zinc right now. We have a Gold development project which has a significantly higher potential value than our producing assets; you want to be able to grow into that yet better asset. And then we have a number of exploration properties. And you need a portfolio of exploration properties because exploration is risky, right? And trying to make a discovery on one property is, you know it’s like playing high card.
Matthew Gordon: No, I get it. We talked to companies like that all the time, but if I may, let’s come to the producing components, do you think that they are doing enough? Are you happy with what’s happening in Mexico? Are you happy with what’s happening in Germany?
Brendan Cahill: I’m never happy. I always want more, right? That’s the business.
Matthew Gordon: So what are you doing about it? What’s happening?
Brendan Cahill: So in Mexico, as I mentioned before, we had a very wet mine, too much water flow, inflow coming into the mine. So we put in an interesting engineering solution to solve that problem. Drawing the water table down in an underground mine. Kind of like treating it like an open pit, creating a cone of depression around the mineralisation, drawing out the mine entirely. And that was really sending in the storm troopers, right? Fix this. It would take every means to fix this. And then we needed to make a change. And right now, over the past six months or nine months or so, we’ve got the optimizers in there, you know, the plastic surgeons. So they’re really working on, you know, optimizing the mine, the normal course mining stuff. It wasn’t possible before, but this yields millions of dollars of cashflow when you push it and make sure that you put to it entirely. We won’t talk about Otis and Kilgore in terms of immediacy, but on the exploration front, we’re making great strides.
Matthew Gordon: Let’s stay with Mexico. Let’s stay with Mexico. Right? So when do these storm troopers report back to you? What are they going to be able to do in terms of the numbers? The economics around this, what’s going to change?
Brendan Cahill: So the storm troopers have left the building now. So yes, I mean, but what they did was they took a mine that we were effectively mining underwater, you know; intensive grouting at the face, a very slow inefficient mining process, and they’ve allowed normal dry mining conditions to continue going forward. So, and that job was done very effectively and it’s just part of our ordinary course of operations now.
Matthew Gordon: So what’s changed? What’s changed?
Brendan Cahill: Now we have to deal with like the ordinary thing of getting guys to the face faster and for longer parts of their shift, you know; more efficient use and safe use of ground support to make sure that we can operate efficiently. Two of the challenges that we face at Platosa are high electricity costs, you know, we pay about 12 cents a kilowatt hour. But under Mexican energy reforms we can go into the private market and get a lot less than that; about 25% less than that. So that’s an optimization that we’re in the process of doing over the next couple of months. Our electricity costs are very high because we’re pumping a lot of water. So that’s going to result in an immediate significant savings to opex.
Matthew Gordon: Okay. Give us some idea of the numbers that you think you’re going to be able to get to, because people are interested in that. People want to know, are you going to reduce your overheads? Are you going to be more profitable? I mean, tell us what can you do?
Brendan Cahill: Yes, so certainly for the past few quarters we’ve not been generating profits, not being generating cashflow. But with these optimizations, you know, we’re targeting and All in Sustaining Cost of something below USD$15. That’s really the target we want to get to.
Matthew Gordon: When?
Brendan Cahill: Towards the end of the year, in the second half of the year, that’s basically where we’re looking at right now.
Matthew Gordon: That’s still quite high, isn’t it?
Brendan Cahill: You know, Silver at USD$18. If you look at our peer group, if you have an All in Sustaining Cost under USD$15, you’re kind of in that top five, 20% or so.
Matthew Gordon: Wow. That high? That’s amazing. Okay. So you think towards the end of the year, you’re going to be able to say; we think we’ve got Mexico Platosa under control now; it’s as good as it’s going to get. Is that the message?
Brendan Cahill: Well, there’s, I mean, Platosa the reality is it’s a, you know, we want to mine 250t, up to 300t per day from the Platosa; so it’s a small mine. It’s the highest grade mine in Mexico. It’s one of the highest grade Silver mines in the world. Production grades are over 1Kg per ton Silver equivalent. So there’s very few things like that out there. But it’s small, so we need to find more, we need to grow more. And that’s both at Platosa and then at Evolution, which is where our mill is; about 200kms to the south, but big exploration package around that. We’ve made a new discovery there as well called the Lechuza zone. So that’s something we’re going to move towards resource over the course of the year. I need a bit more work to kind of set it on that path, but you know, it’s organic growth from that perspective, like identifying new deposits and put them into production.
Matthew Gordon: So how much money, how much money are you going to put to that to spend? I mean, are you going to spend time, effort, money, and if so, how much?
Brendan Cahill: Yes, so our exploration budget is generally around USD$4M to USD$5M per year within our existing assets. And that doesn’t sound like a lot, but it’s very effectively spent money. You know, what we’re trying to do is find new things, right? So you don’t want to grid drill a green-fields project in the hopes that something might be there. We use a very scientific approach, and the way that we look at an exploration is really, it’s research and development, right? And it’s one of the things that’s been lacking in the industry for a while. But, you know, for us, it’s spend the money wisely, identify the target and then bring your rigs on and start drilling something off.
So down at Evolution, we’ve actually done quite a bit of that over the past year and we’re ready to move that now towards, to find a resource over the course of 2020.
Matthew Gordon: Right. And I don’t know how much cash, I mean, how much cash are you sitting on at the moment?
Brendan Cahill: So as of this transaction, we’ll have about USD$10M in cash so we’re in a pretty good position, and with Platosa starting to turn around over the next few months, we should be generating that sustainable cash flow for the exploration that we want to do within our Mexican portfolio.
Matthew Gordon: Right. So Platosa will be break-even; is that what you’re telling me?
Brendan Cahill: Sustainable operation, yes.
Matthew Gordon: Sustainable, I guess. Sustainable. Okay, cool. And towards the end of the year, moving towards more of a profitability?
Brendan Cahill: Yes, exactly.
Matthew Gordon: Okay. So let’s move away from that. Germany; what’s happening in Germany – that well-known mining district?
Brendan Cahill: Actually, you’d be surprised.
Matthew Gordon: Tell me.
Brendan Cahill: There’s over 50 underground mining operations in Germany, right? There’s a huge amount of coal production in Germany, you know, and we’re actually in the state of Saxony, which is in East Germany. It’s kind of in the crook between Czech Republic and Poland, and it is a very, very long mining history. So the project that we have; it’s called a Silver City, or the Bronze Door exploration license. It’s about just Northwest of the city of Freiburg. And this area was mined for 800 years; from the 11th Century, all the way through to just after the Franco-Prussian war. And Germany won the Franco-Prussian war and got a 200 million pound Gold settlement from the French. And really, you know, they dropped the Silver standard, went to the Gold standard and history progressed from there.
And this was one of the interesting things when I kind of was presented with this project back in late 2018, I was dismissive at first as well. You know, who goes to Germany, right? But I didn’t know, but I did the research and I thought about it and then he pitched to Ben and he said, geologically, like, we have to be here, we have to check this out. And when you understand that history, and then you’ve got the switch to the Gold standard and you’ve got World War I, you’ve got the Weimar Republic, the Great Depression you have World War II, and then you have this becoming part of USSR effectively, or the Soviet empire, right? Which was not focused on the capitalist metals of Silver, it was focused on Lead and Zinc and Tin and Coal. So that was really what was explored for here and Silver was forgotten about.
Matthew Gordon: I get the history, I understand the history of Germany and Europe around that time. Today, Coal is not in favour in Germany. It’s a very green, liberal country these days. So, you know, how is mining in Germany for you? I mean, do you come across problems, protests, any issues with regulation, law?
Brendon Cahill: Well, we’ve only been there on the project since the fall of 2018 sorry, 2019. So really, we signed an option agreement on this asset back in September. But the integration with the community, and with the institutions there, and with the regulators there has been quite impressive. And you know, one of the things is, the impression of mining in Germany and exploration in Germany, Brussels and Germany, Berlin actually founded an Institute called the Helmholtz Institute there in 2011. And this was, if we go back to 2011, I’m obsessed with history and the chronology of why things are, right? That’s why, sorry for going through the whole history of the 20th century, but it is, there you go. Right? So it is so critical that you understand the history or you miss opportunities, right? And you think, well, somebody else would’ve done this. How was this opportunity mine, somebody else would have done this. And then you reel back the history and you’re like, there is a huge opportunity here.
So Germany 2011, if we go back to 2011; Silver’s at USD$50, Gold’s at USD$1900. You’ve got rare earth metals absolutely ripping. You’re coming off, you know, Nickel highs, Copper highs, so Germany recognised that they needed to start controlling strategic metals, which is a very topical aspect now. Rares are still an issue in Canada. The mining association of Canada is looking at strategic metals review. Germany recognised this in 2011; created this Helmholtz Institute to further exploration, development, production, with high technologies in Germany. The great thing is Ben Pullinger, our Senior VP Geology, his former professor is actually the head of this Helmholtz Institute. There’s this weird serendipity or synchronicity that kind of happening with us going to this project. That Institute is in Freiburg because Freiburg also has one of the oldest mining and metallurgical universities in the world: the University of Freiburg.
So if you go around the world, you come across geologists all the time. I didn’t exchange there, I went to school there, I’ve been underground there, you know, in the old workings under the town. So that’s the kind of thing that we’re drawing on. We’ve got a high technology Institute with, from drones to core scan technology to a Met-Lab that they’re developing right now. Loads of PhD students who have been crawling over this ground, looking at the opportunity for years now writing their dissertations on it. We get the benefit of all that research and yet there’s been no modern day exploration. There’s never been a drill hole for precious metals on this project.
Matthew Gordon: So tell me what you’ve got; so thank you for that, that was actually an education, I’ve learned something. That’s good. But tell me what you’ve got. What do you know about what you’ve got in Germany?
Brandon Cahill: So the concession that we have, or the exploration license, we have; we call it Silver City, the Silver City property. And people are like, why Silver City? That’s not a German name, but you know, Freiburg, the nickname for Freiburg is ‘Silberne Stadt’, which, forgive my pronunciation, but; Silver city. So it was a pretty easy branding exercise when I saw a Silver and Stadt, and I’m like, well, there we go. We’re good. So there is that long history of mining, certainly. Well what we have is 164kms2 with 35kms of strike, and a number of veins running through that property along this strike and loads of historical underground workings. So our concession was mine for, you know, on and off well, continuously for almost 800-years. We have all the records of that mining as well, or most of them anyway, right?
So we know where the workings were. We know how deep they went and what they were mining. And some of the grades that they were seeing there, you know, up to 3,500g/t Silver, excluding other metals. And it was definitely Lead, Zinc and Gold as well, and up to 10 metres width. So we know where they stopped. And it’s a really simple, as far as geology and exploration are ever simple, to know where they stopped, understand where the system is, using all this information that’s being generated by one of the top mining universities in the world, and set the rigs down and start drilling the deeper part of this.
Matthew Gordon: Okay, let’s talk numbers, so I’m going to assume that you wanted to mitigate country risk from Mexico into another jurisdiction and you came across something which you thought might fit that bill, okay? I’m going to assume it.
Brendan Cahill: No.
Matthew Gordon: No? You thought this was headed out of the park?
Brendan Cahill: I mean, I had the same impression as you, right? Like Germany; that’s kind of an asymmetrical assessment of improved country risk, right? So it was really, we were looking around the world for high-grade exploration opportunities that could deliver results very, very quickly, as far as you can ever have that expectation. And this really fit the bill. It wasn’t until we got over there, and did our work and diligence long before signing the option agreement, that we realised this was actually a special opportunity, you know, a regulator that was very much in support of bringing exploration back to Saxony, with a huge amount of wealth and talent to support that kind of reinvigoration of this region. But even to say reinvigoration; it is a little bit of a misnomer because we’re not the first guys there. We’re not the only guys there. There’s loads of exploration down in the South on the Erzgebirge, again, forgive my pronunciation, but the ore mountains, which were mined for hundreds of years in the middle ages. Up to the Northwest, there’s the ‘Kupferschiefer’, which I never pronounce properly, one of the world’s great Copper mines and the big coal mines along the North part of Saxony.
Matthew Gordon: So I get the bit why you think this is unique in its own right. It sounds like you’d be proud to have this in your own right, but that is surely the definition of risk mitigation. You’ve got Mexico, you’ve got another jurisdiction, you’ve got two assets instead of one. Is that part of the thing? I’m just trying to work out what’s going on up here. Why, why are you doing this? Why Otis? What was the problem you’re trying to solve, Brendan?
Brendan Cahill: So I mean, I guess when you’re looking at business, right? You know, risk mitigation people are like; ‘Oh, you’re in a different jurisdiction. That’s cool. That’s good’. Right? And it’s a good jurisdiction; excellent rule of law. And it’s actually a very clear permitting process. You know, if you follow the rules, do the right work, you know, it’s one step, two step, and things will happen as you expect. So that’s good. But this is about opportunity. You know, this is, you’ve got risk and you’ve got opportunity. This is far more on the opportunity side, understanding that the risks are relatively minimal. Because when we look at the project, you know, 35kms of strike, that would almost cover the entire Fresnillo belt from Fresnillo down to Zacatecas. That’s about 50kms to 35kms. If you put that in there and turn the clocks back 150-years, you know, just after the Spaniards were wrapping up, you’ve got one of the richest chunks of the Fresnillo Silver belt, you know, it’s absolutely a special opportunity, and there’s been no exploration since the 1870s for precious metals.
Matthew Gordon: Okay, so let’s talk about some of the numbers then, okay? Because how much did you pay?
Brendan Cahill: So it’s an option agreement over three years.
Matthew Gordon: What’s that cost you?
Brendan Cahill: CAD$500,000 in three payments over the three years, and CAD$1.6M in shares of Excellon. So CAD$2.1M total consideration; a very reasonable deal for sure.
Matthew Gordon: And what are your obligations in terms of…what are your other obligations, financial?
Brendan Cahill: At the end of the exercise of the option, there’s a 3% Royalty on precious metals and a 2.5% Royalty on base metals, each of which are, we can buy them down collectively for a payment of USD$1M, so we’d go down to 1%, 2% precious and 1.5% base. And then there’s an exploration bonus, but relatively or sorry, a discovery bonus and a resource bonus of relatively small amounts. In terms of work commitments, there’s no work commitments under the option agreement. We do negotiate work commitments under the exploration license with the regulator. For this year there are around CAD$500,000. next year around CAD$500,000, and CAD$1M in the third year. So very manageable, and certainly with success, we’re going to be spending a lot more than that this year and around a million dollars on the project.
Matthew Gordon: Right. Okay. Well; over and above, in terms of your allocation of people’s time on it or collectively?
Brendan Cahill: So CAD$4 million in Mexico and CAD$1M in Germany.
Matthew Gordon: Got it. Understood. Sorry, I wasn’t clear.
Brendan Cahill: They’ve got tons of talent there. So, you know Ben; he has people in Mexico, Jorge Artega, our exploration manager down there, really managing the country effectively. And we’re developing a team in Saxony as well.
Matthew Gordon: Okay, well I’ll be interested to see how that develops this year. Okay. Now the bit you want to talk about – Otis – you’ve done it yesterday. You made the announcement, I’ve got the press release here. Why’d you do it? It’s not Silver, it’s Gold. Do you know anything? What do you know?
Brendan Cahill: You strip it back. It’s our job to create wealth, right? So when you do that, you’re not like tied into to ideologies effectively, right? It’s really about generating returns for shareholders and the community and our employees and the whole kind of continuum of the business. So, and it’s really founded on if we were at, you know, if we were in 2013 and Gold had tumbled from USD$1,900 down to USD$1,600 in April 2013, going down to USD$1,300 or USD$1400, this wouldn’t be the time to do, to kind of, you know, you weren’t in the right part of the market. So we’re very much market focused and market trend driven. And I think that’s the important part of the industry. There’s times to buy, there’s times to sell, there’s times to hold, there’s times to explore, there’s times to build, right? And we didn’t put that in the right order, but you know, there is different aspects that need to be done at different parts of the market cycle.
Right now, we firmly believe we’re back in a precious metals bull market that wasn’t like, you know, over the past couple of weeks, with the horrors that are happening with the coronavirus and everything. This is from May last year when Gold moved through USD$1,375 through USD$1,400, and it was game on, right? Silver is trailing of course, but Gold, it’s game on.
So that’s why we bought this now. But what it does is, it increases our precious metals or our total resource base by 450%. That’s just on M&I. It’s more when you include inferred; the inferred goes up by 6,000%. And importantly, it switches our mix of base metals, sorry, our mix of metals. So right now we’re 50% Silver and 50% base metals. After this transaction we’re over 90% precious metals. So that’s a very important switch as well. You know, continuing on it, it completes our growth pipeline. We have production, we had exploration, have exploration; a big portfolio there. Now we’ve got an excellent development project in the middle.
Matthew Gordon: Fantastic.
Brendan Cahill: -that improvement as well as having the torque that you have from exploration.
Matthew Gordon: Got it. If I may interrupt, okay. You’ve got the blend of production, development and exploration. You’ve changed the mix from 50/50 on base versus precious to, you know, 90/10. It’s great. So you’re making all the right moves. I think the interesting thing that you said there was the fact that when you started the conversation about Gold, it was before Gold started moving. So it suggests some foresight there. So this wealth that you’re going to create with Otis, what’s the cost of the wealth that you’re going to create? So what’s it cost you? How much are you going to have to spend, and how much focus are you going to give it?
Brendan Cahill: Yes. So with Otis as well, we’re adding their VP exploration to the team. He lives in that part of the world. Great guy; Alan Roberts, trained at RandGold, so experienced all of the world. Very you know, obsessed with this project. It’s a great project, right? So, you know, the goal is; keep the focus on stabilizing Platosa, start generating cash flow from there. You know, with Kilgore, again, the oldest asset, right now it’s about doing the studies in support of another PEA, or an updated PEA over the next while. Doing the exploration to grow the resource. Right now the PEA provides for a USD$81M of capital for five years of mine life at 110,000 ounces Gold a year at an All in Sustaining Cost of around USD$830.
It’s a very nice project at USD$1,500 Gold; so 53% IRR and USD$185M NPV at 5%. So a very quality project, but we’re not building that quite yet. It’s still in the study stage so it’s not going to cost a ton of money. But we do want to do there though is look at the bigger opportunity, and that fits into our exploration and discovery portfolio.
What we look at Kilgore, it’s like a round mountain. So a round mountain is a mine that Kinross has been operating for years. It’s been in production since 1977, has produced 14Moz over that period. So an exceptional deposit down in Nevada. This is a very similar kind of geology. Now around the mountain at surface you’ve got, you know, 0.5g/t oxide, but as you get to depth a much, much higher grades.
And here, there’s a series of drill holes which really haven’t been followed up on. A number of them actually ended in mineralization. We’re talking like 95m at 4.2g/t. 30m at 5g/t, you know, a series of these holes. So it’s really chasing that round mountain opportunity. That fits into our bigger exploration play perfectly, you know, and that’s from Platosa looking for a big CRD to Silver city, looking for a new epithermal district to Evolution, you know, on the continuation of the Fresnillo Silver trend. And now this is part of the game as well.
But again, on that kind of stuff, it’s intelligent exploration, doing your science from the start. Drilling is the last thing you do to prove the theory and then define the asset, right? But we take every single aspect of geophysics, of geology. And I’m getting too far down the geological wormhole here. I’m a ‘geologisht’, not a geologist. But it is like kind of really painting the whole picture of what the opportunity is before you spend the significant capital on drilling and then, you know, grid drilling to the final –
Matthew Gordon: Okay. So let’s go back to my question; which was, how much money are you going to need to spend? Because I think you’ve got USD$5M left: USD$4M going to Mexico, USD$1M in Germany. You told me you’ve got USD$5M left. Is all that going into Otis or are you going to raise additional money to develop it, develop this wealth that you’re talking about?
Brendan Cahill: Right. So the first is that, you know, as we turn the Platosa around, that will start generating cash flow, which will take a lot of the burden off and cover kind of –
Matthew Gordon: But that’s towards the end of the year, isn’t it? That’s what you said. How do you allocate money now?
Brendan Cahill: So, I mean, I think one of the things is, and the reason we’re doing these things now is that it’s a different market, right? In this market, people are paying for exploration. You know, if you really look at the money rates since January 2019: USD$1.1Bn, something like 70% or 75% of it went into exploration. And why? Because that’s where the greatest returns are. Like, we’re finally back, and it happened I think in 2018; you could see discoveries and stocks would just fly and go up 10 times, 20 times. Right? And in this market, when you look at say, a Silver Crest or a Great Bear Resources, you know, incredible returns on the market for incredible assets that have been funded from the market. So if you have the right thesis and the right focus, that money is there and that’s the difference of the market we’re in versus the market we were in you know, even last year and certainly two or three years ago.
Matthew Gordon: I think that’s the case if you’re able to articulate your model, like if I say, Great Bear, great example, and there are other business models that we’ve looked at and explored and CEO’s who have been able to articulate it. But you know, I say 50%, 60% of CEOs go, we’re just going to drill holes. So that’s their thesis, right? Which is maybe the right thing to do, but it’s hard for investors to then differentiate between companies necessarily, which ones they should target. So I’ve enjoyed listening to your thesis, as it were, today. But like I say, so on Otis, your idea is to just sit back and evaluate what you’ve got. You’ve got a PEA, which is, you know, it’s the start of a process. So what are you going to be doing this year in terms of, you know, is a PFS on the card this year?
Brendan Cahill: So I think the first thing is, is improving our studies and understanding of the project, and those studies are going to move towards an advanced or an improved PEA, or PFS ultimately. And we haven’t closed the acquisition yet, so we’re not talking about timeframes yet. Give us a month or a few months on that until we put more time frames, or a timeframe for the timeframe. But you know, the ultimate goal here is from what we have right now: a very solid base, great PEA, great NPV and IRR, but really growing a resource that supports a 10 year mine life at a hundred 100,000oz a year. You know, that’s something that’s very assessable by the market, by analysts and something that you want to build. As well, at the same time, looking for that bigger opportunity. You know, the multimillion ounce deposit and that’s why if Nico is a shareholder, I’m sure we’ll talk about shareholders as well, that is a big opportunity that has to be part of the focus as well.
Matthew Gordon: Okay, that’s a good point you raised, so you haven’t yet closed it. What’s the timing on that?
Brendan Cahill: So we announced the transaction yesterday on February 24th. We will be mailing materials in mid-March, mid to late March at the latest, and aiming to close in mid to late April.
Matthew Gordon: Okay. You didn’t get much of a market reaction when you made the announcement? I’m just trying to re-read around chat rooms and forums; people don’t seem to understand why you’re doing it.
Brendan Cahill: People don’t like change, you know. And certainly, we’ve been Mexico’s highest grade Silver producer for a long time, but you know, our stated vision –
Matthew Gordon: But you got to make money though, haven’t you? It’s all well and good having high grades, if you’re not making money, it’s no good to anyone, is it?
Brendan Cahill: Yes. I mean, I think one of the key things is looking at the Silver space right now, Silver has been trailing Gold significantly over the past, long time now you know, at an 89:1 Silver to Gold ratio. What we’re doing here is buying. It goes back again to that, you know, multiplying our asset base and moving into precious metals. Lead and Zinc; certainly in the global economy and everything right now, are not the place to be making money, especially when you’ve got treatment charges increasing year over year now. We had incredibly low treatment charges for a period: three to five, five years ago, and now they’re kind of back to the historical norm, but metal prices are coming down. So you just have that margin getting crushed. So this is an asset that we’re buying with, you know, producing paper, right? To buy an acid in the ground that we think has great value in it.
And one of the things that, when we look at the market now, the junior developers that aren’t financed, right? They’ve just very much underperformed the market. The finance developers have flown: they’re up 63% in 2020. The senior producers have skyrocketed. They are up 30%, 40%; for these big companies, that’s a big move. And that’s what you would expect to see at this point in the market. When you compare this market to 2002 to 2011, 570% returns over that period. For us, since 2016 to now, it’s around a 48% return. So we’re really in the early days of that market, but we’re seeing exactly what we would expect to see in the early days of a new bull market, right? The money first starting to go into seniors, the generalist money going into seniors. What we’ve seen which I really like, is the money going into explorers for discoveries, mostly it’s post discovery. But if you don’t have the development money, it’s a little bit tricky to get right now. So this combination increases our size, makes us more financeable from a development and exploration perspective, and really kind of completes the story and sets us up to really ride this new bull market.
Matthew Gordon: So those treatment guys make money?
Brendan Cahill: It’s a good gig.
Matthew Gordon: Just an idea, just an idea; you can have that.
Brendan Cahill: You’ve got to build a smelter though.
Matthew Gordon: Just buy one.
Brendan Cahill: When you’re the man in the middle, that is always good too.
Matthew Gordon: I know a guy, I know a guy. Okay, let’s talk about some of these shareholders. You’ve got some big names in there. Okay. So Eric Sprott, Agnico; how involved are they? I know they are shareholders. Okay, let’s start with the easy one. So Agnico, did they own one of these assets before? Why are they in here? Have they put hard cold cash in?
Brendan Cahill: Yes. So Agnico, I invested USD$5M in Otis in 2017, and they did it because they see this opportunity in Kilgore.
Matthew Gordon: So it is option money, right?
Brendan Cahill: Not option money. This is money to go into the ground to define a 3Moz to 5Moz deposit.
Matthew Gordon: It’s option money for them. It’s like, it’s nothing. So why aren’t they doing this themselves?
Brendan Cahill: Because if you look at the way that Agnico operates, and again, this is second-hand knowledge because I’m coming in and you know, we have to develop that relationship with Agnico as a shareholder, and hopefully a significant backer. But they look at projects that do have that potential. So they do a lot of diligence before they put in money. You know, this is not high card money. It’s not throwing chips on the table. This is extensively researched. We know this asset and we want to put money in. The interesting thing is, the guy who did that for Agnico, or led the initiative at the time, Mike Timmons, who was their VP Corporate Development, he’s actually joining the board of the combined company. So when he learned that we were acquiring Otis for Kilgore, he said, ‘Oh, I’ve got to be involved in this. This is something I want to, you know, further this idea on that Agnico started a couple of years ago.’
Matthew Gordon: Okay, so I sort of jest there, but when I say it’s option money, it’s like you’re one of 20, 30 companies that sell USD$3M to USD$5M out, okay? So if one of them comes off big, they make their money back. So in that sense, it’s option money. At what point did they work out what you’ve got and whether they come in for the next round of cash, or however the relationship works?
Brendan Cahill: I think like the option money, it’s not really about making their money back. It’s really about finding things that they can acquire. Right? They’re looking for new mines, whether it’s in Mexico, whether it’s in North America, it’s not just a trade. Right? It’s really, it’s research and development and the furtherance of a new invention, which they can, you know, buy and put into production.
Matthew Gordon: Yes. But you appreciate that we talk to companies all the time who’ve got money in from the big players, who’ve spread the cash, spread the love, as I say in the hope of finding the next global big scale projects.
So, okay. I understand about Agnico. Let’s come to the interesting bit for me, which is Eric Sprott. When his name is associated with a project, it usually means the project is going to work. Whether the project’s any good or not is another matter. So when did he come in and what’s he going to do for you?
Brendan Cahill: I really feel like the trade is going to work, right? His market sense and his ability to see opportunities –
Matthew Gordon: Absolutely.
Brendan Cahill: So he came in, he’s been a long-term supporter of Excellon since long before I joined the company. And that was originally through Sprott Asset Management, right? Which is, Sprott Asset Management is still a shareholder. Eric’s retired. It’s run separately, but he started putting money in personally in April 2016. And so he put money in at 45 cents, then at USD$3M, USD$$3M in a private placement. Then we put another USD$7M or so, in a public offering in July of 2016. And then invested again in 2017 and 2019. So he’s been a long-term supporter and you know, he’s timed the market well in terms of wanting to put money in as well.
Matthew Gordon: So what’s his involvement? I mean, do you get that phone call once a month going, ‘What’s going on, Brendan?’
Brendan Cahill: No, he’s like the best shareholder you can ever have. He really is like, he was very, very supportive of pretty much every company that he’s in. And you know, for us on presenting this Otis deal, he was happy to sign a support agreement which was obviously a huge, huge benefit of the transaction.
Matthew Gordon: Okay. Okay. Well, great story. I like the model. You’re going to be bouncing around PDAC next week; better you than me. What’s your sense of the market reaction when you put the Otis press release out? Were you getting inbound phone calls? From what, what were they saying?
Brendan Cahill: Yes, it was a busy day. We’ve got you know, I think it’s a little bit of a difference; some of our shareholders were like, why are you doing this? But when we presented it to the market and kind of the funds that are invested in the company and they’re like, this is a great move. This is the kind of jurisdictional diversification that it actually is good. We’re, you know, going into Idaho, we’ve got Integrity Resources there, Midas Gold, Liberty Gold, Revival Gold, right? We’re kind of getting into that really re-emerging Gold district. So it is a great jurisdiction to get into. And so the institutional money is now much more interested in Excellon than it was last Friday, right? Because there is a much better asset base. There’s a complete growth pipeline. You can see Platosa moving into Gold production over the next three to five years. So it is a much more integrated story from that big money perspective.
Matthew Gordon: So what are you hoping the share price does? Because it’s, I say it’s been fairly erratic for the last 18-months; mainly because it’s Silver focused. With this Gold acquisition, would you hope to see a slightly more steady state or do you think you’ll kind of get that appreciation from the marketplace?
Brendan Cahill: I think we are for sure. And one of the important parts of this transaction is, it’s a really, you know, there’s a market strategy to it as well. At the closing of the transaction, we’re going to do a share consolidation and we’re going to apply to list on the New York Stock Exchange, we’ll start in the NYSE American.
Matthew Gordon: Yes. Sorry, I meant to ask you, so what do you think that’s going to do for you? Apart from, I guess open up a new investor base, but how do you think the guys back on the TSX are going to feel?
Brendan Cahill: I’m more concerned about how my shareholders feel than the stock exchange, but a different conversation I think. But I mean I think the important – or you mean the shareholders?
Matthew Gordon I do mean the shareholders on the TSX.
Brendan Cahill: We’re going to get a lot more money coming into the stock, a lot more liquidity on the stock as well. I think if you look at any of our peer group, and that’s from say Avino, which is in Mexico, and has been a long time on the NYSE. America Silver, American Gold & Silver now. I’m moving there back in 2017 or so. Most recently, Metalla Royalties and Equinox Gold, so both of them did this exact strategy. You know, they did a 5:1 or 6:1 consolidation, got that USD$2 share price, but really over USD$5. That proved very effective as well. And saw within a month to three months, 20% to 40% returns. And I mean, the reaction was immediate: on announcement of the application, these companies started moving and you can just see the liquidity pickup significant. So again, it’s prepping for this precious metals bull market. We’re at the early days now, but as more generalist interest starts filtering down to the less senior companies, being on that exchange is just going to open up a lot more investor base, a lot more liquidity and that’s for the benefit of all our shareholders, whether it’s retail or the biggest funds.
Matthew Gordon: Okay. Brendan, thanks very much for telling us that story. Like I said, I like the business model. You’ve got a bit of work to do in Mexico, and you know, come back to market and tell them how things are going there. Take care of what’s happening at home. And then with the exploration development and Otis, obviously sounds exciting times in terms of that diversified portfolio approach. Thanks very much. Do stay in touch, let us know how you’re getting on. Okay?
Brendan Cahill: Sure. Sounds good. Thank you for having me.
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