What drew you into mining?
I grew up in Edmonton, went to school at the University of Alberta and I started in veterinary science. You remember that movie The Gods Must Be Crazy? It's about a guy who's a game warden on a big wildlife reserve in East Africa. That's basically what I wanted to do: I wanted to be a big game vet. I had my first geology class and the guy giving the lecture was talking about just getting back from Zimbabwe and the next week he was in PNG, and I thought, oh that's cool, so then I switched to geology. For all the right reasons.
Where did you work?
I worked in the Arctic, the Yukon, BC. You know Sabina Gold and Silver's project? I worked on that back in 1989. Then I went on a backpacking tour through Asia and I ended up in Australia broke. I did my masters at James Cook University, then I left to work for Rio Tinto and spent seven years in Argentina, Chile, Peru, Ecuador. I wasn't a structured guy, so back then, the way to learn was to keep moving around. The more rocks you see, the better the geologist you become, so I moved every couple of years.
Which stocks do you like?
For Brent and myself, it's all about companies that are trying to find high margin, high quality deposits, while managing equity dilution and financing risk, so we've been investing in prospect generators. Greenfield exploration has been declining as a percentage of total exploration expenditure since 2003 in the gold sector. Barrick, at one point back in the late '90s, eight percent of their revenue was spent on exploration. Now it's between two and four per cent. Greenfield's even smaller. Teck's at about half a percent. Some of those companies have killed their exploration budgets, but now they're looking for senior technical fellows and they're having a big problem because there is a paucity of geologists in my generation. An extended period where mining was not doing well chased many away from the sector.
What are you avoiding?
If gold prices stay flat, there's not a lot of projects that generate double-digit returns and for me, investing in a levered gold stock might not be a good idea, because
when the gold price goes up, everything else goes up, and if gold's the last thing out of the toothpaste tube, when you run the assumptions and change your costs, it'll probably still never generate more than a 10 per cent IRR, especially if it is a large project. Leverage is a well followed investment thesis and I'm not saying it doesn't work, it does work, because if you're at close to zero now and it goes to a buck that's close to an infinite return. But if you bet like that, you have to have a well funded, liquid stock so you can get in and get out easily with little financing risk.
So, what are you looking for?
We want takeouts. We want wins like Reservoir Minerals, who found Timok, or Mariana, who found Hot Maden, or Kaminak, who found Coffee. We want that discovery, which will take us to a point that somebody acquires the asset and the company. And that's our liquidity event. But we can also trade something like Ivanhoe, which we bought at 60 cents and sold for over four bucks, and that was driven by the discovery at Kakula. It was finding something new, that was even better than the assets they already had.
What about small companies building mines?
When you're de-risking a project to a feasibility study, it always costs a lot of money and we're really not interested in all the vagaries of development with a junior mining company. We don't want to go much beyond a preliminary economic assessment; a PEA is probably the most optimistic economic study that you can put on anything. More advanced studies will only get worse.
Is the TSX under-regulated?
Last year, with stocks like Garibaldi and New Nadina, among many others, it started getting very frothy. Heavy promotion on chat rooms was driving several juniors. This type of investor doesn't really need a lot of information, the less the better. We tended to stay away from that. There's some press releases that come out and I can't believe the exchange let them write it, but I also think the onus is on the investors to educate themselves because it's amazing they fall for some of this stuff, every time.
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