RNC Minerals (TSX:RNX) – The reason you loved me before (Transcript)

The RNC Minerals Company Logo.
RNC Minerals
  • TSX: RNX
  • Shares Outstanding: 608M
  • Share price C$0.40 (14.04.2020)
  • Market Cap: C$243M

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

RNC Minerals was originally known for it large Nickel project, Dumont, before their extraordinary gold find at Beta Hunt changed everything. As a consequence, investors have been looking towards Australian and consistent cash generative gold, and perhaps have forgotten that in Dumont they have a potentially large future value-generating event.

We spoke with Muinonen in early November to find out where they are in monetising this large Nickel asset. She gives us an update about the movement in the Nickel market and the completion of their Feasibility Study. Muinonen gets in to the detail. She describes Dumont as perhaps the most advanced large Nickel development project in the world. With a Life of Mine of +30-years it is certainly large scale. That also makes it attractive and it can operate through inevitable nickel cycles.

Clearly capable and knowledgeable, Muinonen, a Nickel lifer, appears to have the same energy and drive as her CEO, Paul Huet, and is keen to ensure Dumont is ready when large strategic partners and operators come knocking on the door. She doesn’t seem to think that is too far away. They are fully funded between now and that point, because of a JV with Waterton.

We discuss:

  1. Overview of Dumont Nickel
  2. The Nickel Market: The Impact of COVID-19 and What’s to Come
  3. Positioning and Differentiating Dumont in the Market
  4. Greener Mining Solutions Being Applied at Dumont
  5. Timing on Monetising Dumont: The Ongoing Conversations
  6. Fully Financed: How Long Will the Money Last?
  7. Feasibility Study: The Highlights

CLICK HERE to watch the full interview.

Matthew Gordon: Hello, Johnna. How are you?

Johnna Muinonen: I’m good, Matt, how are you doing?

Matthew Gordon: Not bad, not bad. I haven’t spoken to you since November. And I remember when RNC minerals used to be a Nickel company, so I thought I better get in contact. How are you?

Johnna Muinonen: I’m good. It’s a different days than the last time we were together, for sure. It’s a bit of a different world right now.

Matthew Gordon: Yes, it is. Obviously I think you’re referring to covid 19 impacting on the way people are doing business. But honestly, Minerals is a very different company too; you guys have done a great job on the Gold stuff, bringing in the cash. Nice and consistent. I think the market is saluting that. Well done to you guys. But the other big piece of this, which I think people have forgotten about, and I don’t think they should have because it’s potentially worth a lot of money, is the Nickel component – Dumont. What’s been happening since we last spoke? We’re about to find out. We’re about to find out, are we?

Johnna Muinonen: We are, I mean, the last time we were able to be together, now we’re doing it over video calls. So we’ve been busy with Dumont. If I look at where…first maybe I’ll get into a little bit about what Dumont is for your viewers.

Matthew Gordon: Please, just give us that one-minute overview again.

Johnna Muinonen:  The one-minute overview: RNC owns the 28% interest in the Dumont project. The Dumont project is a Nickel sulphide project located in the Abitibi region of Quebec. We’ve completed an updated Feasibility Study back in 2019. We are fully both provincially and federally permitted. And so, really at this point we’re waiting, we’ve been waiting for a Nickel market, and if we look at where we were back in October, November, December, and even earlier this year, we were really starting to come along in terms of where the Nickel market was, and getting into a bit of a bull market there.

Matthew Gordon: Well, let’s talk about that. First of all, thanks for the summary; it’s a nice reminder to people of how advanced you guys are. And the Nickel market – let’s talk about it. I agree with you. I think there was a resurgence towards August, September last year, then as predicted, the scrap kind of came into the market effecting pricing but it was expected. And you would’ve thought that the price would have sort of recovered kind of mid-year this year, but COVID-19 comes along, what’s that done for you guys? What’s it done for the Nickel market, more importantly?

Johnna Muinonen: Exactly, we talked last October, early November and  definitely, we thought the market had been a bit over-done in the summer of 2019, and Anesia announced they were going to pull forward that ore ban which is still in place. And on the back of that announcement, Nickel price took off, inventories fell down. But when you look at the stainless steel market, it definitely didn’t seem to be translating into demand on the day. It wasn’t coming from demand on the stainless steel side. So definitely thought there was probably going to be a bit of a weakness coming into Q1/20, Q2/20 of this year. Of course, with the impact of covid on top of that, obviously we’re definitely seeing that now, both in Nickel inventories as well as Nickel pricing. Nickel prices being held currently somewhere in sort of the USD$5lbs range.

We’ve got inventories that have increased over the last two to three months since January, into about 230,000t of Nickel on the LME. However, we look at that and there is definitely an impact from covid, but my personal opinion and, just when you look at this market, I think we will get past this. Fundamentally, the longer-term base, the basic fundamentals longer term remain strong. We have seen a deficit in the Nickel industry for the last four years, and that was even before the Indonesian ore ban. We’ll probably see a bit of a surplus this year, however, that’s directly related to this slowdown from covid and we will catch up to that.

Fundamentally there’s been a 10-year period of lack exploration in the Nickel sector. There really just hasn’t been anybody out there looking for Nickel. And there’s been a lack of investment in the Nickel junior side of things as well as even the major companies weren’t spending the money on exploration that historically they used to do. And really what that translates to is that we’re going to see a delay between finding new Nickel projects and being able to bring them on online.

Matthew Gordon: If I may just interrupt because I don’t want to forget to ask you, which is, if you stick around what the impact of COVID-19 is, now obviously, it’s impacting people’s ability to work now. People are being restricted to their homes. I think mostly, globally, most people are adhering to that. It’s affecting people: family businesses, small businesses, their ability to earn cash. And I think some governments are stepping in. Some governments are not. I mean surely that is going to have an impact on people’s buying behaviour, which is going to have a knock on effect into the metals market. But do you see that as a, again, I know you are used to dealing with tens of years for these types of large Nickel projects, but do you think that’s a kind of short-term impact, or do you see that not really affecting the way that large players like Nickel tend to want to plan their operations out?

Johnna Muinonen: Yes, I mean I think, I think definitely we’ll see obviously a short term drop in consumer demand: people aren’t shopping. I think I’ve seen some graphs which shows just the hugely dramatic drop in people’s buying and people shopping, which absolutely will have an impact.

The stainless steel market – most Nickel produced today goes directly into stainless steel. That stainless steel is generally used for infrastructure projects and things along those lines. So one of the things that I think will be interesting to see is, in terms of government infrastructure spending and stimulus packages, how will that really impact the Nickel market and the economy moving forward? , Nickel in the ramp up in 2007, most Nickel came out of the consumer goods space just because of the price of Nickel went up to USD$25lbs and it became too expensive.

So when we look at consumer buying – for sure – that will impact the demand on Nickel. However, I think I’m kind of interested to see what happens once we get out of this initial covid crisis, a month or two from now when governments really want to stimulate their economy. I think they’ve already talked about stimulation in China, and China has sort of come out of the initial covid lockdown and they’re starting to see manufacturing again. I think that would really help Nickel on the stainless steel side. And I think that could be a real positive as we move into Q3/20, Q4/20 this year and maybe into next year. And I think on top of that, the whole lithium battery growth sector and in the EV market and energy storage market on the battery side of things, I still think it’s a very exciting place coming forward.

And I also think that some of the interesting things that people have seen with this slowdown is really the improvement in the environment in cities; in the improvement in pollution and smog without all of the internal combustion engines driving around. So once we come out of that, I think people might look at how to do things differently, and potentially that could speed up that demand for electric vehicles as well as the demand for batteries.

Matthew Gordon: I love that argument. I think that’s so true. I think that’s so true. I think people will behave, think, act differently after this, because it’s going to affect people psychologically. We haven’t had anything like this since the Second World War: we haven’t been held captive, we haven’t been worried about food, toilet roll – had to throw that in there. Energy, seeing friends, all of all of those things you take for granted. And yes, some of the benefits, the main beneficiary here is the fact that the world is possibly a little bit cleaner as a result; we’re seeing rivers and waterways, the Thames included making a huge recovery there. So it is fascinating. I like that argument. Probably worth exploring more. But there’s, we want to talk about you today.

So given that world, that picture that you have painted for us, we have spoken to a lot of Nickel companies recently, they’ve all been telling us they are a top 10 Nickel company, definitely a top 10 at this, that or the other. How are you positioning yourself? Because you talked about the completion of the Feasibility Study in the last year, which is great. You have talked about having conversations in the past and obviously you’re working with Waterton there. So what are you doing? And I guess, what’s been happening since we spoke to advance things  with Dumont?

Johnna Muinonen: Okay, there’s a couple of different questions in there; we can get to all of them. So I’m going to start looking at competition; how are we differentiating ourselves? Like you said, you’ve been talking to lots of Nickel companies with the sort of run up in Nickel there, and a bit of some tailwinds behind Nickel. We’re seeing more and more Nickel companies, or companies that were focusing on other things, now looking at their new Nickel assets.

For us, I think we have quite a few strengths, specifically around Dumont. One jurisdiction – we are in the active mining region of Quebec. We have an educated and experienced regional workforce for both construction and operation of the project. The project has amazing infrastructure. We have water, we have rail, a rail line that’s on the property. We have an all-weather highway right beside the property. And we have very competitively priced green hydro-power which is located 8kms away from the project. So that piece, that allows us to be structurally low cost just because we’re in the right region.

Our timeline to construction; I talked a little bit earlier there where I gave it a little bit of a blurb, the overview of Dumont, we are both federally and provincially permitted. We have a recently completed Feasibility Study and with those pieces we are ready to start construction. So for investors that are looking to hit the next step, sitting in the Nickel cycle, we are perfectly positioned for them.

The asset itself is a large scale, long-life assets.  I’ve previously spoken about the Nickel market and how volatile it is. Dumont is a 30-year project that on average will produce 39,000t of Nickel annually. The long life of Dumont really allows investors increased certainty about hitting several price cycles over the life of project and maximizing their return. If you’ve got a 5 to 10 year Nickel project, you can theoretically build it and miss the price cycle at the time where you need it to pay back your investors. That 30 year life, and then plus upside after that, that really, I think, adds something to our story versus other stories.

And then finally, I think one thing that we don’t talk about enough that I’d like to start talking about with Dumont is really the green side of things. So not only will Dumont produce Nickel and Cobalt to supply the low-carbon energy storage industry it’s also a very low-carbon footprint project. 100% of our electricity is hydro sourced, and we actually increased the electrification of the project in the updated Feasibility Study to include trolley assist for our haul trucks. What that does is actually reduce our diesel consumption by over 500M litres over the life of the project, or by almost a third – this gives us the advantage. So when we’re talking to potential investors, many of these investors, especially those based in Europe have carbon footprint ESG requirements for some investments. So I really think that that helps us and that is definitely something that we can take and we can bring to the table over other projects.

Matthew Gordon: Now that stuck out: when you were talking about green hydro-power, I was going to ask you, it’s not something we’ve talked about before. We’ve looked at projects which are battery related, and you talk about, how do you get a truly end-to-end green solution here. And we’ve talked about, at the back end here, there’s a fantastic Australian company called Neo Metals, which is doing a battery recycling project, which is getting back a huge percentage of the commodities which have gone into the batteries and then recycling and reusing them. And we like that, but no one’s really talked about the front end, which is as you say, all of that diesel and that dirty power that’s used for mining, and the way that miners behave. Their ESG is not usually up to scratch. It is interesting that you’ve thought about that. And I agree, we’ve got some pretty big funds here in London who have pretty much changed their rationale for investing based on that. So I like that, that’s fascinating. Fascinating.

Johnna Muinonen:  Yes, I know, and actually, one of the pieces of work that we’re talking about right now is looking at, we had to quantify our greenhouse gas emissions from the project for our environmental permitting process, through  the province. However, looking at that life-cycle of including all of our reagents that we have to buy, including the transportation of those to site, as well as the fact that both our tailings and our waste rocks have the ability to sequester carbon passively, we are looking at trying to quantify the whole picture so that we have that for our potential investors. Because I do think moving forward that is just going to be a very important piece that we can bring to the table for various investors that are much more ESG focused today than they were five years ago.

Matthew Gordon: Well, let’s talk about that, and you’re going to need some point of differentiator, because according to a lot of companies we’re talking to, they’ve got fantastic projects as well. I don’t think they’re anywhere near as advanced as you, in all honesty. But nevertheless they’re going to be talking to the same people as you. So can you give us an idea of timing? Because again, you talked about being able to hit the cycle at the right time, being able to insert yourself to benefit from an uptake in price, et cetera. Where are you with regards to the conversations and the timing for actually monetising this? I’m not going to ask you too much about monetisation because I know you’re not going to tell us anything. You’re not going to give anything away there, but what are those conversations like? Let me put it like that as opposed to where are you with them?

Johnna Muinonen: Yes, no, absolutely. I mean, I think it’s been an interesting time in the last six to eight months, right up until PDAC in early March, we were seeing some significant positive overall market signs that definitely had us considering a much more focused marketing approach for 2020. And including that when we look at, and I want to be clear, I’m not talking about conversations specifically with us, but when we look at some of the major mining companies around the world, they’ve been publicly stating a shift of focus, and now are publicly stating that they want to look at Nickel sulphide resources, and they want to look to add those to their portfolios, or they’re looking at funding additional Nickel exploration projects.

I think in general, in the fall and early in the winter, Nickel was definitely starting to get some tailwinds. And while the short-term market is going to be a bit soft, many were starting to look at the medium and longer-term knowing that there’s a timeline to get these things into construction, to get them into production. And as we’ve indicated, as we said, we’re definitely further ahead than most Nickel companies. So when companies are looking at the space of Nickel juniors and Nickel projects, having one with a Feasibility Study, having one that’s fully permitted definitely ticks many boxes, more so than some of the projects that are earlier stage where they’re still drilling or looking to get into just starting either a PEA or a pre-Feasibility Study.

Also I think, some of them, I think for the last, earlier in the fall and early mid last year, people were still deciding how they want to divest in the battery space. I think there’s a lot of ways that people talk about the battery space. People are very excited about it. However, how do you want to invest in it? Are you looking at Lithium? Are you looking at Nickel? Are you looking at Cobalt or Copper? And I think, over the last six to nine months, we’ve really seen a couple of things: one is that almost all battery chemistries, especially for electric vehicles are trending towards more and more Nickel. As well as, when you look at major mining companies, most of them are very familiar with operating base metal assets such as Copper, such as Nickel as opposed to say, Lithium. So in terms of major mining companies that are looking around, Nickel would be familiar and in the real house.

So one of the main drivers for the timing for us to update the Dumont Feasibility Study was really around being able to come into what we saw as an upcoming bull market for Nickel with a current technical report so that we could go out and really start to market again. Now obviously, I think the COVID-19 pandemic has slowed everything down in the short term, but I really do feel confident that once we get through this I think we’re going to regain the momentum that we were seeing in the Nickel market that we saw earlier this year and late last year. The fundamentals remain strong, and the world does need more Nickel. Dumont is well positioned to weather the storm without any near-term financing requirements so then we will be well positioned to be able to emerge from the current economic crisis: the covid pandemic. We will be ready to hit the ground running when the markets return.

Matthew Gordon: Okay. I know you’re fully-financed. I know you don’t need to, although quite frankly you could these days, because I think the Gold business is throwing off so much cash at the moment, there’s no reliance to go and ask Paul for more money. You’re fully financed to take you through to…what? Until when?

Johnna Muinonen: Yes. So, I mean, I’ve talked about this a little bit before; we own 28% of Dumont. Dumont is 100% owned within the JV that we have with Waterton. And the financing for the Dumont work is contained within that JV. As part of the initial agreement back in 2017, the RMCs portion of that funding was provided by Waterton in a segregated account. We are well-financed to complete the work that we’ve planned for 2020. And then if things continue to slow, we are able to hold the project for another several years without any additional financing. And that includes maintaining the project team and all the brain trusts that sort of has worked for the last 10 to 12-years on Dumont so that we don’t have to lose that as we move forward. So in the medium to mid-term, there is no requirement for RNC to have to provide any additional financing.

Matthew Gordon: I think that’s interesting. Again, a lot of the juniors that we’ve been talking to have been cognisant of saying, we’re running out of cash but we can’t lose the, I think you just called them the brain trusts; the people with the knowledge here, because if we have to lay them off, we’re not sure to get them back on. It’s a real concern, for sure. Can we just finish off? Can you remind me of what were the highlights from the Feasibility Study with regards to the numbers -in terms of cost, returns, scale, et cetera?

Johnna Muinonen: Yes, absolutely. So we completed the Feasibility Study last year. It has an NPV8 of USD$920M, just over a 15% rate of return, 15.4% rate of return. We have an All in Sustaining Costs of less than USD$4lbs. The project itself will produce an average of, it’s a two-phase project approach. The initial phase, which is the first seven years will produce an average of 33,000t of Nickel per year and that will be expanding to 50,000t per Nickel annually after that for the next sort of, for the first 20-years. Overall the project itself is a 30-year life project. And the free cash flow once we’re an operation over the life of the project is around USD$200M per year.

Matthew Gordon: Wow. Okay. And what are you going to need to raise? I missed that number.

Johnna Muinonen: And the initial capital is USD$1Bn.

Matthew Gordon: Okay. So it’s not big by Nickel terms.

Johnna Muinonen: It’s not big by Nickel terms. I mean it’s very much, if we look at even by sort of larger scale Gold operations, if you look where we are operating in the Abitibi, it’s USD$1Bn to build a 50,000t per day plant. You look at Malartic, which is about 60kms south of us, it’s the large Gold mine that was built in 2009 for about USD$850M. If you look at Detour Gold, which is on the other side of the border from us in Ontario, again, that was more remote and needed a camp. However, it needed more power infrastructure, however, that was built for about USD$1.2Bn, USD$1.3Bn for about the same size mill.

So roughly within the area that we’re operating, we have people that are experienced in how to build these large mills, and recently. That is one of the biggest advantages with where the project is located. We get to take advantage of all of that experience.

Matthew Gordon: That’s fantastic. Well, Johnna, thanks very much for the update, and please stay in touch with us. Obviously, as we move through and sort of work out when we can get back to some sense of normality, or some semblance of normality, should I say, it would be good to sort of see how you’re getting on with regards to conversations in the market place, and can you move this forward. I mean, you are the most advanced Nickel company that we’ve spoken to, so I guess people are paying attention to you.

Johnna Muinonen: Yes, I mean I think right now we’re seeing a bit of a lull on the market side, but I do want to be clear that we’re actively working on items to move the project forward internally. So we’ve got a few things that we’re looking at this year. We have, since we last spoke, we did approve the 2020 work plan and that work plan really focuses on sort of three different things. One is maintaining our shovel-ready status. So that’s one thing we’re very proud of in terms of, we have permitting, we are ready to go into detailed engineering. With the completion of the 2019 Feasibility Study, we need to update some of our documents, which includes things like the closure plan, which is a critical element in finalising the mining lease and that goes towards maintaining our shovel-ready status. And also, we need to be able to communicate with all of our stakeholders what the results of the 2019 Feasibility Study were. That includes shareholders and obviously, we were on your show a couple of times, as well as just the local community, local governments, provincial governments. So we’ve been starting that and we’re going to work, continue to work through that in the next six months.

So we’ve been working on things like that where really we can take advantage of the time now to really reduce any sort of schedule or cost risk to the construction phase. And terms of, the Feasibility identified several opportunities to add value to the project so we are looking at several of those items, and we’re going to be looking at how we can add more information, add data, and bring some of those opportunities closer to fruition over the next few months.

Matthew Gordon: Fantastic. You sound as pumped up as Paul was when I last spoke to him. But what are you guys drinking?

Johnna Muinonen: We are pretty excited about the Nickel market in general. I mean, I think we need to get through this current period, but I think long-term, the fundamentals are good. I know I’m a Nickel bull but, definitely, definitely I think it’s an opportunity that Dumont has been waiting for in terms of the market, having one of the few Nickel projects that is able to be delivered and built in short order. Being able to take advantage of that. I think when we look at the world, there just hasn’t been enough exploration in Nickel over the last 10-years. So we’re able to really differentiate ourselves between us and other Nickel companies just because we do have a project that has a Feasibility Study, that is fully permitted, and we are ready go into engineering, detailed engineering and construction.

Matthew Gordon: You’re excited. I’m excited for you because I don’t think the market is giving you a credit for the Nickel component. I think that it’s all valued on what’s happening with the Gold. If you can move this thing forward this year, I hope you can, I’m referring to COVID-19, nothing else. If the market does recover and you are able to demonstrate to us and your shareholders exactly what it is worth, it’d be nice to see. I’m sure you’ll be delighted. I’m sure Paul will be delighted. We wish you will wish well with that.

Johnna Muinonen:  Thank you so much, Matt, thank you very much for having me on. It was good to catch up with you again.

Matthew Gordon: Beautiful. Speak to you soon.

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

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RNC Minerals (TSX:RNX) – Right back to where it should have been (Transcript)

The RNC Minerals Company Logo.
RNC Minerals
  • TSX: RNX
  • Shares Outstanding: 608M
  • Share price C$0.34 (06.04.2020)
  • Market Cap: C$207M

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

COVID-19 has affected stock markets across the land. Very few have managed to emerge unscathed, and even the historic safe haven of gold investment has been hit, though the gold price has now recovered nicely and quantitative easing should drive it even hire.

So, RNC Minerals. An amazing operational turnaround in 2019 was lacking one thing: share price growth. RNC Minerals appeared on the cusp of growth, especially given the exciting exploration and optimisation plans in its 2020 guidance, but COVID-19 has heavily impacted the share price. Investor sentiment is low, and patient investors in RNC Minerals have been left feeling frustrated.

However, in this passionate interview, Huet cuts through the COVID-19 crisis, and explains in detail why RNC Minerals could still be a fantastic bet for investors. RNC Minerals released its Q4/19 results last week, and Huet was keen to emphasise the significance of them. What are the headlines?

• Gold Production: 26,874oz
• Adjusted Earnings: C$14M
• 2H/19 AISC Guidance BEATEN
• NO CHANGE to 2020 Guidance

The operational figures are mightily impressive; there is no way of getting away from that. However, the most encouraging fact of all for investors is that there is NO CHANGE to the 2020 guidance, despite the coronavirus outbreak. This is the clearest indication yet that RNC Minerals currently appears to be available at a steep discount on its true value.

Huet unpacked some of the results for us to provide further reasons to believe. RNC Minerals’ 2H/19 gold production figure of 51,090oz comfortably exceeds its own guidance (42,000-49,000oz). The Q4/19 AISC also defeated expectations: US$1,131, a 12% reduction of 1H/19. The company has reiterated the position in its 2020 guidance: 90,000-95,000oz gold in 2020 at an AISC ≈US$1000/oz, provided COVID-19 has no adverse impact on the company. It will be interesting to see how an ore sorter can further transform these economics and act as a catalyst.

Adjusted earnings of C$13.7M FOR Q4/19 are particularly impressive, especially when you consider the full-year earnings for 2019 are only C$15.9M. RNC Minerals managed to reinforce its balance sheet in 2019, holding a strong cash position of US$34.7 million, net of a US$3 million debt repayment, and working capital of US$26.5 million.

The real promise of share price explosion comes from exploration at the HGO open-pit production pipeline. Recent drilling has created mine life extensions of the Baloo and Fairplay North open pits. RNC Minerals has identified a number of areas at HGO for further exploration: the Aquarius Project, a newly interpreted 5km structure north of Trident, as well as potential open-pit expansions to both the Mousehollow and Hidden Secret projects.

In addition to optimising its Higginsville Mill, RNC Minerals is considering its royalty arrangement with Maverix Metals at Beta Hunt, which stands at 6% on gold and 1.5% on nickel. We have no doubt Huet will deal with this in due course and in the right manner.

RNC Minerals also filed the technical report for the maiden gold mineral reserve at Beta Hunt of 306,000 ounces (3.4 Mt at an average grade of 2.8 g/t) and has produced a revised feasibility study on the Dumont Nickel-Cobalt Project. RNC Minerals’ corporate strategy and business model looks strong. Huet’s leadership thus far has been equally strong. The company is moving into a clear growth phase, and there is very little to make us doubt they will deliver. Right now, a share price of c. C$0.30 looks like the market has lost its mind, and when that happens, its time for investors to think about acting.

We Discuss:

3:28 – 4th Quarter Numbers: What’s Been Achieved?
4:44 – 4 Areas of Advancing the Business: What’s Been Done so Far and What is Being Planned for the Future?
10:20 – Morgan Stanley Royalty: 5 New Exploration Targets; What Does That Mean for Investors?
14:28 – Stockpiling and Discussing the Ore Sorter
20:08 – Maverix: What’s Been Happening?
22:31 – Marketing at Present: Reaching Investors Through Digital Means
27:03 – Raises in 2020 and Purpose for the Money

CLICK HERE to watch the full interview.

Matthew Gordon: Hey Paul, how are you doing sir?

Paul Huet: Hey Matt, how are you?

Matthew Gordon: Not bad, not bad. You are holed up at the house with the kids and the wife?

Paul Huet: Yes. So look,  it’s no surprise, I’ve been saying this for a long time. I’ve got a beautiful wife and 6 children, so you can imagine it’s a little stir crazy in the house, but we’re certainly getting through it and following the guidance from our leaders to make sure that we stay home and do our best to prevent any of this spread. But you can appreciate those young ones – they feel like there are bars on their rooms here, so they’re ready like Mike Tyson to fight their way out.

Matthew Gordon: Well, I know, I know. We’ve got them all at home as well, and with animals to boot, but we will get through this. Look, thanks for the call. We were really pleased to see your  Q4 numbers come out. And, you know, I’d like to talk to you about some of those numbers because I keep saying to people, this is one of the turnaround stories of last year. You know, when you kind of joined as CEO in, was it May/June last year? And also, I’d like to talk about what 2020 looks like if you don’t mind. If you can give us some idea of what the plan is, what the targets will be and what you’re hoping to achieve? So, but let’s kick off with the Q4 numbers – so you have got to be pleased?

Paul Huet: Yes, look, it’s hard not to be pleased. In fact, on several metrics we did slightly better than we had anticipated. And I think the thing to remember here, Matt, is that a lot of these things that we’re doing are first time; it’s the first time the company has its own mill. It’s the first time the company ever put out guidance. It’s the first time we’re held accountable to numbers. You know, let’s just talk about our guidance: we outperformed our high-end guidance by 2,000oz, coming in at 51,000oz. A lot of these metrics that are normal for everyone where you seem to just go, well yes, well they should be doing, it’s normal, they are big steps because the company had never done it; putting together budgets, mill availabilities. You know, our mill came up significantly by almost 4%. So on metric after metric after metric, all these things together, they pay off. And look, the best report card we have is the Gold bars at the end of the stream and the cash in the bank. So nobody can deny cash in the bank and the Gold bars.

Matthew Gordon: But you’ve always talked about the 4 areas of business that you would look at. Now, clearly you’ve got to cut costs, and have you been doing that? I mean, how have you been doing that? What are the things that are working for you on just on that first one?

Paul Huet: Yes, and thanks for asking that question because I’ll tell you; what we look at is really – are our efforts working? Are the things we’re doing and our plans coming together as anticipated? And in our situation, we were very clear on identifying four main areas that we believed could cut our All In Sustaining Cost (AISC) and get us to that target. We’re targeting USD$1,000 an ounce, which we will get to. So when you think about those four things, one of them was G&A; we realised G&A where it’s maybe at about USD$160 an ounce. There’s a lot of room for improvement and we have been working on that. We’ve been making some tremendous changes internally:  we’ve reduced the office significantly. That’s an area where we’ve made some huge changes. We talk about people; you can never underestimate the people. So we’ve repeated some of the metrics, but they’re worth mentioning, if you talk about putting the right people in place.

When I joined, you had two new GMs come, we brought in them guys and they had a network; they brought in about 87 people, and let me tell you something, how that is impacting us so much today. We talked about how our head over rate dropped from 87% down to around 16% to 18%, but one thing we didn’t mention when we were talking about that is the circle, or that network that these guys brought in, most of them were local. Graham was born in Norseman, which is just South of our operations. Those people that followed Graham were around the communities. So how does that help us today? We didn’t anticipate that before, it was reducing our costs because – fly-in, fly-out. We have a lot less people flying in, flying out. We are able to sustain and keep our operations, our mill running, our doors running because we don’t have such fly-in, fly-out, and the government is imposing a lot of strict metrics.

But by having Graham, we’ve said from day one, putting in the right team matters, and we’re seeing it matter so much today. It has helped us; our productivity rates have increased by 30% in the mine. Our efficiencies in the mill have come up from 93% all the way up to 97%. So look, every little step matters. These little thing matters and they add to the bottom line. I couldn’t be prouder.

Look, we said we’d focus on two areas – we said G&A people, top 20 vendors. We have been working long and hard with our top 20 vendors – that is paying off. We’re only able to do this because we’ve turned this ship around. These things are only able to be done because we now have consistent cash flow. We have a balance sheet, we have a strong team; none of these things would have been possible had we not done all the steps and turned this company around.

The last thing we said we were going to focus on was Royalties. So those were our 4 picks. And what’s the best report card? Well look at what happened with Morgan Stanley; we’ve taken a Royalty that had been in place for almost 20-years, Matt. We’ve taken a Royalty that was 7%, down to 2% – what a change. We can’t ask for better results. This is phenomenal. We have since unlocked 5, not 1, not 2, five, 5. Five new areas. I’ve never seen something so aggressive, so exciting in such a short time.

So when you think of those 4 things, what’s the report card? The trend, look at it. We started here, Matt, first half of the year, over USD$1,300 an ounce. Our first quarter running the mill, not all alone, we had to do some toll-milling in Q3, we dropped it to USD$1,183. The second quarter that we have full production on our own, we dropped another USD$50 an ounce. And look, don’t ever underestimate what those bushfires and everything else did, we were doing this while we were dealing with a global catastrophe, ahead of this Covid-19. So hats off to the team here. I can’t be prouder to serve as CEO of this company. These guys are doing a good job and it is flowing into our numbers, into our reduction in costs, achieving our production. There’s a disconnect in the share price, but not a better buying opportunity. You’re going to find around anywhere.

Matthew Gordon: Well, that’s a very passionate riposte to the 2019 figures, I mean, the 2019 figures. I mean, genuinely I’m impressed with the turnaround bit, but I think, and I’ve not made a secret of that in the marketplace, I’ve been telling people that this was phenomenal. What you’ve done from the base you started with, to what you’ve done is phenomenal. I am interested though, because you have got to keep it going. You can’t rest on your laurels. I don’t for one second think you will ,because if you are as passionate with your staff as you are with this interview, I think that they know what you want out of this, which is to continue driving those costs down.

So can I just talk about…so Morgan Stanley – you’ve talked about how you’ve identified 5 exploration targets. What does that actually mean? So people are watching this and go, well, great, 5 exploration targets, but what is that actually going to convert into in terms of value to them or for you?

Paul Huet: So let’s break it down. All right, those five, let’s talk about the geophysics first. So if you look at the history of this asset, our mill, that mill was built for the Trident mine. The Trident deposit is right at the plant. It produced 1Moz, and based off memory, somebody would fact check this, but I’m certain it’s 9 to 10g/t. Somebody could fact check that for me, but 9 to 10g/t: 1Moz. After we renegotiated the Morgan Stanley Royalty, we spend approximately USD$100,000s on geophysics just North of where the plant was built. We discover a brand new trend 5kms in strike. This is a brand new, not one drill hole, this is completely virgin territory, wide open, but you can clearly see it in the geophysics; there is a structure there that resembles why that plant was built. So that’s one target and that’s for the future.

Now let’s talk, let’s bring home some stuff that are even closer to us. After renegotiating Morgan Stanley, we have some drill holes in Fairplay. We’re already mining Fairplay. How does that transfer into our people? When we had the bushfires in December and November, and we were dealing with that, we were very fortunate that our team was proactive getting reagents, and we also had a stockpile. When we bought the plant we had a stock pile, we burned it up. So what does Fairplay do? It adds another source. We’re not reliant on only two sources, today you have Baloo, Fairplay and Beta hunt. Those stockpiles that we had to burn up during the fire seasons are being replenished. We’re actually building the stuff out today. We have north of 45,000 tonnes now. That is extremely good, considering we don’t know the outcome of the future. None of us can predict what’s going to happen.

We’re really pleased that the Australian government have been good about mining, not shutting anything down, but having that stockpile surely will help us to get through anything, or overcome some of the things we have to do. So we’ve got a 5km strike, new geophysics, we’ve got Fairplay. We’re actually mining it. And you know, this Royalty has only been less than 3-months and we are already mining it in the area. The other two are pipelines that will be mined into our mine. They’re actually, we’ve just built a new mine plan at Higginsville, or Western Australia – the whole district. These assets or projects: Mouse Hollow and Hidden Secret are now part of our pipeline, and they’re actually closer to the plant than Baloo. So it’s a very exciting pipeline. And the other one is Aquarius, it’s an underground target. We announced some of the intercepts over 600g/t over 200m, 250g/t over 1.9m. Extremely high grade, narrow vein, exactly what I’ve done my whole career. How much more exciting can that be for us? This is a pipeline of stuff that we have directly on our back door within a 50km radius of our mill. And before I step off that, the paleo channels, I know I didn’t talk a lot about it, but those are also an area where we’re targeting, so unlocking that Royalty, removed handcuffs in a district that had been in jail for almost two decades too.

Matthew Gordon: Okay, so let me just…a lot of things there: Higginsville – you’ve already said the productivity is from was 93%, 94% up to 97%. Great news. Okay. But with these stockpiles, how quickly can you replenish, or get back to where you were or what are your plans of, you know, how big do you build that stockpile whilst you’re doing everything else you need for prevention of any future catastrophe?

Paul Huet: So look, Matt, having a stockpile is very proactive in giving ourselves much needed insurance. The way to look at a stockpile is, these guys are being proactive and it’s insurance, but the size of the stockpile depends on the throughput. And in our case, having an 80,000t to 100,000t stockpile is very beneficial because that’s about two and a half months of runway. With that being said though, we wouldn’t want to generate a stockpile of two to 300,000t, our next step should be, well, why don’t you put it through the mill. And it’ll flow into what I wanted to talk to you about; it’s the Oris orders. We had a team on the ground. They were there, they were working on it. We did the initial test results. Unfortunately because of the pandemic, they had to leave the site, but we did get some initial results. Initially we’re seeing anywhere from screening or scalping off 20% to 30%. That’s a big difference. Think of anytime, if you’re going to haul from any of our sources, it’s, you know, once we get this completed, if we can scalp off 20% of the tons instead of moving 100,000t at USD$7 a ton, running it through the mill at USD$$29 a ton, you’re going to do 80,000t instead of 100,000t, but get the same amount of ounces, well then you’re really doing something smart here.

So I know it’s early. We didn’t complete the work, but we had started, we were excited about the initial results. It appears positive. Once we’re allowed and when we’re permitted, we will really step that up and follow through with it.

So back to your question, your question about stockpile, what’s the rate? In our case, 80,000t to 100,000t gives us that insurance that we want, that flexibility, so that if anything happens, we need to anticipate, and our risk register, obviously we have a number one risk which is potentially getting shut down by the government. We could potentially run the mill alone because you could run that plant with six or seven people in way different areas. So the a social distance would be simple. We’re anticipating the worst. Preparing for the worst, hoping for the best. Putting in these insurances will help us so that we wouldn’t have to deplete our cash. You know, we’re in a very unique position that, let’s face it, not a lot of juniors have the cash that we have. We ended the year strong. We were actually ready for this. None of us knew this was coming, there was nobody in the world. I’m 51 years old, I’ve never seen anything like it. You talk to somebody who is 80 years old, they’ve never seen anything like it. We were ready. We’re blessed that we have a strong balance sheet. We can get through this, we will get through this. Putting the stockpile just gives us that much more strength. Not having to burn up cash and making sure we’ve delivered.

We haven’t even changed our guidance. I’m looking, every day you look at any press release out there – everybody is changing their guidance because things are evolving. They’re so fluid. And that might happen to us. I’m not saying it’s not, don’t get me wrong here, but we haven’t yet. And that’s a reflection again on Graham, the team, us being prepared, readiness, having reagents there, having people that are local instead of fly-in, fly-out. So we’re running with about 80% of our people here that are being brought, taking care of the mill. We were the first company to hire a nurse to put her on staff at the airport, making sure people don’t come in with it. If anyone had anyone had any symptoms, we made sure we quarantine them. We are taking so many steps to be so proactive that help make sure we get through this, the health and safety of our employees, and that it doesn’t disrupt our business plan and it doesn’t harm us internally. So there’s a lot of things here that we’re doing to tick the boxes to make sure that that guidance remains in place and that we deliver.

We’re known for one thing; we could do a hundred things right, and then if we make one mistake, people won’t forget. We’re doing everything we can to prevent that and to be as proactive as we can, anticipate as much as we can. And we have a reputation of delivering. It won’t change in this company. That reputation I’ve had in my career will not change in RMC.

Matthew Gordon: Okay. I don’t doubt that, and again, you know, I’m hearing you loud and clear. I think there’s a lot of things that you said there which probably need, you know, exploring. And I know you’ve got to go, but you know, if you get a chance with your communications to clarify, what does going from 93%, 94% up to 97% mean in terms of dollar terms for you through the mill, when will you know – I know you’ve done some initial testing with the ore-sorter, 20% is big for you, 30% is obviously bigger. What does that mean for you in terms of throughput? in terms of reducing the AISC even further? You know, all these sorts of numbers. We as investors would like to understand what the impact is going to be on the bottom line.

But I think given, given the timeline, I want to finish off with a big question for you if I may, which is, you have seen the benefit of the negotiations with Morgan Stanley hitting your numbers in Q1/20. You have been in conversation with Maverix, but it’s all quiet on the western front there. What’s happening? When will we know? And you know, when do you think we can start to see the benefits of that? Because they, I mean the Royalty that they have is, it’s one of the biggest in the world. I mean it’s, I’ve not seen a number like it. You obviously have entered discussions presumably to reduce that or come to as a different set of terms; have you gone anywhere?

Paul Huet: Yes, so let me just start by saying we’re not oblivious to it. We know that it’s a very large Royalty. We get that. We get that it’s our responsibility to do our very best to renegotiate this in some form or another. We have to be tactful in this situation where it has to be mutually beneficial for both companies. There has to be a plan. These things, this is not specific RNC, people do this. There are royalty companies that renegotiate things all the time. We are looking for solutions that are mutually beneficial to both companies. We haven’t gotten there yet, but we’re still in discussions, and that needs to progress. We need to continue on that path. Do I expect similar results to what we had with Morgan Stanley? No, I don’t. For someone to think, well he’s going to go from 7% down to 2%, we have about a 7.5% rate now. And I’m not disclosing anything that everybody doesn’t know. People know it’s 7.5%, 6% plus 1.5%. It is big. We let go to 2% like Morgan Stanley, I’ve never ever said that. I don’t expect it to do that. I expect it can get a lot better than where it is today. And I’ll just close it there, Matt, because it is something that’s very important to us. I know it’s important to them as well, and I’m hopeful that we will find a mutually beneficial solution for both companies.

Matthew Gordon: Let’s finish up here, the world has slightly changed in the last few weeks. A lot of the conferences that you were going to go to and continue your marketing around the world, you know, they’re not happening. I think a lot more people are going online and I

think you’ll probably be doing a lot more marketing online with people like us. Which obviously is a real change, but I think for the mining sector as a whole, because there’s not some traditionally, you know, big marketing sector or vertical. How are you going to be able to reach the institutional investors the way that you used to without traveling around? Because we have talked in the past about trying to get that balance between retail and institutional investment into the company. How’s that going? Are you finding yourself restricted in any way?

Paul Huet: Yes. So let’s just look at some of the actuals; so I was looking at a report here just before the board meeting, we have actually added 15 new institutional names to our story. That’s pretty significant. 15 new institutions that were not shareholders before we started this turnaround. How do we meet them? It is very important that we, if I’m asking my people, Graham and everyone in Australia to go to work every day and be healthy and be safe, and I have to be willing as a CEO to serve them as well, and step out of my comfort zone and do whatever that is I have to do. Whether it’s pick up the phone and get on a video call. If that’s what we need to do, then by God we will do it. We are going to take those steps. We are going to think differently.

We’re coming up on a call here on April 1st, we will set up one-on-one meetings with people virtually. If people don’t have that ability, we’ll set up calls. We will not sit on our hands while we ask our other members of our team to go in there day in, day out and mine this ore and put it through the plant.

So for us, we just need to think differently, stay healthy. We can’t be arrogant and then get out there and get sick. None of us, me getting sick or any one of my executives getting sick is not a really good solution. So we’ve got to stay out and think differently. And we already are. You know, my senior vice president of corporate development and investor relations, he was on the call talking about several metrics of video conferencing, things we’re already doing and we’re going to be doing different.

Look, we just announced here last week, 2 of our research analysts have us in their top 3 picks of the year. So for 2020, one of them I think, I believe we’re number 1 pit for the year. The other one just announced a couple of days ago that were in their top 3 choices of Gold turnaround stories for the year.

We owe it to our shareholders to continue this story to continue, to deliver it, to continue to think differently, challenge ourselves, work outside of the box. Our share price will follow. You don’t have success operationally with people with ending Gold bars, ending treasury without that share price following at some point. There’s a disconnect today. It won’t be there forever. We will be rewarded for those long hours, the sacrifices and the efforts we put forward.

Matthew Gordon: Okay. You’ve been building up your, this is the final one, honestly, this time – you’ve been building up-

Paul Huet: You keep saying that.

Matthew Gordon: . I know, I know. I’m so bad.

Paul Huet: You’ve lost a lot of credibility.

Matthew Gordon: I’m the worst. I’m the worst. You have been building up your cash position. You have been producing free cash flow. I mean, that’s what I’m excited about for you guys, because you’ve said to me somewhere in this conversation, your guidance for 2020 is not being adjusted for bushfires, for Covid, for any reason. You haven’t taken the opportunity to say, I’m going to reduce my guidance here because you feel that you can deliver and continue to deliver consistently. That’s what I’ve heard. So that says to me, your free cash flow will continue to happen. You will continue to build a cash reserve, and that’s going to give you optionality to do some things. So I’ve got to ask two questions: one, are you going to be raising any money this year? To your knowledge today, is that in your thinking at the moment?

Paul Huet: Absolutely not. We have no reason to be raising money, and giving up our paper at these levels – it’s really not a very wise decision for me at all.

Matthew Gordon: Okay. And what do you do with this cash? You’re building cash but cash is just cash. Cash which creates value is more exciting to shareholders. So today, do you have any plans for that cash?

Paul Huet: Yes, so organic growth is really, really directly in front of us. We have five new areas that we’ve discovered. We are going to be following up because we have cash, we are able to follow up on those expiration opportunities and we are certainly doing that. This pipeline; Aquarius, if that turns into an underground line that could be double or triple the average grade of the Beta Hunt underground deposits. That’s extremely exciting growth. That’s what I’ve done my whole career, Matt, my whole career, starting off as a miner in Timmins Ontario. I was drilling and blasting in those narrow veins so I know what it’s like. There’s tremendous opportunity in front of us and we have the flexibility and option to do something about it because of our cash position.

Matthew Gordon: Paul, thanks so much. I don’t know what time of the morning it is there, but you’re full of energy. I want whatever you’re drinking. Fantastic.

Paul Huet: Yes. Yes. That’s life in a house with six kids.

Matthew Gordon: You’ve probably been up for four hours. Well I hope you make it through this period that we’re in at the moment safely, with this pandemic that we’re all suffering. Great news about the company last year. Well done. I’m excited to see you keep delivering this year. Sounds like you’ve got some big things ahead of you. I hope they have an impact. I think, like a lot of people monitoring what on earth is keeping the share price down because there’s no reflection of the company that we’ve analysed and see in front of us. So keep it going.

Paul Huet: Before I sign off, I just wanted to say, I can’t remember the exact numbers so I won’t give a number, but I know that we are really pleased that our short position is almost like obsolete. It’s extremely, extremely low, which is very beneficial. And I don’t want to give you the exact numbers. Maybe you can research the market, one of my guys, but I know that they’ve been cut down to next to nothing. We looked at the top 30 short. We’re not even near anywhere near that, whereas before we would always be in the top 10. So in closing, RNC is in a different position. We’re very passionate about what we do. We’ll continue to deliver, we’ll make sure our people stay out there. And our shareholders, those that are with us that are continuing to buy, they will be rewarded. They’re not going to regret it. So onwards and upwards.

Matthew Gordon: Okay. Well thanks for your time and we’ll speak to you again. Cheers.

Paul Huet: Take care. Cheers.

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

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

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

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

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

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

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

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

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

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

Interview highlights:

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

Click here to watch the interview.


Paul Huet: Hey Matt, how are you?

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

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

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

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

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

Matthew Gordon: You have also been producing cash.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paul Huet: Yes.

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

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

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

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

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

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

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

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

Matthew Gordon: That’s the next question.

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

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

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

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

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

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

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

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

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

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

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

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


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

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

RNC Minerals (TSE: RNX) – Turn Around and Take a Bow

Several people stood against the backdrop of a chart. They are trying to push the line back up, and are succeeding towards the end by standing on each other's shoulders.
RNC MINERALS
  • TSE: RNX
  • Shares Outstanding: 606.32M
  • Share price CA$0.47 (15.01.2020)
  • Market Cap: CA$284.970M

What a year 2019 was for Paul Huet and RNC Minerals.  The implementation of a robust gold-focussed business plan delivering consistent production numbers and reducing costs has resulted in perhaps our turnaround story of the year. And just when the market needed to hear it.

A screenshot of the thumbnail of Paul Huet's interview with Crux Investor.
Paul has impressed in his recent interviews with us.

All Change

RNC Minerals today bears little resemblance to the vehicle that Huet walked in to as the CEO at the end of May last year. That’s not to say Huet hasn’t benefited from a good year for the gold price, he has. However, at the beginning of his reign RNC Minerals had just $1.3M in the bank. It ended the year with $37M, of which RNC paid down $3M of their debt to reduce interest payments.

This turnaround hasn’t been because of luck. As far as we have heard in our various interviews with Huet, this has been about giving clear direction to the market and restructuring the company to allow RNC to deliver his vision; now entirely focussed on gold (the fully-funded Dumont nickel project patiently waiting for more signs of recovery in the Nickel market); reducing expenditure in the right areas, but not to the detriment of long-term productivity (always a cheap and quick win that has long-term negative consequences); and better communication, both internally and to shareholders. “That wasn’t so hard, was it?” you can almost hear relieved shareholders saying.

A photo of large nuggets of gold on a muddy surface.
Gold, gold, gold: every investor’s dream.

RNC is producing gold and is, therefore, producing cash. They hit a record monthly consolidated gold production of 9,620 ounces for December 2019, undoubtedly aided by their acquisition of the HGO mine and mill. For Q4/19, production was an impressive 26,874 ounces. A complex, detailed overhaul of RNC’s production processes has likely been the primary driver behind this performance. The grade is a consistent 3g/t and occasional large coarse gold finds will always bring a sprinkle of magic the market so craves. Huet is playing down the ‘magic’ and is keeping employees and shareholders grounded and focused on doing the basic things well. This has been an encouraging start to the Huet era, but there is always more to be done. He needs to drive down the AISC, currently sitting around the $1,150 mark, further towards $1,000. If he can deliver this, we believe the market will react positively. In the meantime, the building up of cash reserves is a very welcome distraction.

RNC exceeded 2019 expectations only because of a late charge for the line. In the second half of 2019, gold production reached a total of 51,090oz, exceeding the top end of RNC’s own production guidance (42,000 – 49,000oz). While there have been ‘minor disruptions’ caused by Australia’s bushfires in December, the consequent regional road closures have had little impact on operations, because stockpiles and Baloo ore were processed during the road closure period. No impact is expected to Q1/20 results. RNC’s supply from Beta Hunt and the delivery of reagents to the mill has now been restored. In addition, its HGO mill is operating at full capacity with feed coming in from both Beta Hunt and HGO. Keeping the mill filled with its own ore is the number one priority. Talk of adding an ore sorter fills the chat rooms and we for one would welcome any news from the company on this front. Productivity can be greatly increased, and costs come down; it is typically a $2M-$5M outlay and is something that pays for itself in 6-12 months (that’s what we read). Let’s wait.

It really is all change at RNC, and this change is particularly evident at the top. There has been a key addition to the board, with the appointment of Chad Williams. Williams is Chairman of RedCloud Securities and presumably brings access to more institutional investors. This clearly suggests the company’s continued move to consolidate more shares into the hands of large institutional investors. Personally, we think this makes sense and will help bring more stability to what has been a very volatile stock, indeed, one that continues to be shorted, something else an increased institutional register can help with.

In light of this change, it would seem opportune moment for Huet to tell us what the remainder of RNC’s Board is bringing to the table.

RNC has been clear, including our recent interview, they will not be going to market to raise capital this year, it is completely off the agenda. There is no ambiguity here as far as we are concerned. There was the stumble on the investor call last year on this topic, so there are those who will keep bringing it up. My take at the time was that the money was needed and it would create financial freedom for RNC Minerals to make the fundamental changes to the infrastructure, people and simply pay suppliers. We haven’t changed our minds since then. It was important. The company was running on vapour.

It’s important to talk about Dumont. It remains on the books as a potentially huge upside given the right market conditions. The JV with Waterton has $3M and covers the overhead costs. How and when it is monetised is down to Johnna Muinenon. She is clearly bright, and they have done a lot of work, but it is the nickel market opening up that will inform her. We can’t see anything happening until 2H/19.

I look forward to the release of the 2020 guidance within the next few weeks, which Huet himself has said will include guidance and production targets (unlikely to include coarse gold targets), costs & savings, AISC target and hopefully talk of more renegotiated royalties. I guess we’ll just have to wait on that one!

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

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

Several people stood against the backdrop of a chart. They are trying to push the line back up, and are succeeding towards the end by standing on each other's shoulders.

IsoEnergy (Uranium) – NexGen’s Baby Brother Taking Baby Steps

It’s hard to not to like Craig Parry, CEO of IsoEnergy. He’s a laid back Australian with a laconic drawl, who has been living in Canada for long enough to consider it home. He cut his teeth in the uranium mining space on the Board of NexGen, one of the better junior Uranium stories in what has otherwise been a spectacularly depressed mining vertical for the last few years. We’ve spoken to Parry a few times about his plans to develop IsoEnergy (TSX: ISO). He claims his plan is simple. Drill holes in a target rich environment and work out what you’ve got. In fact he was keen to labour that point in our interview .

This potentially leaves investors struggling to work out how IsoEnergy is different from all the other junior uranium miners saying exactly the same thing, but we’re not sure Parry is particularly phased by that. The reason for this is that he has a huge institutional following, not least of all a c.50% equity stake by NexGen, who continue to follow their money. Retail shareholders represent about 15%, but don’t seem that interested. Chatrooms and forums are all quiet. We found one lone retail commentator who, a bit like us, was wondering where everybody was. The thing about most junior miners is that retail investors are very good at holding the company Directors to account and constant questioning of decision making. Looks like IsoEnergy shareholders, like a lot of Uranium shareholders, are exhausted. Good news for the management team, not so good for liquidity and volume of trading.

For those of you new to Uranium equities as an investment thesis, and to keep it simple, here is the Uranium Demand / Supply story in a nutshell. Currently, nuclear energy is commercially the cheapest, Zero carbon energy source on the planet (1), end of lifeNuclear reactors apart. There are billions and billions of dollars of new, longer life nuclear reactors being built, large and small, in multiple jurisdictions, and they will all need uranium products as the basis of that energy production. WATCH our interview with Mike Alkin who nicely summarises the macro story or indeed any of our interviews on our YouTube channel . The Supply side is relatively complicated. The two main suppliers to the market Camaco (Canada) and KazAtomProm (Kazakhstan) have the highest-grade and largest-resource available, and even they have had to reduce production as the spot price has been between $20-$25 for the past couple of years, so they are losing money mining for uranium. Most Uranium producers need $50-$60 to mine economically, and obviously would prefer prices even higher than that. As I said, the issues on the supply is multifaceted and the subject for another article. It’s a small, $10Bn, market but evokes high emotion.

As a commodity and as an equity Uranium has been stagnant since Fukushima Daiichi in 2011. We all know it, and until the buyers, the Utility companies, come back into the market for new material, rather than relying on their stockpiles, not much is going to change. This interesting to note, but none of this is relevant to IsoEnergy yet as it is nowhere near a producing asset. That is easily 5-10 years away. And as an investor this is important to note, because the management need to tell us if and how they are going to make shareholders money in the next 5-10 years.

We were keen to know where Parry sees IsoEnergy in the Uranium cycle and indeed if there is a business plan. Not sure we got much clarity on either point and maybe they just don’t want to comment on the cycle as they don’t actually know what they have yet. Fair enough. What I do have a problem with is not being able to clearly articulate a business plan. What are investors buying in to? What exactly is this quite senior Board of Executives, who are well paid, planning to do with the business? Are they setting themselves up as the exploration arm of NexGen; is NexGen viewing them as purely an equity investment which they will cash in on when the need is there or time is right; or has IsoEnergy got plans to acquire more land packages in and around the Athabasca basin. What is the strategy and who is going to deliver and fund all of the above?

IsoEnergy recently raised around CAD$6.7M, of which CA$3.5 was flow-through dollars to support exploration programs for the “next six months.” The remaining CAD$3.2M “hard dollars” was provided mainly (CAD$2.9M) by NexGen Energy, a sizeable Uranium Development company also based in Vancouver. Is that long enough for price discovery in the market? We don’t think so. Both companies share some of the same board members and NexGen holds about 50% of the IsoEnergy. IsoEnergy has managed to raise capital “relatively” easily says Parry, which is of some comfort especially of you look at the institutional holders of the stock: something many uranium juniors struggle with, but it’s now a matter of what they actually do with it.

IsoEnergy has options. We ask Parry what he is going to focus on. Parry is confident of the quality of the asset, and claims their upcoming “aggressive” drill program is likely to provide positive results, thus growing the company. IsoEnergy’s assets are based in a prolific uranium region, in a highly stable mining region, but is this doesn’t mean it is going to work. A lot of hard work need between now and then.

One thing is for sure Parry seems quite relaxed. We’re not sure how to read that, but that is all we have to go on for now. Not enough data to analyse or do meaningful diligence on. For us this is a watch and see scenario. IsoEnergy is lucky the institutions seem to be valuing their Board members from NexGen and the company’s Athabasca basin focus. It is certainly not based on the amount of data gathered.

  1. https://e360.yale.edu/features/why-nuclear-power-must-be-part-of-the-energy-solution-environmentalists-climate
  2. https://www.energy.gov/ne/articles/nuclear-power-most-reliable-energy-source-and-its-not-even-close
  3. https://www.world-nuclear-news.org/
  4. https://www.nucnet.org/

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

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

Serabi Gold (LSE: SRB, TSX: SBI) – Steady Growth for Shareholders. At Last. (Transcript)

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

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

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

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

Interview Highlights:

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

Click here to watch the interview.


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

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

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

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

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

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

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

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

Matthew Gordon: And they’re still there?

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

Matthew Gordon: Not no retail. Not enough retail.

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

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

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

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

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

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

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

Matthew Gordon: A very technical team.

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

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

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

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

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

Matthew Gordon: What does that mean?

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

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

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

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

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

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

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

Matthew Gordon: What is that going to help with?

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

Matthew Gordon: And very low cost presumably.

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

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

Mike Hodgson: $1M

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

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

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

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

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

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

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

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

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

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

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

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

Matthew Gordon: You made a few tweaks to it?

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

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

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

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

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

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

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

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

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

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

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

Matthew Gordon: The blended number?

Mike Hodgson: $900-$950.

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

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

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

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

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

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

Matthew Gordon: Well that’s the magic number.

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

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

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

Matthew Gordon: is there much of that in Brazil.

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

Matthew Gordon: I’m a buyer of that.

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

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

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

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

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

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

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

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

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

Matthew Gordon: So that’s Sprott?

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

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

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

Matthew Gordon: Well, who knows?

Mike Hodgson: Do you?

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

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

Matthew Gordon: A lot of people are getting that.

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

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

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

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

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


Company website: https://www.serabigold.com/

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

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

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

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

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

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

Interview Highlights:

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

Click here to watch the interview.


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

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

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

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

Matthew Gordon: What’s happening in Mexico?

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

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

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

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

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

Matthew Gordon: Why?

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

Matthew Gordon: How much does Fund 1 own?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Igor Gonzales: Thank you, Matthew.


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

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Global Atomic Corporation (TSX: GLO) – The Largest High-Grade Uranium Sandstone Deposit on a Global Scale (Transcript)

Global Atomic started in 2005 and focused on Niger, which is one the best performing regions for Uranium outside Kazakhstan and Canada. By 2007 they had tied up 6 assets and have developed 4 of them before settling on their main asset. The Uranium development has been supported by their share of a Zinc producer in Turkey. Last year they rebuilt the plant to almost double the production. This has been highly attractive and has allowed Global Atomic to grow the Uranium business whilst others have struggled.

They have a highly experienced Uranium management team who has produced and sold Uranium in to the market. We think this is critical to the success of any junior Uranium company. Not many junior companies can claim to be end to end and that is why so many fell over in the last cycle.

Stephen Roman tells us about doing business in Niger. The area that they operate in has been a producing Uranium for over 50 years. They have done 140,000m of drilling so have good picture of what the deposit looks like. Stephen talks about the grades and size of deposit which is the largest high-grade sandstone deposit in the world. 250Mlbs at today’s price of $25 is c.$6Bn. Stephen talks about the economics of how much it will cost to get it out of the ground.

Interview highlights:

  • Overview of The Company
  • The Turkish Asset
  • The Management Team, Their Experience and Roles
  • Running a Business in Niger: Government, Obstacles and Advantages
  • Getting into Production: What Do They Have? What Does The Timing Look Like? What’s Their Strategy?
  • Why Should You Invest in Global Atomic?

Click here to watch the interview.


Matthew Gordon: So you going tell us about the Global Atomic story. Why don’t you give us the 1 minute summary and we’ll pick it up from there.

Stephen Roman: Global Atomic started with an ex-partner at Denison Mines, Clifford Frame, back in 2005. And we were out basically looking for Uranium around the world. Our background with Denison Mines, of course, one of the biggest producers in the world was started by my father, as a matter of fact. So we got that going. And at the time we wanted to look in Niger because Niger is a producer, it didn’t have a lot of international investment. It had been tied up by the French for many years. My associate, George Flach, who I’ve worked with for many years, was in Niger at the time working on a Gold project. And I called George and I said is there any Uranium potential properties that we could start doing exploration on? And he said, ‘yes, you should come over. The government is just opening up the the doors for foreign investors’. So we went over in 2005 and by 2007, we put together a nice package of six really high profile properties, started our exploration program. So since then, we’ve developed four Uranium deposits there with one major discovery called Dasa that we discovered in 2010.

Matthew Gordon: So we’re going to get into that in a minute. But you’ve also got operations in Turkey.

Stephen Roman: Turkey, yes that’s another company Clifford and I started in 2005 at the same time to actually look for base metals around the world. And we ended up in Turkey on a primary Zinc deposit. And then the crash of 2008 happened, financial crisis. So we didn’t want to leave the country empty handed. So we found a shutdown plant in a place called the Iskenderun right on the coast of the Mediterranean. And it had been processing electric arc furnace dust. So waste from steel mills. And so we bought that plant and refurbished it, got it going again by the end of 2009. And it’s been making money ever since.

Matthew Gordon: It has been making money. And I think that’s one of the attractive features that investors of Global Atomic are looking at. Is the fact that this thing is quite a simple process in many ways. And having looked at the economics, it’s quite profitable.

Stephen Roman: It’s very profitable.

Matthew Gordon: Talk about some of the numbers that because I think it has a big impact.

Stephen Roman: Last year our EBITDA was $13M, and we have currently at 49% share, we’ve turned it into a joint venture. So because that wasn’t our primary business operating a plant like this, it’s a 56m long kiln that’s like a cement plant. You put the waste in there with some feedstock, coking coal, et cetera. And you volatize the Zinc that’s left in the waste and then you condense it and you make a very high grade Zinc concentrate. Running at 70%. Our biggest customers are NyrStar and Glencore. So we ship right out of our own port facility in Turkey that we have with the steel mills there and ship this concentrate to Europe.

Matthew Gordon: So the presumably the 51% shareholder is local?

Stephen Roman: No, the 51% shareholder is the world’s biggest company in this space. It’s a company called the Befesa Zinc. They trade on the Frankfurt Stock Exchange. So we brought them in. They were always interested to get into Turkey. And the fact that we were already there operating and we actually accelerated their plans to get in the country. And they didn’t have to do stand alone that would have taken five years. So they came in and they paid us to buy into the project. And we agreed to make them operator. And so now we have a very, very good joint venture with them.

Matthew Gordon: And what’s that throwing off for you?

Stephen Roman: In total our share was $13M. So out of $49M. So let’s say $26M-$27M total EBITDA last year. Now what we’ve done in 2019 is we shut the old plant down. We completely demolished it and we built a completely new plant, that’s now running. So within 6 months, we tore down an old plant, built a new plant. And so this is now doubling our capacity from 30Mlbs a year of Zinc to 60Mlbs a year of Zinc production.

Matthew Gordon: When does that pay back?

Stephen Roman: That pays out in about eight months.

Matthew Gordon: And then it’ll be free cashflow after that?

Stephen Roman: That’s right.

Matthew Gordon: What sort of quantum are we talking about in terms of the free cash flow component for you?

Stephen Roman: That’s 60Mlbs at $1 per pound, that USD$60M a year. Your costs are going to be in the 30%-40% range. The rest is free cash flow.

Matthew Gordon: And net contribution… So you’re not running or operating that business. It’s something that you started, you monetise and someone else is operating. Sounds smart to me. It’s throwing off cash. What are you gonna do with that cash?

Stephen Roman: Well, so what we did. That was in a company called Silvermet. Started by myself. Global Atomic was a private company. So between George Flach and myself, we raised about $60M from this company. And we really use that to develop the big Dasa project. So what we needed is, of course, liquidity for our shareholders. So we decided since nobody really cared about a small Zinc recycler, we would merge the two companies. So about a year ago, we merged them and gave everybody liquidity. We gave the Silvermet shareholders a big asset in our Dasa project, and gave the Global Atomic shareholders liquidity on now the Toronto’s senior board, Toronto Stock Exchange. But also the cash flow from that Zinc can help us develop the large Uranium asset.

Matthew Gordon: So I think that’s well understood. And that’s when you even took on free cash flow position there is obviously a lot more around. Can we talk about Global Atomic? I want to get into the detail of it. It’s in the Uranium space in Niger, which is a very well known space for Uranium.

Stephen Roman: One of the largest producers.

Matthew Gordon: Absolutely. And high grade for Africa. Let’s talk about the team. Because I’m a strong believer and strong advocate that the team needs to know what they’re doing. Be able to talk about what they are doing, be able to deliver that. Who’s on the team? Who have you brought on board?

Stephen Roman: George and I really got things going. George is a professional geologist, has been working in West Africa since the 80s. We started working together in Ghana on a Gold project that Denison and I had in 1985 called Bogasu. The fact that I my roots are with Denison Mines, I had a lot of talent from there that actually came and joined us. So now one of our prime consultants is a mining engineer, Royal School of Mines named Fergus Kerr. He was running all Denison’s operations in Elliot Lake.

Matthew Gordon: So he’s got Uranium experience?

Stephen Roman: Big time.

Matthew Gordon: So he was the guy you brought in.

Stephen Roman: And we brought in another guy named Dr. Peter Wallenberg. He was the head of Areva’s Uranium department in North America. So Peter is a geologist and he was credited with the discovery of a number of uranium deposits. One of the big ones is in the Northwest Territories and Canada. So he is also on our team working with us. Then we have people in Africa that have been there working with us and with George, some senior Uranium geologists that are part of our team in country. And then we have our CFO, Rein Lehari ex- PriceWaterhouseCoopers (PWC), that has been involved in the mining business for a long time. And finally, the last gentleman I can name here as part of our team is is Merlin Marr-Johnson. He’s a geologist. He’s worked with many companies, mineral companies, exploration companies, and he’ll be our London liaison. And helping us with our feasibility process and management who aren’t based in London.

Matthew Gordon: And who of that team actually manages the in country relationships?

Stephen Roman: George Flach is our VP of Exploration. He’s also a Vice Chairman of the company. But he spends a lot of time in Africa. He lives in Africa. And so he manages that. Merlin is now helping him with that whole aspect as well. And so what we’ve done as a foundation with a couple of individuals, of course Clifford Frame was a mining engineer and he was the President of Denison Mines. We put together a real core team. And as we move along and complete feasibility study, we add to that team as we go forward.

Matthew Gordon: I need to kind of point out to people here is the importance of what you just said, because I would say mining is tough. Uranium mining, that’s a whole other ball game.  If you haven’t done it before, it’s a case of you don’t know what you don’t know. Because not only has it got all the mining risks associated with it, it’s also got all that geo-political risk to it, regulation around it, safety etc… And so you need to been through that to understand what you’re getting into. So if you’re making investments, you need to consider if you think this team understands what it’s doing. So that’s a big deal. You’ve deliberately gone about putting a very well versed and experienced Uranium team together.

Stephen Roman: Absolutely. I started working underground as a miner at Denison at 19. So I’ve been in the Uranium business most of my life. Denison was the biggest Uranium producer in the world from Elliot Lake. My father built the town there and we employed thousands of people. Our big customers were initially the Japanese, various utilities there. TEPCO was one of our biggest customers. I was involved with the price negotiation, sales on Uranium, mining Uranium, exploring for Uranium. So we’ve been in this business a long time. And then the big contract we made was with Ontario Hydro, for 126Mlbs. It was one of the biggest contracts for Uranium ever in the world.

Matthew Gordon: That’s amazing. So what I’m hearing is that you put a lot of store by having the right team of people who’ve been there from exploration and actually selling product and market. I would argue from what I’ve been hearing over the past few days, in the past few months in speaking to Uranium companies. Getting out of the ground is difficult. But that’s where that’s where the difficulty actually gets even harder from there. Getting it into market, on time, buying cycles. Understanding logistics and physically moving Uranium around the world and getting it to where it needs to be and all of the cost issues, because you don’t necessarily get paid the second it comes out of the ground. Managing that is quite complex. So it sounds like you’ve got a team and that’s what they’re doing. But let’s let’s get into the project itself, because I want to understand your impression of Niger. Doing business there. How are you gonna go about doing it? What are the barriers? What are the things that you’re seeing that you’re dealing with to be able to do business in the Niger? Tell us about the country first?

Stephen Roman: As I mentioned before, we’ve been working in West Africa since the mid 80s. And we’ve got a lot of experience in all the West African countries. Niger is primarily desert. So from a point of view of logistics, it’s quite easy to get around. We happen to be located in an area called the Tim Mersoi Basin, which is like the Athabasca Basin in Canada. It’s got good infrastructure. So that’s that’s a good thing. Well, highways, power lines, towns. There’s there’s the main core production for New Year comes from the Tim Mersoi based. And so around all mining formerly called Areva started mining there in about 1970. So the two mines that they, Cominak, and Somair have been running that long, our deposit is located just about 100 kilometers south of those two mines. Then we have another mine operated by CNNC, the Chinese National Nuclear Corporation bought one hundred kilometers to the southwest of us. So we’re in an area that’s very well known for uranium mining. We we’ve particularly zeroed in on that area because obviously good geology and the fact that we did have interest.

Matthew Gordon: So why haven’t the French picked up this land package.

Stephen Roman: Well, the French owned all of this land. But because of what happened in 2005 with the government effectively telling the French, ‘listen, we’re not going to allow you to own the entire basin’,.

Matthew Gordon: And just sit on it.

Stephen Roman: And sit on and land bank it? So we want other companies in here. We want other companies spending money, developing projects. So we’re gonna leave you with eight concessions and we’re gonna divvy up the rest to people that are interested. So that’s what we picked up our six.

Matthew Gordon: If I look at the Athabasca, it based on the stories we’ve heard, there are some great stories and amazing stories. High-grade, fantastic, but some very deep assets. That adds to costs. Can you describe the base in here and where you sit on that and why you’re saying it’s a great place to be?

Stephen Roman: We we went to an area that had previous work done on it by the Japanese. We developed as a surface deposit.

Matthew Gordon: Meaning he inherited data from them?

Stephen Roman: The areas that we picked up were known to host uranium. So there had been limited amount of work. There were outcrops. There were drill holes. There was data available. So we went through all of this data and we picked the areas specifically that were exciting. When we went into follow up on some of them, we found deposits that could be exploited. So we did a lot of drilling on one of our concessions. But it was it was a typical lower-grade African surface uranium project. We were looking for something bigger. We’re an elephant country here. So we followed our nose. We did a lot of prospecting on surface, hand Geiger counters walking across the ground and beside one of our other projects called Dajy, about a mile away. We found a blowout. It means that from down below. Something has percolated up a crack. It’s left a blob on surface. And that blob in surface. The Geiger counters went crazy. So we took this material, brought it to Canada, assayed it. It was running at 30% uranium. So we said holy smoke. This is this is something unseen in Africa. We need to start working around this area. So we laid out a drill program. And we outlined a lot of lower-grade material like a halo around this blowout. And it was going down to about 20m or 30m and it was a reasonable amount of uranium, but the grades weren’t there. So we said, where is this coming from? In Niger, they had a preconceived notion that when you got to a volcanic to horizon in your drilling called the event formation, they stopped drilling because they said there’s nothing below it.

Matthew Gordon: So what sort of level are we talking about?

Stephen Roman: That was probably 50 or 60 metres down. So we said, there’s gotta be more to this story. So we said, ‘we’re going to forget about what all the local geologists think and what the preconceived notions are, where we’re going to drill through this Abinky’. And when we drilled through this Abinky, we hit the mother lode. So this a Abinky had created an impervious cap. It’s on top of it a mudstone. So a down faulted block, covered the mudstone and Abinky. It totally sealed this deposit from the surface, except for that little chute.

Matthew Gordon: So you’re able to paint that picture of what was looking like underground quite easily as a result.

Stephen Roman: Yes. So we’ve done about 140,000m of drilling. We did the shallow drilling, but we also drilled right down to about 700m. So that whole graben. And now what we discovered, it’s got a large deposit sitting under that Abinky formation. That is spectacular. So far we’ve drilled off about 250Mlbs. We’ve got grades in it running over 20% uranium. We’ve got large areas that are running at 1% to 4% uranium. But overall it’s just a spectacular deposit.

Matthew Gordon: It’s more significant than most other Uranium deposits in Africa.

Stephen Roman: This is right out of Peter Wallenberg’s mouth. It’s the largest, highest-grade sandstone hosted Uranium deposit in the world. This is this is quite a statement. And he said that at a PDC talk where he had the room full of people and very technical people.

Matthew Gordon: Let’s qualify that. Because we’re trying to educate our audience about uranium and which investments to look for and why they should look at certain companies, not others. So most people understand the Athabasca. Very, very high grade deposits there. You’ve got Australia, you’ve got Kazakhstan, you’ve got Africa. They’re all slightly different deposits with their own attributes and their own negatives to in a sense some people are pro-mining and some aren’t. And some are not necessarily free trading, as it were. But what exactly do you think you got here in Niger? It’s one of the better regions for African uranium mining. But what do you think you’ve got if you got a numbers that you can share?

Stephen Roman: Just to give you a bit of a numbers on our project. So we have currently about 250Mlbs in the Dasa deposit. If you take it at the current metal price about $25 a pound. That’s about $6.5Bn metal value sitting there at the moment. So that’s a big number.

Matthew Gordon: There’s a big chunk $6Bn-ish number which is great. But 1, you need to be able to a mine economically.

Stephen Roman: That’s right.

Matthew Gordon: And 2, I think the obviously the whole market is hoping that the uranium price recovers. And then you’ve got to work out what you can get out of the ground for at the point you just want to go back into market. So all of the usual mining rules apply there. But that’s a big number is still a big number you’ve got pounds in the ground.

Stephen Roman: Yes, absolutely. And, it all boils down to economics. So I think the Dasa stands out in that regard, because the mineralized material comes right to the surface. We can start mining right from the surface open pit.

Matthew Gordon: Keeps the costs down.

Stephen Roman: Keeps their costs down.

Matthew Gordon: But at some point you can opt to go underground aren’t you.

Stephen Roman: Well, I would say eventually as the deposit goes deeper, you have to make that decision from an economic point of view. Many cases you’ve mine an open pit down to 300m and then you go in with a ramp from the pit and you continue mining down to 600m-800m. Chuquicamata the big copper project in Chile, they’ve mined that thing down to 800m to 900m. It’s a massive pit. So these things are capable but that’s something that will happen 30yrs or 40yrs from now. So for the next 10 years, it’s going to be a very easily mined open pit, right from surface, low strip ratio. We’ve done all the metallurgical test work on the material, the uranium leaches with typical sulfuric acid leaching. There’s no nasties in the ore. So it should be a very low-cost producer. Kazakhstan currently has the lowest production costs with in-situ leaching. I would say that our costs typically we would be able to mine a pound a process and put it in a drum for under $20 a pound. That would be a typical open pit with a stand alone plant. A plant would be in the $300M range. So we’ve been looking obviously at that option as a base case, but we were looking at other options of actually starting with a heap leach operation, which could significantly lower your costs because your CapEx would be much lower, your production costs would be lower processing. So we’ve estimated for an initial heap leach operation, very low strip ratio, we’d be in the $10 to $15 a pound range. I think even at $25, we can show a very healthy profit from initial operations. The mine wouldn’t actually get into production. We’re doing the feasibility over the next 12 months and then applying for our mining permit. We should have that by the end of next year, early 2021. So this could be a very profitable initial start up operation with a low CapEx number.

Matthew Gordon: And a contribution coming from Turkey.

Stephen Roman: That’s correct. The turkey aspect. And people ask like, why did we do that? With that very solid cash flow coming out of Turkey, it gives you many financing options. We don’t have to dilute the shareholders. We can we can do some sort of a note that’s backed by that cash flow from Turkey to actually build a mine.

Matthew Gordon: You can leave leverage? That becomes very interesting. Well, in a non-diluteory sense. So let’s come back to Niger. There’s a study going on?

Stephen Roman: Yes.

Matthew Gordon: So what type of study is this?

Stephen Roman: It’s a feasibility study. That will be the one that we would present to the government in order to get our mining licence.

Matthew Gordon: There are a few of the players in and around you. I note you have had conversations with them.

Stephen Roman: Well actually we’ve signed an MOU, a memorandum of understanding. with Orano mining. So we did that in July 2017.

Matthew Gordon: For what?

Stephen Roman: So the idea there was that we would be jointly studying the ideas of potentially shipping ore to their plants in Arlit. So they have the Colinak mine, the Somair mine both up there. The idea was that by us shipping ore it could of course get us started very quickly without a plant. And it would augment the supply of ore that they have at their operations so they could extend the life of those operations.

Matthew Gordon: So that you signed an MOU to be able to access and share information which allows you to make an assessment as to whether you want to do that or not at all. All the economics need to be decided as part of a feasibility study. That’s interesting. So that whole tolling relationship, given the amount of pounds you’ve got on the ground. Getting into early cash flow, I guess is the bit that interests you. You just got to work out and see if that makes sense for you.

Stephen Roman: Exactly.

Matthew Gordon: Because the CapEx for building plant…your own plant would be quite large plant.

Stephen Roman: A heap leach wouldn’t be as much as a conventional uranium plant, but it’s still a fairly significant Capex. I would say in the $100M. A conventional plant, you’d be in $300M. So all these are things that we have to take into consideration. We thought as a value opportunity. Doing something with Orano at early stages, could start generating cash flow. So we’re in discussions with them about doing something like that.

Matthew Gordon: So when’s the study actually due?

Stephen Roman: We won’t be finished until June of next year.

Matthew Gordon: So at some point you’re going to make some commercial decisions based on ‘how much money you need going in the ground’. And ‘what relationships you want to form’ and ‘what you’re going say to the marketplace’. So June next year?

Stephen Roman: I would say that we would have all the decisions by then. Of course, we’re going be putting up updates throughout the next 6 to 12 months. The other component is the government. The government wants to see us in production tomorrow.

Matthew Gordon: But their considerations are on employment, taxation, royalties.

Stephen Roman: Absolutely. This is their number one revenue generator in the country. Uranium mining. So that’s one of the reasons we’re there. I mean, in Canada, these are fantastic deposits in the Athabasca Basin, but it takes minimum 10 years, maybe up to 20 or 30 years to permit those mines. In Niger 4-6 months. It’s a whole different thing.

Matthew Gordon: They have some different drivers, haven’t they?

Stephen Roman: They have different drivers. But it’s it’s the only game in town, really. And now they have some oil there that the Chinese are developing. But really, uranium is the mainstay of that country.

Matthew Gordon: This comes down to the question we touched upon earlier with regards to buying cycles. Let’s not get into the macro story. But what it means for you and your shareholders and new shareholders coming in, is understanding how quickly can you get into production? And that’s there’s a bunch of factors… your at feasibility study. You can make an economic decision at that point. You’ve then got apply from mining license. You’re saying that’s a relatively quick process because there’s a lot of uranium mines already operating.

Stephen Roman: Well, there are in Niger. But on top of that, it’s a quick process, a very well-defined process in Niger.

Matthew Gordon: So that happens. And then is a question of which option you choose to go with in terms of how you start producing or processing your ore. What’s that timeline look like, you’re getting into production by when?

Stephen Roman: I would say get into production by, if Orano would like some feed by 2021, we could start then. If we have to build a plant, it would be probably 18 to 24 months later. Depends what scenario you go with.

Matthew Gordon: That’s your decision.

Stephen Roman: Well, we have to look at the economics at the end of the day. What can you do to move it ahead quickly and make money for shareholders.

Matthew Gordon: But that’s what this interview is about. It’s about making money for shareholders, which is where I’m coming at it from anyway. Let’s understand what happens next. What are the options? I want us on what’s happening in your head. What are you thinking about? You’re building something great here in Niger by the sounds of it? You believe you are. You’ve also got some optionality at what point you check out, right? You could get a strategic partner. You could hand the keys over, say, ‘there you go’. And say we’ve created value. Or you can build this thing out. What are you thinking?

Stephen Roman: Well, we’re mind builders. I just finished building a mine in Ontario in Canada, a gold mine. the company is called Harte Gold. And it’s it’s Ontario’s and Canada’s newest gold mine, probably in the last 10 or 20 years. we can take projects. From exploration to production. I had a project in Northern Ontario, a company called Gold Eagle Mines. So we made a big discovery in Red Lake, Ontario, and we were already working on sinking an exploration shaft, buying equipment for that. And we were approached by Goldcorp. So they were interested in buying our project. And we assessed the situation. And I made a deal with the Gold Corp for $1.5Bn for that gold deposit.

Matthew Gordon: It’s a great day at the office.

Stephen Roman: It was a good day at the office. All of our shareholders were very happy. Many of them made tens of millions of dollars on that transaction. There are a lot of those shareholders are now in a Global Atomic. They backed me on the next deal. So I have a track record of making money for shareholders. You have to assess things as they come along. We would like to develop this project because they’re really, frankly, is none other like it in Africa. There are very good projects in Canada, but the time-line to develop those is very long. So I think ours is exceptional from that point of view, both in the size, grade, value and time that you can actually start making money. To answer your question, we have the French in Niger, we have the Chinese in Niger, we have the Russians in Niger, we have the Indians in Niger. Everybody’s looking for something like this. So you know what? If a deal comes in the door, you have to assess it. You have to talk to the shareholders, ‘Would you like to have a buyout at some premium? And everybody get a big dividend, big payout’. You have to assess these things as they come along. In the meantime, we continue to create value by moving this ahead. We  derisk this project.

Matthew Gordon: That’s the answer every CEO has got to give me. They have to say we’re gonna build this thing, because you get that discount when you say, ‘we’re just developers’. We’re going take it to a point. You’ve got to be able to show that you can deliver those, don’t you?

Stephen Roman: Absolutely.

Matthew Gordon: And you would argue with the team that you’ve got, it not only is it about finding it but building mines is something that you’re very comfortable with.

Stephen Roman: Absolutely. Done it before many times.

Matthew Gordon: So I got to ask you’ve got the right team for exploration, development and production. You’re telling me you’ve got a great asset I’m hearing. Finance. Are you going to need to raise any capital or are we going to use all the money from Turkey to develop this thing?

Stephen Roman: Well, I think at this point in time, we’ve raised a little bit of money because there’s been a lot of institutional interest in this project. We have about $5M cash on board now, and Turkey is starting to kick out cash as we speak. So our new plant is just being turned on now. So we get management fees and sales commissions every month and then annually we get a big dividend payout.

Matthew Gordon: Is it enough?

Stephen Roman: Oh, yeah. That would be enough to move this project ahead.

Matthew Gordon: Depending on route you go with. I presume there’s a caveat there.

Stephen Roman: Yeah.

Matthew Gordon: But that decision is not made until June year.

Stephen Roman: That’s right.

Matthew Gordon: What are the other barriers? What are the other obstacles that you need to. You can see coming which you’re going to have to deal with or manage because it’s all about risk mitigation. Every day little fires to put out. What are you seeing as some of the things that you need to be dealing with between now and the point at which we get into production in Niger?

Stephen Roman: Well, I think in Niger one of the big issues that comes up is security in the country. So we’ve been there operating and running projects for many years now. We have a good security system in place. The Niger government wants to attract foreign investment. So they’re really clued in on the security situation. The Tim Mersoi basin and is seen as a strategic area. So they have a lot of military there. The Americans have built a new military base just 100km South of us. The French have one 100km North of us. So the area is very well patrolled. Niger is totally aligned with the West as far as being the hub of security for West Africa. So there are sporadic attacks from from various al-Qaida factions in West Africa. But Niger is managed to keep things fairly under control for some time now. AnWe expect them to continue that. And particularly with the American presence there and uranium being the material that they don’t want that being jeopardised.

Matthew Gordon: So thus it has always been with the Americans. That’s it for sure. But what else?

Stephen Roman: There’s there’s good trained labor force there because there’s been uranium mining going on there for 50 years. So I think we have a lot of people interested in coming to work for Global Atomic. It’s really getting the feasibility done and getting the capital organized, whether it’s through some sort of a leverage facility. Using our cash flow from from Turkey or coming up with potentially a JV partner. Maybe the French or the Chinese or the Russians are interested in farming into the project. These are all things we have to look at over the next year or two.

Matthew Gordon: Now talk about the markets, Your shareholder will want you to be talking, giving guidance, directing them as to what you’re up to. But you’ve got new investors looking to come in, pick a uranium team to go after. What are you telling them? Why is it Global Atomic versus the other companies?

Stephen Roman: Well, I think it’s a Global Atomic. Number one, we’re a profitable company. We’re not coming to the market every few months. That’s very unusual. Number two is the size and quality of the asset. There’s just nothing like it out there with a short timeline to production. So that would be that it would be the top qualifiers. I would say is excellent projects, good jurisdiction. Very quick permitting timelines. Definitely growth potential there. This thing could get even bigger than it is. And the profitability of the company as we currently sit.

Matthew Gordon: Plus the team has done it before.

Stephen Roman: We’ve done it a few times.

Matthew Gordon: Not many people can say that. I buy all that.  You do have your points of differentiation and what is it has been a difficult market for the last year for uranium players. What are you seeing happening in the next 12 months in the uranium space? I know we said we wouldn’t talk about macro, but just with regards to some of the companies and players in this space, what’s your sense of how they’re going to fare?

Stephen Roman: Well, the companies that have really outstanding assets. They may not be able to move them along very quickly, but they’ll always have value there. They’re the lower grade projects, I think are going to slowly fall away. Uranium is going to stay reasonably flat for the next couple of years. It’ll move a little bit. In the last three years, four years, there’s been and including this year, about 45 new reactors built in the world. Now there is another 150 scheduled to be built in the world. Uranium is going to be in big demand.

Matthew Gordon: There is a need. I mentioned specifically about the type of companies you think or what companies need to be able to survive. Because you’ve given a timeline which is quite interesting. I’ve heard all the last three days, last few months, since 232 about the timing of that, right? There’s lots people that needed to be before Christmas, right? Price discovery. And real quick, because they have cash flow issues. And that comes onto one of the points you’ve made. If you don’t have cash, you got to work out what business model you employ to survive. If it’s a two year timeline for this slow recovery, that’s going to put a lot of pressure on a lot of companies. And they can have to think about how they raise this capital, what they have to give away, what it’s going to cost them, the cost of that money. So that’s very important. So whether the asset is good or not. But the ones with lesser assets, they’re going to have a tough time, aren’t?

Stephen Roman: They will have a very tough time.

Matthew Gordon: That’s good for you. It’s good for people like you.

Stephen Roman: Well, the good thing about our company is we have very solid cash flow stream that is basically not reliant on a deposit.

Matthew Gordon: You’ve almost mitigated the risk there. It’s in a separate commodity, a separate country, separate company. So there’s no correlation anyway in terms of the risk.

Stephen Roman: That’s right. And even if things take a little bit longer on one side, you don’t have to come to the market to keep the lights on.

Matthew Gordon: You’ve got optionality.

Stephen Roman: You’ve got optionality. It’s very important. And I think people are starting to realise that now that sort of sets a Global Atomic apart from a lot of companies.

Matthew Gordon: But do you think that’s been priced into your market cap now or do you think there’s a ways to go?

Stephen Roman: I think our market cap right now is around CAD$70M.

Matthew Gordon: Where are people attributing the value? Is it the Turkish asset or is a what you’ve got on the ground in Niger?

Stephen Roman: Based on the way our partner Befesa trades at about 10 times EBITDA. Yeah. If we take the same for us, we should be trading at a $1.50.  And that’s without any value to the uranium asset at all. You get the uranium for free. As this new plant now cranks up and we start kicking out, you know, $20M- $30M EBITDA annually, our shares are going to move up just on the zinc asset alone. The uranium is a huge bonus for our shareholders.

Matthew Gordon: Perhaps maybe getting a slight discount because there’s a liability there. There is a cost of getting that in to production. People are thinking, does that mean dilution or these guys going to come up with a way of getting that finance, which doesn’t dilute me. So until you can answer that question….

Stephen Roman: Well, I’m a big shareholder. I continue to buy shares and put money into the company and I sell, you know, what I think says a lot? We’ve kept the share capital and the dilution very low. So we expect to continue to have that strategy. Low dilution and leverage what we have in order to develop something that’s that’s worth billions of dollars.

Matthew Gordon: So you don’t think it’s worth like getting a just a little bit in and give you a little bit of headroom for the unexpected?

Stephen Roman: Well, there might be…

Matthew Gordon: But there won’t be a lot.

Stephen Roman: No. There’s a couple of institutions that have approached us that have expressed an interest to have a position. We’ve said, well, that’s something we’ll consider at the right price.

Matthew Gordon: So you might facilitate that to get the right people on board. Again, to give you optionality going forward. But it’s not we’re not talking a huge amount of money.

Stephen Roman: No.

Matthew Gordon: Interesting approach. Well, I really appreciate the story. First time our viewers have heard this story. We know a lot about it because people talk about it. It’s an unusual position you’re in. And I think investors considering uranium as part of the portfolio should look at Global Atomic seriously, because the reasons we stated. The management teams experience, the cash flowing, very unusual, the scale of the assets in Africa. And all of those mitigating risks that we’ve just gone through in terms of how you going to manage this thing going forward. Impressive. Thanks very much for your time, sir.

Stephen Roman: Thank you.


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

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

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

Interview Highlights:

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

Click here to watch the interview.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Matthew Gordon: Being what? 

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

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

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

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

Matthew Gordon: And any more deals coming through?

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

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

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

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

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

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

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

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

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

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

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

Matthew Gordon: Who are they?

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

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

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

Matthew Gordon: Has that made a difference?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Matthew Gordon: No salary?

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

Matthew Gordon: At market?

Marshall Koval: At market along with the other investors. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Company page: https://luminexresources.com/

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GoviEx Uranium (TSX-V: GXU) – Are Uranium Stocks Correlated to the Stock Market or to the Energy Market? (Transcript)

In the aftermath of the Trump Section 232 Petition announcement, the Uranium market continues to be in a period of uncertainty. Utilities still cannot plan for Uranium contracts. In the meantime, Uranium stocks dwindle to previously unseen levels.

We talk to Daniel Major, CEO of GoviEx Uranium, about his thoughts on the 90 Working Group, put together by Donald Trump. Is it just kicking the can down the road? Will the US Uranium companies benefit from this review. Have the experts been calling this wrong for 3 years or have they just got in early? Could investors have been investing in other things for the last 3 years and walked back into the Uranium market today?

Interview Highlights:

  • Section 232 and the Expected Result vs What Happened
  • Remit of the 90 day Working Group and the Likely Outcome
  • Investment Hacks: Uranium Companies Fall Under the General Rules of Mining
  • GoviEx Uranium and What They’ve Been Doing
  • Reporting and Managing Mine-able Ore for the Market
  • The Uranium Market, the Uncertainty Within it & the Stock Markets

Click here to watch the full interview


Matthew Gordon: Okay, 232, you are going to tell me you expected that result, are you?

Daniel Major: I wouldn’t say I’m that smart, but I’ve always tried to set out both sides of the camp here, and explain why I thought it would not succeed, that there was a bigger issue here.  I think ultimately that’s what’s played through.

The way it was announced – the Working Group, to me – there’s two ways of looking at this.  Is this just purely a can kicking exercise?  You know, couldn’t make a decision on 232.  Let’s kick the can down the road, but we dealt with 232, per se the documentation but we just kick the can down the road for 90 days.  I’ve got another 90 days to think about it and worry about it in the future. 

That isn’t my concern to a degree, that that’s effectively… That goes both ways. That could be, I’m kicking the can down so the miners feel they’re loved, but at the end of the day I’m going to dump half of it anyway – or, I’m kicking the can down because I wasn’t ready to make that decision.  I’m slightly surprised by the rounding argument that was put there because when 232 started, there was application by the miners but they very quickly turned it into a review of the nuclear sector.  So what he’s asking for is effectively what they did at the beginning anyway.  I think the Working Group, to me, is politics.

Matthew Gordon:  So do you think the formation of the Working Group has removed any uncertainty in the market? 

Daniel Major: No. 

Matthew Gordon: No? 

Daniel Major: Because you’ve still got 90 days to think about it.

Matthew Gordon: But if you look at the way it’s been positioned by some groups…

Daniel Major: Yes. Oh, they definitely have their views

(Check out our recent interview with Uranium fund manager Mike Alkin).

Matthew Gordon: Everyone’s right.  My interest is in what the 232 set out to do because it was a conversation around national security.  I think it’s been re-engineered to be a conversation around, “Well, we’ve started a negotiation or discussion around the nuclear industry, from which we (Uranium equities companies) will benefit in the US. So it’s a win-win.”  Are you a buyer?

Daniel Major: No.

Matthew Gordon: It seems to me there’s multiple conversations that could spin out of this. 

Daniel Major:  I think it’s slightly a can-kicking exercise because when you looked at the depositions that originally went in, they came from everywhere.  The nuclear industry, the mining industry, everybody had an opportunity because they expanded it away from just the production of Uranium, and they made it a bigger issue.  So from that point of view I do think it’s, “I need 90 days to think about this.” 

The way it was worded coming out, you could look at it and say, “Quotas are off the floor.  That’s already been taken away. The defensive side has been removed because that’s what he said.  That’s the one categorical element that came out, which is “We don’t see a security issue here.  Let’s get this away.”  Where that ends up at the end of this, I don’t think anyone has any context yet of what this Working Group’s going to throw up or why.  What you might see is trying to make it easier for the miners to go into production – and I’m not talking about price. I’m thinking permitting rules, those kind of things.  That might be where they go and say, “Things have got to be commercial still, but let’s make it easier for BPO filing, that kind of stuff.”

Matthew Gordon: Do you think it was clear what the remit of the Working Group was? 

Daniel Major: I haven’t seen one other than the Working Group which will be formed to relook at the nuclear industry and the supply of material to it. 

Matthew Gordon: So you think it could have been handled better?

Daniel Major:  Not knowing the detail of what they’re trying to achieve, very difficult.

Matthew Gordon: Does anyone? 

Daniel Major: I don’t think so. The US Uranium miners will welcome the Working Group. Not many other people are rushing to welcome the Working Group because no one else has an opinion on it.

Matthew Gordon: I disagree.  I think everyone’s got an opinion on it.  The problem is, is it speculative, is it hopeful, is it a matter of pride?

Daniel Major: I think it’s all speculative at the moment, to be honest, and that’s the way I’m looking at it.  Until I see some clearer direction coming from wherever it’s going to come from to tell us what’s going on, I think the only thing that I’m reading into the decision-making process is this concept of direct quotas for security is probably off the table. That seems to be the only thing that… I could even be wrong there, but that seems to be the only thing I can see at the moment that has a degree of uncertainty – which is that’s gone. 

Matthew Gordon: Trying to work out what a likely outcome could be is impossible because you don’t know what the remit is.  We don’t know the extent of this and there was a dialogue going on before 232 which seemed to omit quite a few pertinent factors like where the utilities companies sat in all this.  There was a lot of conversation around they need certainty, but no one talked about opposition to the 232 petition.

Daniel Major:  They all had to put documentation in.  So there were utilities putting in documentation to state their positioning on it, and they were one of the ones that were very ‘we don’t have an issue, guys.  We buy from Canada more than we buy from the Soviet States.  It’s not a big problem for us and there’s so many places we can buy Uranium from.’

People have always said, “it’s only four per cent of energy costs for nuclear or six per cent.’  But when you’re not making a lot of money, anything is a lot.  You’re squeezing your margins now.  You’ve already taken everything into account.

Utah now sign off their clean energy bill.  You cannot be providing financial support on the one side and then up the input costs on the other side.  It just doesn’t make any sense, and I think ultimately that was figured out. There’s not a lot more we can say on this.

Matthew Gordon:  It’s guesswork?

Daniel Major: Speculation all over the place.  We just watch.  All I hope is that it doesn’t drag out this problem, and particularly Cameco who said they were not going to be going to the market to buy their material until Section 232 was out of the way.  Well, it’s out of the way, but I’m not sure we’re seeing a lot of Cameco buying yet.  So maybe what this has done has also pushed them out further. 

Matthew Gordon: We’ve spoken to one utility and a couple of other players in the market who have said that this thing could go on for as long as 18 months. The Uranium space has got some unusual characteristics to it and there’s a lot of moving parts.  More so than any other commodity, so let’s hope we find out.

The fundamentals of mining still apply, and Uranium buyers, equities buyers, seem to forget that in conversations – it’s relatively convenient to talk about the macro picture, but there are going to be good companies and not so good companies, and that’s important to say.  Why don’t we talk about that? 

We call this investment hacking for our investor community.  With your investor hat on, I want you to describe the sorts of things that you look for in a company if you’re going to invest in the Uranium space right now.

Daniel Major: On your question, there’s nothing different to Uranium mining as there is to copper mining or gold mining, or any form of mining.  Mining is mining.  The only difference is our operators have to wear dose meters and they don’t.  And it’s a real pain to ass to do paperwork.  So I’ve even done pulp and paper in my life.  It’s the same as mining.  You crush a tree down.  You bleach it out and you produce a paper from it.  What’s the difference to putting gold in a mill, putting cyanide on it and producing a gold bar?  The process is the same.  At the end of the day, it comes down to the same things that we always have – what is the quality of the asset?  What is the jurisdiction?  What is the management and the cost?  Nothing is different when you look at companies.  I think the only things that you’re looking at is timeframes here. 

Nobody will dispute the Canadian projects that are currently sitting out there are probably the three best mining projects that are out there.  You can’t dispute Denisa who’s got 19 per cent grade in their deposit, that that is not a good deposit.  I mean, flipping hell!  But this comes down to timing and cash flow.  It’s a great deposit, but as I said, you keep the Ferrari parked in the garage for ten years, it’s a bit boring.  You want to get to the shops, you’ll take out the Ford Mondeo because you can use it to run around in. 

 Someone like ourselves we’ve got a great project, but it’s permitted and you can get going.  And that comes back to jurisdiction and understanding jurisdiction.  Canada is a safe place. 

Matthew Gordon: It is a safe place and I think even with Athabasca there are projects which are better than others.

Daniel Major: Yes.

Matthew Gordon: In terms of they’re shallower or deeper, etc…

Daniel Major: High-grade or whatever they are.

Matthew Gordon:  High-grade or they’re earlier stage, the stock is at a price which may lift more.  If you’re one of the big producers perhaps you don’t see those uplifts anymore.  So as an investor you need to pick what your investment thresholds are and make that decision.   I agree with you.  I think the ASIC is really, really important.  The management team’s ability to deliver is really important.  Encourage Uranium investors to look at the mining fundamentals before they leap in.  Not all comapnies are born equal.

 So with regards to that, are you saying because you’re permitted, you’re the best out of the rest outside of the Athabasca? 

Daniel Major: We have that one big advantage sitting there.  If I was looking at myself compared to everybody else, what is the one thing that has standing out against the rest is I’ve got a permitted project.  It’s ready to roll.  All it needs is an improved price. 

Matthew Gordon: But what are your grades?  It’s not just about permitted, it’s permitted, low-grade, low margin…

Daniel Major: You look at your project.  You go, “There’s my key factor that I’ve got.  Why has this project got real potential?”  And so therefore you go, “Well, I can do absolutely nothing and just hope for a really high Uranium price, but by the time I get a really high Uranium price, time has gone and everybody else… I’m losing my angle.  My advantage is being eked away.”

It’s a bit like IP.  IP lasts you for five years and then if you haven’t made your money it’s gone.

Matthew Gordon: Are you just saying that you’re so far down the track. You’ve got your DFS, you’re permitted. That gives you an advantage, but if that’s your only advantage….

Daniel Major:  That’s where I was going to. So, what we have to do and what GoviEx is completely fixated on. I’m completely fixated on, which is… Well, you either wait for this price or you do your damnedest to drop your cost and optimise your project, so you actually only need this price.  That is what you’ve got to do which is, “I have a first mover advantage,  I need to make sure that this company is turbo-charged to take that advantage when it happens.”

Matthew Gordon: So what have you done?

Daniel Major: So, we had continue… First thing I did when I started the FS, people say, “What are you starting?” was actually to take that opportunity and not bring in a cast of thousands, but to put a small team together that basically said “Look guys, there’s your PFS -what can we do to this project that substantially changes its costing?”  Firstly, let’s forget about 21 years of my life, because we know it’s there and it’s probably actually going to go for 50 years in the end. But this thing has got to pay for itself – it must pay its debt down within five years.  How do you change this project to pay its debt down in five years? 

So that’s why it was important to get Merriam in, the other part of Merriam that was missing – the six million pounds that are there in measured and indicated, because that meant the open pit was now longer than the debt period.  So the debt guys could do that.  So that basically simplifies the project that the only bit we look at is an open pit.

Matthew Gordon: So just simplify it for people – open pit means cheaper, right?

Daniel Major:  It’s cheaper, it’s simpler.  Banks understand it, it’s literally digging a hole in the ground.

Matthew Gordon: It’s less risk because it’s pretty much all at surface, because as soon as you go underground there’s uncertainty about where things are and the cost of actually getting at it.

Daniel Major:  It’s a more complex mining methodology, ramping up… digging with a truck and a shovel, pretty basic.

Matthew Gordon: Right, so that’s the first great thing which has happened, where you with other things?

Daniel Major:  So now we’re looking at contract mining, because I can cut out about $25 million of capital if I can get a contract miner in.  What we’re doing is trying to find that balance between operating costs and capital costs, because you’ve got to get a better or same return out of your project.  Because the contract miner’s going to want a higher operating cost, because he’s got to consider his profit margin and his amortisation of his mining equipment. So you’ve got to deal with that. 

So we’re out talking to, and getting quotes from, almost a dozen contract miners around.  That’s the big difference from when we did the PFS, because there was nobody who wanted to do contract mining in Niger.  Now there’s lots of people  more than comfortable to do it because Niger as a jurisdiction is becoming more and more appealing.

The other thing…and things like the plant was designed to be on top of the underground because that was the biggest mass, but we have to truck to it every time.  We’ve got to go 25 kilometres to get to the plant from the open pit, so why not just move it next to the open pit and start there?  There’s some longer-term benefits to that, and I won’t go into detail on that now, because we could talk for hours on that. 

The other big thing was to look at the plant and just say “Look guys, 50% of our costs, from an operating cost, and two-thirds of our capital are in the process plant”.  If we’re going to make savings on capital, it’s going to have to come out of the process plant, just by scale – that’s where it all sits – operating costs.  Very hard to change the mining costs a lot because, you know, it’s pretty basic.  Can you do anything really radical to the process costs to change it? 

Our biggest issues were new technology we were applying anyway, and we wanted to make sure it worked, or change it to get rid of it, to de-risk.  And we were using a fairly aggressive costing approach on Uranium recovery using solvent extraction.  It’s still built into a $24 cash cost, but it was still an aggressive way of doing it.  So, we basically sat down and broke that out and said: “what can we do to radically change that? What’s new, what haven’t we spotted before?” and that is what we’re doing.  So we’re now looking at gravity.

And some of these things come because of a result of what you’ve done before – you learn.  And you go “Well, we did this and this, and that changed, so now we have a better understanding of how material operates.”

Matthew Gordon: You did a “what if” exercise?

Daniel Major: Yeah, so as you go through, you go, “Well if that didn’t work, but we realised what the parameter was that was causing the reaction.  However, if we now apply that somewhere else, we get a radical change.”  So, we’re looking at a process where we’ll still do radiometric shorting because it’s good at clearing out.  We’ve got a big test going on in South Africa in the next month to just check that. 

Then we’ve looked at ablation which we were using before but, because ablation shrinks everything down to a small size, we did some dry ablation work.  We got dry ablation to work, but unfortunately it wasn’t scalable – we had too many little bits of equipment.  So, you need 14 rigs to make the thing work.

Matthew Gordon: Did things go wrong?

Daniel Major: But what we did realise is that gravity works.  I mean like there’s a massive SG, specific gravity, difference between the background material and the Uranium and that works.  So we tested that.  It has a benefit because we’re getting massive scale…we’re getting really small mass pull, so we’re coming down to less than … These are initial tests and we’ve got to prove them up, but the initial tests were showing only 20% of our material would be going through with 99.7% of the Uranium.  But the key was almost no Calcite.  And Calcite eats up acid, and acid is 10% of our operating costs.

Matthew Gordon:  Wow!  I didn’t appreciate that.

Daniel Major: So I can cut my acid costs down a lot, I’m going to save a lot on operating costs.  The other important thing is it looks like it simplifies the back-end of our plants as well to a much lower cost back-end, and smaller.  So, these are the things we’re kind of looking at to say “what can we do to radically change the project?”  Think outside the box, test it for low cost and then gradually scale it through. 

There’s another side to this, to my brain thinking, as well, which is – if I simplify the process, the piloting becomes easier as well.  So I’m trying to avoid some of my piloting because, if I can revert completely to industry standard, I can do things on very small batches and therefore save the amount of money I need to complete the FS.  So I’m trying to save not just on the project, but how much money do I need to complete the bankable?  

Matthew Gordon: I saw the press release, last week. There were some  very important people there.

Daniel Major: There were some important people there. We got the President of the country and some fairly big hitters from his Parliament into Arlot. The President hadn’t been there since 1970.  So it pulled him back to his roots.  We had a first stone-laying, which doesn’t mean we’re going to start construction today, and even the Mines Minister said it won’t start straight away, but it was just to really highlight that the Government is really getting on with things and we are. 

What happened in that agreement we did with the Government was we, in exchange for not paying back seven million Euros that we originally owed them from the acquisition, and we disputed about $6.6M of surface right taxes.  We said, “Look they’re not due because of various technical reasons.”  We agreed to convert that into a share in the project with the Government for a 10% stake.  The intention being that in the future we have the right to buy it back again so they get their cash back, because they didn’t want to actually want to put more equity into mining companies.

The other thing that was key to them…and the Government kept talking about one particular item – the President made one point repeatedly, which is he felt Niger had suffered from the injustices of the Uranium pricing in the past. The Government is looking for transparency and is looking for engagement.  And as long as you’re doing those, it wants to work and it wants to actively develop.

Matthew Gordon: Quite often they do love a photo op and it fills the papers and it’s just for the voters, and nothing actually happens.  So why was this significant that they came up and saw you?

Daniel Major:  Why was this significant – because of the agreements we signed with them.  That was the key thing, because it showed we are moving forward.  They could have gone hard on us and said No, pay up your money – you owe us this money, pay it”, and they went “ No, this is much more pragmatic, we want this company to build. Commonack is supposed to be closing, we want a new project, we want to work with you and get you to develop a mine”.  So it was very much….part of it was obviously politics, but part of it was actually stating “we are moving forward” and that is key. 

Matthew Gordon: So you’re keeping busy, you’re doing things – optimising, getting the ministry and the President of the country involved. But things are where they are today.  Things haven’t moved and we talked at the beginning of this interview about uncertainty still with the 90 day Working Group.  I think there will be for some time. How are you fixed in that – how long can this go on for you at this current rate? When do you need to see something move?

Daniel Major: We’ve gone for a long time in this process and it’s bought us time.  I mean, if we’d have had to do this back in 2013 when we did the PFS, that would have been the project we were building.  It’s given me time, ultimately, to get a better project together which will last for a lot longer.  This is the point I made in my speech – this is not just about producing a mine for now, this is one that can go for the next generation.  It’s a 50 year mine plus, and it needs to have the foundations to do that.  So, we can go for quite a lot longer but, getting back to the original comment, I don’t want to be waiting for this price, I want this price.  And at under three million pound per annum, we don’t make a lot of difference to the market.

Matthew Gordon: We’re getting into a discussion about mineable ore.  A lot of companies have put out big numbers, big numbers, but they’re not discussing mineable ore, i.e. what levels can they economically mine at today, next year, the year after? What do the numbers need to look like?

Daniel Major: If you look at today, there aren’t many people who can mine mineable ore today, but you’re looking at trying to pull together a project that one, would only be in production kind of two or three years from now, to start with.  Who knows what the final market will look like in two to three years?  This isn’t a restart, this is a new build.  And we’ve discussed this before – what I’m looking for is that momentum. 

The other thing I’m looking for is to be able to take a much more interesting project…we have a great project, but I want it to be super great because I can then go and start talking to the off takers way more aggressively, because they want certainty of supply.  And if I present now they’re going “Well hey mate, you’re going to need a much higher price so let’s wait”.  When we go in and say “Well, actually I can get away here. This is the contract I want, here’s my nice project – you can provide that greater fiscal security” and the banks.  So nothing really changes, but like everybody else, we need momentum. I mean you can’t move….

Matthew Gordon: You need momentum. The conversation is getting into how miners manage the numbers.  You’re talking about open pit for the first few years of this, get past the debt position and then, guess what, the costs will go up and I think other people take that attitude – let’s get the good stuff out of the ground, pay off the debt, get some cash flowing, you know, and that’s the way that they approach this. 

We’ve been looking at some studies with regards to mineable ore numbers at different levels, and obviously it starts small and builds up as you go up that curve, but at some point there’s an optimal number for the market….you want to sell for as much margin as possible, but there’s an optimal level for the market.  Where do you think that is?

Daniel Major: We talked about this before, when you asked me about…  I think it was in the very first interview we did and it was…. my benchmark for this project was to get below $45 Uranium as an incentive price That was the price.  And my rationale to that was Cameco, when they first closed everything down, said $50 was their number to restart McArthur River.  McArthur River coming back on is 18Mlbs, you know, it’s no small amount arriving and the Kazakhs, we know,  can take their material up. 

So, I think in the short to medium term my rationale has been – Cameco will restart when they’re comfortable that the market is right.  The one thing we haven’t seen is that buying, Cameco just upped the amount they need to buy by the end of the year by 7%.  That’s got to have an effect, no matter what happens this year, Cameco have got to meet those contracts so I think while we’re concerned about the 90Mlbs today, Cameco has got to be saying “well at some point we’ve got to pull the trigger,  we have got to be mining material”.

Matthew Gordon: So they’re the guys who are going to blink first in this process…

Daniel Major: They’ll have to.

Matthew Gordon: …and set off a series of events.  I guess everyone’s hoping that.

Daniel Major: Well, yes and I think they will.  What they didn’t like to be was the only guys in the market, but I think the reality is US utilities now can be a bit more comfortable because, yes there’s a Working Group, but there’s nothing defined – there’s no Section 232 thing going on, there’s a chat going on in the background.  But I think, more importantly, is that Cameco need to buy material to get what they need.

Matthew Gordon: We’ve talked about dealing with the oversupply in the market at the moment, eating that up, but you think it’s being eaten up at a rate which is unsustainable for very much longer.  So, you must therefore be able to put a timeline on this when you think it’s going to…?

Daniel Major: I think by the end of this year we’ll have seen that momentum kick into gear.  I think Cameco’s actions…unless something really aggressively comes out of the US Government, which I don’t expect it to occur.  If they’d have done something super aggressive, I think they would have already done it.  I think that demand pull for Cameco will start to move things.  We’ve seen inventories gradually coming down elsewhere – if you look at UXC’s numbers for US, Europe, they are dropping.  Then if you look from next year onwards, the uncovered contracts issue starts to become a much bigger problem, because at the moment they’re relatively well covered, Europe I think is covered next year, but even the EU came out, because not everybody is in the same place, so some utilities are well covered, some are less well covered, and they are starting to flag “guys – those of you who are less covered should probably start thinking about getting cover in”.  So I think, as you move into next year, that contract market’s going to become a bigger and bigger issue.

Matthew Gordon:  I’ve looked back at videos for the last two to three years – the great and the good in there quoting when it’s going to turn out, how much it’s going to turn by. And you could argue – you just got there early, we’re ahead of the crowd.  Or you could go “you got it wrong guys, for three years you got it wrong”, but we’re now at that point where everything’s there. 

Do you think Uranium is going to become less susceptible to the turns in the market, because of the nature of what it is going to be able to allow people to do with regards to energy?

Daniel Major:  I think it has the potential to do that.  Will it react directly to it? I think given that it has a single big driver behind it, then I would agree with you that it has that potential to do that.  And I think you and I… We all in various ways had all the right pieces, we were just all missing bits and pieces of it, which have had bigger effects than we have expected them to have.  Section 232 has had a far greater impact than anybody ever thought it was ever going to have.

Matthew Gordon:  It was a much bigger organic jigsaw puzzle than we realised and there’s a lot of people with vested interests and influence which had not been taken into account.  Not by the big funds, not by anyone in the market place and it’s kind of a reality check when these moments occur.  But what I’m more excited about is the fact that Uranium is getting to that point, despite the demand gap supply story is there, and the macro story is there, it’s going to get to that point where you can’t do without it, because there’s so much infrastructure being built now that, even say if there was a downturn, I’m not sure Uranium gets affected in perhaps the way it once would have?

Daniel Major:  No I don’t….look – again we’re predicting if you like…

Matthew Gordon: Sure, that’s the fun bit isn’t it?

Daniel Major: Not going to comment, I’ll probably get it completely wrong!  Look, the fundamentals that are all there – the tightness in the market, the fact that you’re going to have existing producing assets fading away.  You’ve got about a two per cent growth in demand going out there; you’re going to have longer protection to the US reactors, I think you’re going to see more life extensions coming through.  The fundamentals are all there for the Uranium market….

Matthew Gordon: At a macro level?

Daniel Major: At a macro level to be completely counter-cyclical if you had a falling market.  What will affect, obviously, was if the market’s going one way and is that having a dampening effect on where it could go? Or is it going to completely ignore that?  That’s going to be be your factor, which is a falling market – does it just put a brake on it?  It will still rise, but it will just rise at a slower right because the market’s not helping it.

Matthew Gordon:  So at a macro level, I think everyone is in violent agreement with each other.  At a micro level, my concern is still in terms of this investment hacking-type advice we’d like to give people is – look at the small stuff – look at the management team, look at the asset, look at the economics, the fundamentals, those things still apply. 

Daniel Major: Correct, absolutely.


Company page: www.goviex.com

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