Tag Archives: junior mining

Sprott’s Thoughts: Rick Rule – I Remember My First Period of Catastrophic Losses

By Tekoa Da Silva, May 15, 2015

 

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Rick Rule, Chairman of Sprott US Holdings, sat down with Tekoa Da Silva to discuss his early experience investing in natural resources.

What lessons did he learn from those early days? What are some of the principles for investing in individual companies, not just commodities as a whole?

In this talk, Rick discusses entering the sector during the bull market of the 1970’s and how he endured the subsequent catastrophic collapse of the sector, leaving him deeply in debt and unable to repay in the early 1980’s.

Yet he did not resort to declaring bankruptcy. “I managed over the course of 3.5 or 4 years to pay back everybody,” he says, which earned him the trust of some of his former creditors, who “became the foundation of both [his] reputation and success.”

TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here again today with Rick Rule, Chairman of Sprott US Holdings. Rick, good to see you again.

RR: Thanks for the opportunity Tekoa.

TD: I want to ask you a little bit about your experience being a stock broker, a money manager and what that has meant to you throughout your career. The first question I want to ask is, “Do you remember your first client?”

RR: Well, I’ve had several different incarnations in the finance business which means I’ve had several different first clients. There are certainly 10 or 20 early clients depending on which incarnation that you want to talk about that were very memorable people and interestingly, they share a lot of attributes. They were people who were attracted to me in that incarnation as a consequence of the experience with me in an earlier incarnation. In other words, in addition to being attracted to the resource sector, in one way, shape or form, they knew enough about me to be attracted to the way I think and the way I act.

TD: Do you remember your first big ‘win’?

RR: Yes, yes, very well. My first big win in the natural resource businesses came in the early 1970s and the truth is, Tekoa, and I’m embarrassed to say this, there was so much money to be made in the sector when the oil price ran from $3 a barrel to $301 a barrel and where the gold price ran from $352 an ounce to $8503 an ounce that I made the young man’s mistake of equating a bull-market with brains. In fact the successes came fast and furious for me in the 70s and while I’m delighted to say that I made some good decisions that contributed to my own success, the truth is in retrospect that I was accidentally in the right place at the right time.

TD: Could I ask you a little bit more about that in terms of your first big win?

RR: Well, one of the real instrumental wins in my life was being involved in the predecessor to what became Glamis Gold in a private business. Now, the things that speak well for me in that transaction were that I came to understand very early in 1975 the impact that cyanide leaching on oxidized gold deposits would have in the Western United States.

In other words, even as a young man, I understood the improvements that would accrue as a consequence of that technology and the money that could be made. The second good thing I did was identify two clearly-superior human beings; one, Adolf Lundin, who I knew about from the oil and gas business and the other, Chester Miller, who I had just met. The conjunction of Chester Miller and Adolf Lundin gave us a combination of business and technical skills to employ this technology on a grand scale and that success which was, I think, my second mining endeavor made me, and investors who were associated with me, a tremendous amount of money. That’s the good news.

The bad news is that as a consequence of that success, I thought, well, that I understood the mining business and that it was a fairly easy game. I later learned that wasn’t the case but I certainly remember that success and I remember it with some fondness because, in addition to the fact that the gold price went up, in that success, as a consequence of my ability to identify the value of process and my identification to good people, I had something to do with my success. There were other successes that were purely price-related.

TD: Is the concept there Rick that applying a new technology to what would otherwise be a marginal deposit would allow its NPV to expand?

RR: Yes, absolutely. That isn’t the only way you can make money in resources. There’s a truism in exploration that says you make money employing old technology in new places or new technology in old places, but you don’t make money applying old technology in old places because that assumes that you are smarter than all your predecessors, which is highly unlikely.

So we’ve seen very recently that a conjunction of three new technologies — at least three — three-dimensional seismic, measurement while drilling, multistage fracturing, that sort of thing, has unlocked all kinds of oil and gas wealth in the most over-drilled strata on the face of the earth, the United States. That’s new technology in an old place.

We have also seen recently as a firm, three years ago as an example, that you can make money applying old technology in new places. We followed the Lundin family into the East African rift sedimentary basins that are frontier to be sure but were identified 40 years ago.

The application of old technology in new places — having the guts to go to new places — also generated a lot of wealth and that’s analogous to the impact of cyanide leaching on oxidized ores that we talked about as being the genesis of the success that we had in Glamis Gold.

TD: Rick, do you remember your first big loss?

RR: No. I remember my first period of catastrophic losses. We’ve talked before about how markets work, that bull markets are the authors of bear markets and bear markets are the authors of bull markets.

The truth is that the decade of the 1970’s was extraordinarily good to me. I was a young man that worked very hard but I was in the right place at the right time. Commodities were on the ascent and I was in the commodities business.

As a consequence of never being hurt before, I was extremely aggressive and the fact that I was extremely aggressive made me a very good salesman. I confused the bull market with brains and I was able to convince others to do the same.

I also drank the Kool-Aid myself. One of the things that happens is that bull markets, like bear markets, are self-fulfilling prophecies and the whole narrative in the 1970’s was that the 1970’s was going to go on further which was a very convenient paradigm for me to assume.

They didn’t. In 1982, in oil and gas parlance, I took a $30-a-barrel pro forma into an $18-a-barrel world and that was extremely unpleasant. Having been an extraordinarily wealthy young man through some part of the decade of the 70’s, in 1982 or 1983 I guess, woke up to discover that my net worth, my total net worth was sub-zero.

That’s a combination of declining equity prices and debt, a mistake that I haven’t made in the past. So I certainly don’t remember my first individual loss but I remember as clearly as I can see you today the processes that led to my first catastrophic loss, which was a group of many losses.

TD: Is that usually the point, Rick, where many would-be great investors or entrepreneurs give up?

RR: I don’t know if that’s the case. It takes unique fortitude, or perhaps in my case stupidity, to work through a period like I worked through. I know for a fact that many of my competitors, having discovered that they had a negative net worth, declared bankruptcy, went broke, and failed to pay back their debts.

I didn’t do that. I managed over the course of 3.5 or 4 years to pay back everybody – principal, interest and, I’m sad to say, taxes. But the consequence of that was in the first instance, I felt better about myself. I didn’t agree to take on those loans if it was convenient. I agreed to take on those loans and in the second instance, the people who watched me persevere and who were the beneficiaries of the fact that I paid them off stuck with me in business for the next 20 years and became the foundation of both my reputation and success.

One of the jokes that I have now with younger people in our firm like you is that my role in the firm is to trade scar tissue for fees. I’ve been able to collect a lot of fees because I have a lot of scar tissue.

TD: Rick, do you remember why you got into the business?

RR: I’ve always been fascinated with the extractive industries. I grew up in California when it was a much different place than it is today. Oil and gas were an important part of the California economy. Agriculture and water, which still fascinate me, were important parts of the California economy and I grew up in a little tiny place called Almaden in South San Jose that happened to be the host of the largest mercury deposit in the United States. So I had mining right in my backyard.

The whole consequence of exploration, which, for a young man, equated to a treasure hunt, was fascinating to me and the science of geology was and is endlessly fascinating. I began to become academically — if that’s the right phrase — or intellectually interested in both the scientific process of exploration for oil and gas and mining, and the concept of risk and risk-adjusted net present value as a very young man, which probably explains or probably describes me as a very boring young guy. There probably should have been a whole bunch of other things I was interested in. But I wasn’t. I knew from a very early age that natural resources and in particular natural resource finance were what I was interested in.

TD: As a final question Rick, why are you still in the business today?

RR: I’m one of these lucky guys, Tekoa. I have so much fun doing this that if you describe work as something that you have to do to sustain your life, I’ve never worked a day in my life. My wife would tell you that my life is what I do to sustain my work. I get up every day. I can’t wait to be here. I joke that I would do this for free if it didn’t pay so well. That’s not, strictly speaking, true. I like to get paid, if for no other reason than as a measurement metric. But this is an endlessly fascinating business.

The other thing, Tekoa, for right now, this is a really, really cyclical business. As I have said many times before, bear markets are the authors of bull markets and we are in an epic bear market with the TSX-V (the Toronto Venture Exchange where many mineral exploration companies trade) off 83 percent.4 If somebody thinks that I am going to cash out in 2015 — in other words my epitaph is ‘the contrarian who sold out at the bottom,’ they got another thing coming.

TD: Rick Rule, Chairman of Sprott US Holdings. Thanks for sharing your comments with us.

RR: Pleasure.

For questions or comments regarding this article, or on identifying high-quality precious metals mining companies, you can reach the author, Tekoa Da Silva, by phone 800-477-7853  FREE or email tdasilva@sprottglobal.com.

1 http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=F000000__3&f=A

2 http://www.federalreservehistory.org/Events/DetailView/33

3 http://www.cbsnews.com/news/is-golds-price-drop-just-the-beginning/

4 http://web.tmxmoney.com/pricehistory.php?qm_page=69004&qm_symbol=^JX

 

Sprott’s Thoughts: Why the Rush into Canadian Gold Mines May Continue

By Henry Bonner, May 1, 2015

agreement

In the mining sector, mergers and acquisitions can deliver rapid returns to shareholders.

Investors in Cayden Resources saw their shares swell by 300% in price late last year, when Cayden received a takeover offer from Agnico Eagle Mines.

Steve Todoruk, a broker at Sprott Global Resource Investments Ltd., has been eyeing the next possible takeover. He believes he’s narrowed down the most likely targets.

In a recent note, he explains why it comes down to safety for the company making the acquisition:

I’m seeing two trends in mergers and acquisitions right now, as I look around the space for the next Cayden or the next Osisko Mining (which received a generous takeover early last year).

First off, in the last bull market, many big mining companies went after mines in higher-risk jurisdictions around the world. Today, investors are retrenching towards areas that are perceived as ‘safe’ – where governments aren’t likely to change the rules or confiscate assets. Investors are increasingly risk-averse and want exposure to mines in countries like Canada, the US, and Australia.

That’s why we’ve seen Eldorado Gold recently announce it was spinning off its Chinese assets, for instance.

The second trend we’re seeing is the strength of the US dollar relative to the Canadian dollar. If investors and mining CEOs believe this will last, then it will make sense for them to build mines in Canada. Their mining costs will be paid in Canadian dollars and they can sell their gold in US dollars. This could offer companies a bump to their bottom line, simply for building their mines in Canada.

In fact, the weak Canadian dollar is one of the few positive effects of poor resource markets. It’s a big break for mining companies that are trying to control costs now that their margins have contracted dramatically.

Investor preference for safe jurisdiction, coupled with a weak Canadian dollar, make Canadian mining assets especially appealing.

We’ve already seen a significant rush into Canadian assets as a result, besides the Osisko takeover. Goldcorp acquired Probe Mines in March, 20151 for their deposit located in Ontario, near an existing Goldcorp mine.

Soon after, Centerra Gold entered into an expensive joint venture agreement with Premier Gold Mines to develop its Hardrock gold deposit in eastern Canada.2 In April, Alamos Gold tied the knot with Aurico Gold through a merger in order to gain exposure to its Young Davidson Mine in eastern Canada.3

We’ve also just seen Yamana Gold announce a takeover of junior explorer Mega Precious Metals for their Monument Bay gold project in central Canada.4

As you can see, there’s a strong amount of interest in Canadian gold mines and deposits currently, and I believe it may continue.

There’s a short list of Canadian gold deposits and mines still on the market, which may look attractive to a major miner.

Based on my experience, majors will try to acquire medium-sized or large mines that will be able to produce at least 100,000 ounces of gold per year once they’re in operation.

As we saw in Goldcorp’s acquisition of Probe Mines, big miners also prefer to have mines that are close to their existing operations. This minimizes additional costs for new infrastructure or mine planning. Their labor force is already close by, and geologic conditions are likely to be similar, meaning they will have the right expertise in-house to develop the mine efficiently.

For mines that are further from where they are currently producing, an acquisition target will likely need to be larger and high-grade, with sufficient economics to warrant the strain and costs of extending out to a new area.

So which potential acquisition targets are left standing?

In my view, a short list of well-followed companies would include Detour Gold for its Detour Lake mine, Pretivm Resources for its large, high-grade Valley of the Kings deposit, Rubicon Minerals for its very near-production Phoenix gold mine, Richmont Mines with its Island Gold mine, Lakeshore Gold with its producing gold mines in the Timmins mining camp, Kirkland Lake with its producing mine in eastern Canada, and Kaminak Gold which owns the Coffee gold deposit in the Yukon.

Of course, we don’t know when a takeover could occur, and prices of these stocks could drop from here. Shareholders waiting for a takeover can often be left disappointed. If no takeover occurs, share prices can decline as investors lose interest, and a takeover can occur at a price that’s below where some investors purchased their shares.

Still, in my view the trend of mergers and acquisitions for control of Canadian assets will continue and more companies could receive bids, offering the possibility for attractive returns to shareholders in the midst of a bear market.

When a company gets taken over, it can deliver attractive returns to shareholders. We’ll be watching the companies on Steve’s short list for signs of interest from a major miner.

Steve’s short list does not constitute a recommendation.

 

Mega Precious to be Acquired by Yamana Gold

Apr 24, 2015

Mega Precious Metals Inc. (TSX VENTURE:MGP) (“Mega” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Agreement”) with Yamana Gold Inc. (TSX:YRI)(NYSE:AUY) (“Yamana”), whereby Yamana will acquire all of the outstanding shares of Mega under a plan of arrangement for consideration of 0.02092 of a Yamana share and cash of C$0.001 per Mega share, equivalent to C$0.10 per Mega share, based on the closing price of Yamana shares on the TSX on April 23, 2015. The total consideration to Mega shareholders is approximately C$17.5 million, based on the Company’s issued current and outstanding shares. Yamana has also agreed to purchase the outstanding convertible debentures held by Pacific Road Capital Resources Funds.

Mega’s board of directors has unanimously approved the transaction and recommends that Mega shareholders vote in favour of the arrangement. All of the directors and officers of Mega, as well as certain shareholders who collectively own approximately 22% of Mega’s issued and outstanding shares, have entered into support agreements with Yamana pursuant to which they have agreed, among other things, to support the transaction and vote their Mega shares in favour of the arrangement. Paradigm Capital Inc. has provided an opinion to Mega’s board that the consideration is fair, from a financial point of view, to Mega shareholders.

Benefits to Mega Shareholders:

  • Based on April 23, 2015 closing prices, the Yamana shares offered for each Mega share represents consideration of C$0.10 per share, representing a premium that Mega management and directors believe is fair to its shareholders in the context of the current market environment;
  • Yamana is a high-quality, low-cost gold producer with a diversified, long-life production base, and its shares represent good value and offer significant upside potential;
  • Mega shareholders will be provided material increase in share trading liquidity, and participation in immediate gold production through Yamana shares; and
  • Yamana has the resources and technical expertise to advance Monument Bay along with its many Regional Exploration targets and the Company’s other projects with a view that they may become valued additions to its Canadian portfolio.

The acquisition represents a material progression in the advancement of Monument Bay from a grass roots exploration project when Mega began to explore the project in early 2011. Mega’s Chairman, Mario Stifano summarizes the board’s view as follows, “We are very proud of the work that the entire Mega team has done on Monument Bay over the past 4 years. The Monument Bay Project has grown into what we consider to be one of the best development assets in the industry and we are proud to be part of this story. Our team has assembled a 338km2 camp-sized land position, advanced the project to its current multi-million ounce resource, formulated a regional geological and targeting model, including the realization of a potential tungsten by-product and importantly, we have developed a positive and respectful relationship with the Red Sucker Lake First Nation. The acquisition by Yamana allows the work done on Monument Bay to continue unabated to the benefit of all stakeholders.”

Glen Kuntz, Mega’s CEO is keen for Yamana to continue the work on the project, stating, “My experience in dealing with Yamana’s management and technical team is that they are world-class and committed to growing the Monument Bay Project along with the rest of their portfolio in Canada. This acquisition not only validates the project and its value, but also the opportunity to our shareholders to participate in the future success with one of the industry’s most respected gold producers. The work Mega’s team has done on Monument Bay has been remarkable, we have not only grown the initial small underground resource into a multi-million ounce resource, but also discovered multiple new deposits and structures. We believe this transaction is an excellent outcome for Mega shareholders as it provides a significant premium recognizing the value embedded in our projects. We look forward to joining their team and continuing the work we have successfully started.”

“The acquisition of Mega Precious Metals advances Yamana’s strategy to expand our presence in Canada, which we established last year with the joint acquisition of Canadian Malartic and a portfolio of exploration properties in Quebec and Ontario”, said William Wulftange, Senior Vice President, Exploration for Yamana Gold. Yamana’s exploration program has contributed to unlocking value within our portfolio through consistently finding high quality ounces at our properties and we are looking forward to applying our experience and expertise at Monument Bay. The significant existing mineral resource base at Mega’s Monument Bay and North Madsen Projects in particular provide an opportunity for further exploration to meaningfully increase the potential of these assets. “With the addition of Monument Bay in particular, we look forward to continuing the positive relations that have been established with the First Nations population and other stakeholders in the region, including the Government of Manitoba.”

Transaction Details:

Full details of the transaction will be set out in Mega’s information circular that it will prepare in respect of the meeting of shareholders to approve the transaction. Mega intends to mail the information circular in mid-to-late May 2015. The transaction is expected to close in late June of 2015, subject to the satisfaction of certain conditions, including court and shareholder approval, and Yamana’s satisfactory completion of its title, environmental, tax and litigation due diligence on or prior to May 15, 2015.

Pursuant to the arrangement, Mega is subject to customary non-solicitation covenants. In the event a superior proposal is made to Mega, Yamana has a 5 business-day right to match such a proposal. Under certain circumstances where the transaction is not completed, Mega has agreed to pay a termination fee of C$700,000 to Yamana. Yamana has agreed to a C$500,000 placement in Mega if the transaction is terminated in certain circumstances. The transaction is subject to approval by Mega shareholders, court approval and other customary conditions. Mega has engaged Paradigm Capital Inc. as its financial advisor and Bennett Jones LLP as its legal advisor in connection with the transaction. Copies of the transaction agreement, support agreements, management information circular and certain related documents will be filed with securities regulators and will be available on SEDAR at www.sedar.com.

Full release

No Such Thing As a Sure Thing – But Sometimes It’s Close‏

By Louis James, Apr 22, 2015

In the investment world, there’s no such thing as a sure thing, and if anyone tells you they have such an investment, you should run the other way. Fast. But sometimes, the odds are so clearly stacked in one direction that it comes pretty close.

How can one be so sure? Due diligence, of course; the devil is in the details—and so is the profit.

It’s impossible to illustrate this without tooting my own horn a bit, so please bear with me on that. The point of the story is critical to investments in all sectors and should help you with your own.

My sector—my specialty—is mining. I’ve been kicking rocks around the world for more than a decade now, learning geology and engineering and metallurgy from world-class experts in their fields. But the point is to make money, not just to figure out nature’s geological puzzles, so I’ve also immersed myself in the world of legendary investors, learning all I can from their successes and failures.

The result is that I now have an encyclopedia of mineral exploration and exploitation projects in my head, as well as experience with thousands of companies in the field—and the outcomes of their efforts. This enables me to very quickly sort the wheat from the chaff.

I’m sure it won’t surprise you if I say it’s mostly chaff out there (I’m being polite), so the due-diligence “trick” is to disqualify an investment idea as quickly as possible. That way, you spend precious time digging deep into only the best opportunities and risk precious funds only on the very best of the best. I can knock out more than half of the pitches that come my way in 60 seconds or less, and I can knock another four out of five opportunities within five minutes. The real contenders can take hours or even days to thoroughly vet, depending on how responsive management is (or how clever they are about hiding potentially fatal flaws).

Now we get to the part where the rubber really hits the road. When an investment opportunity looks great on paper and it has survived my best efforts to disqualify it, my MO is to go see the project in question. Due diligence in person—literally kicking the rocks in my case, on surface or underground—looking for that rarest of rare beasts: a metals deposit with clear evidence of the capacity to become a profitable mine.

Usually the result of all this due diligence is a level of comfort; the opportunity has survived all my efforts to drop it, has a clear value proposition for investors, and looks like a reasonable speculation.

It does happen sometimes—very rarely—that I come away from a due-diligence investigation thinking, “Wow! I can’t believe the market has overlooked this great story.”

I can’t honestly quantify it for you (I intend to keep track going forward), but I can tell you that when an opportunity impresses me this way, it almost always turns out to be a spectacular winner. It’s never a sure thing, but the odds are great, and the returns… well, they’re measured in three-digit percentages, or sometimes even four.

A case in point would be a trip I took to see a high-grade gold project in Canada last year. I can’t name the company in fairness to my paying subscribers, but it’s a well-known story that fell from grace because the mine builder the company hired to take the project to production adopted much stricter criteria, slashing the “official” grade of the deposit. For technical reasons, this was the right thing to do, but the market hated the drop from ridiculously high grade to merely high grade.

So the stock was selling cheap, but the question was: will the new mine plan deliver and send the share price back up again?

On paper, it looked like the company was deliberately pursuing an “under-promise and over-deliver” policy, but when it comes to the reality of blasting a bunch of rock to rubble and shoveling it through a delicate chemical plant, there’s really no way to know without inspecting the operation in person.

Again, my usual hope is to fail to find any fatal flaws, leaving me with a reasonable speculation on a positive outcome that can “move the dial.” This time, just about everything I saw exceeded my expectations:

  • No expense was spared on new, state-of-the art vital equipment, but not a penny was wasted on cosmetic foolishness or management perks.
  • Underground drilling right in the guts of the deposit was finding more gold than the company resource model predicted, not less.
  • Great pains were taken to ensure worker safety (even at its best, actual mining is still dangerous).
  • The project had major production cost advantages due to being located right in the heart of a prolific high-grade mining camp with plenty of water, power, and trained personnel available, as well as strong government and community support.
  • Nothing was sloppy; everything looked to be executed to the highest standards. The technical people all exhibited high levels of knowledge and competence.
  • Key point: the project looked far more advanced than the company’s timetable for starting production implied it should be.

That last point really impressed me. I came away convinced that the company would start producing gold sooner than anyone who hadn’t been there would expect. That made this opportunity one of my top picks for 2015. And now the news is just out that I was right; the company has started processing ore earlier than forecast.

As I write, the stock is up 45.6% from its 2014 low, which was hit last November, but due to the volatility in the gold market, it’s still relatively cheap, making it a great speculation on my other forecast: that the mine will be profitable at current gold prices, can still make money at substantially lower gold prices, and will perform phenomenally well at higher gold prices. That’s all to be determined, but I’m very bullish.

The takeaway here is that it all comes down to due diligence. There are no sure things in the investment world, but serious due diligence can show objectively undervalued opportunities poised to deliver in spades.

Granted, this is my specialty, but I’ve met individual investors in the field as often as I have other professional analysts, if not more so. It may not be easy, and parts of it may be boring, but it is something anyone can learn to do, and it’s the key to stacking the investment odds in your favor.

This is why I always say that if one wants to make serious money investing, one has to get serious about due diligence.

For a glimpse at the kind of in-depth research that goes into every one of my recommendations, click here to read more on the mining company mentioned above. I don’t expect shares to stay where they are for long.

BLOG: Is Gold Canyon getting ready for a breakout?

Gecko Research, April 10, 2015

Normally, a flag formation is a short term chart pattern which in our experience have been proved to be quite reliable. After a leg up, which we had, the stock trades in a sideways pattern (the flag) until the price moves above the upper trendline, which is when the trend continues up.

Making a technical analysis on a small and thinly traded stock like GCU is always more risky and less predictable, but nevertheless, it will be interesting to observe the near-term in GCU.

gcu_apr10_2015