Month: March 2020

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First Mining Gold – Springpole and Goldlund Project Site Visit

Goldlund

NOTE: This site visit report was sent to Junior Stock Review Premium subscribers on Mar.15th. Get my insights first by becoming a Junior Stock Review Premium subscriber today and save 40% using the promo code PREMIUM, until March 31st.

There is nothing like a site visit to gain perspective on a junior resource company which is moving their project towards a PFS or FS.

You just can’t beat getting a physical perspective on where a road may be built, or the mine’s proximity to a community, or where a tailings facility will be located.

Seeing the lay of the land is an X-Factor.

Additionally, it gives you the chance to spend time with management in a less formal way.

Meeting someone at a conference, at a booth, you are typically seeing a façade.

Breaking bread, having a drink or simply travelling together is a great way to see people for the way they really are.

This past week, I had the chance to travel to northern Ontario, specifically Sioux Lookout, to see First Mining Gold’s Springpole and Goldlund projects.

First Mining’s land bank strategy, which the company was founded on, is gone.

A new management team, led by CEO Dan Wilton, is in, and with them, have brought a renewed focus on the development of their best projects.

In short, I will not be adding First Mining Gold to the Junior Stock Review Premium Portfolio.

While I do see value in owning the company at its current share price, I think that the risk to reward profile of the company isn’t good enough to make its way into the portfolio at its current valuation.

There are other companies that have better upside potential and less risk associated with them.

With that said, I have put together my  thoughts on First Mining Gold for you here.

Enjoy!

First Mining Gold (FF:TSXV)

MCAP – $107.6M (at the time of writing)

Shares – 633M

FD – 722M

Strategic Ownership – Management 3.3%, First Majestic 2.3%, Institutional 7%

Cash – roughly $12M after recently closed $8.5M financing at $0.22 and a 3 year ½ warrant at $0.33

Site Visit – March 9th and 10th

After being away from home at PDAC the week previous, I decided to forego a hotel the night before my 8:20am flight to Thunder Bay.

It was great to sleep in my own bed, but waking at 3am to drive to Toronto’s Pearson International Airport was tough – especially with the time change the night before!

From Thunder Bay, I took a small jet operated by Bearskin Airlines to Sioux Lookout.

Sioux Lookout is a key location in northern Ontario because it’s home to one of the major hospitals – Meno Ya Win Health Centre.

Next to health care, I’m told the other major draws to the area are forestry, construction, mining and one of my favourite pastimes, fishing.

Day 1 – Goldlund Project

Upon landing in Sioux Lookout, I was picked up by a representative of First Mining Gold and brought to the Goldlund project.

The Goldlund property has good infrastructure with a main office building, a few maintenance structures, a large core shack and 2 core storage facilities.

Historically, Goldlund was host to an underground and open-pit mine between 1982 and 1985. In fact, the mine’s old infrastructure is still around today, with the main office building being one of the historic structures.

Goldlund is an advanced exploration project which encompasses 280 square kilometres and has a current 43-101 compliant resource on it.

Indicated Resource – 12.8Mt at 1.96 g/t for 809,200 ounces of gold.

Inferred Resource – 18.3Mt at 1.49 g/t for 876,954 ounces of gold.

Prior to First Mining, Goldlund was owned by a private company, Tamaka Gold Corporation. This changed in 2016, when Tamaka was absorbed by First Mining.

In December of 2019, First Mining closed a flow through financing at $0.27 per share. I was told by management that this money will be used exclusively at Goldlund for mostly infill drilling on its main deposit.

After lunch on Day 1, we had the chance to have a Q&A with Goldlund exploration geologist, Andrew Wiebe. Wiebe outlined the geology of the project and gave us an overview of its exploration potential.

I was particularly intrigued with the discussion over the exploration targets: Miller prospect, Camreco South and the Mustango target.

First Mining is concentrated on converting the inferred portion of the resource into the indicated category, which should be straightforward considering it is an intrusion-related deposit and makes sense from a corporate point of view.

First Mining can afford to risk capital to exploration drilling given the market and their current MCAP. Money needs to be spent on straightforward valued-added actions.

Clearly, however, there is potential outside of Goldlund’s main deposit, making the project even more attractive than it is already, considering its size, grade and location.

After discussing high level points for the project, we visited the core shack and drove to the drill rig which was set up on the Main deposit for infill drilling.

As you can see, Goldlund’s core has visible gold (VG), which is always exciting to see.

Day 2 – Springpole Project

Day 2 started early, with a quick 6:30am breakfast.

Once finished, we were headed straight to the airport, where we caught an eight seat Cessna Caravan which flew us to the Springpole project.

The flight was roughly 50 minutes long and we landed on the frozen Springpole lake.

Upon landing we headed straight for the camp’s cafeteria where they were set up for the Springpole presentation, covering the mine plan outlined in the updated PEA, and the improvements that they were looking to make heading into the PFS.

After going through the project’s high level points, including a good briefing from First Mining’s David Mchaina, VP of Environmental and Sustainable Development, we jumped in a helicopter to get a good look at the lay of the land.

Specifically, for me, this gave a good perspective of the location of the proposed coffer dams and tailings facility locations.

In retrospect, I wish I had more time at Springpole to really take it in and ask more questions, but we were on a tight schedule.

I will cover more of Springpole in the following Risks to the Investment section, and following that, in my valuation metrics.

Risks to the Investment

Investment in First Mining is not without risk. Here are what I believe are the biggest risks:

  • Environmental Permitting – All mining projects have the risk of not being permitted, however, in First Mining’s case, it’s just as much if they get permitted, as it is when they get permitted.

Time is money.

 As I mentioned in the overview of the project, a bay on Springpole lake will have to be dammed and drained to allow for the open pit to be mined.

Not only this, but the planned tailings facility is almost completely surrounded by water.

These are very real risks to the environment, which will have to be clearly addressed and explained to the Federal and Provincial governments, plus eight First Nations’ communities.

Management explained that they plan to submit one Environmental Assessment document to both the Federal and Provincial governments for simultaneous approval.

Also, the company is considering incorporating the use of a synthetic tailings liner and dry stack tailings into the PFS mine plan.

This will no doubt come at a higher cost, but will give themselves the best possibility of being approved.

Further, it should be noted that the damming of the lake for the construction of an open-pit mine isn’t unheard of in Canada.

Examples are Agnico Eagle’s Meadowbank gold mine and Rio Tinto’s Dvavik Diamond mine.

Permitting is going to be a long process and could be a hindrance to value recognition from the market.

Or, maybe the market will turn bullish and permitting risk won’t matter to a portion of investors.

  • CAPEX Cost – Last fall, the updated PEA saw the upfront capital cost to construct Springpole into a mine almost double, moving to over $800 million.

At first glance, this seems very high, however, remember that Springpole is expected to produce roughly 400,000 ounces of gold per year – this is rare. Given other large undeveloped gold projects of similar size, the cost, from what I can tell, is in line.

Consider the following graph provided in the First Mining Corporate presentation:

New Gold’s Blackwater is estimated to cost $1.8 billion to construct, Iamgold’s Cote Lake is estimated at $1.5 billion, Seabridge’s Courageous Lake US$1.52 billion, Midas Gold’s Stibnite is $1.12 billion and Sabina’s Back River is $476 million (but it is half the production).

My point is, although the CAPEX to construct Springpole will rise, in my view, costs will still be in a range which is in line with other large projects.

With that said, Springpole will have to rely on other factors to make it stick out from the crowd.

Other factors could possibly be location, mine life, exploration potential or AISC.

  • Burn Rate – Management tells me that the company burns roughly $5 million per year without any value added work. Breaking that down, $3.5 million is spent in G&A and roughly $1.5 million is spent on project up keep.

$3.5 million in G&A is a lot and is rarely justified in my books. Management teams that are making this kind of money usually have share price charts that move in the opposite direction of First Mining.

Examining the chart, you can see that over the last three to four years, shareholders have been delivered nothing but losses and dilution.

Conversely, good people demand top dollars, which I won’t argue with. Given that First Mining’s new team has only been around for a year, I think that they deserve a chance to deliver on their vision.

From what I can tell, the right people are now leading the company.

I haven’t met CEO Dan Wilton, but in asking around, he does have a good reputation.

Second most important is COO Ken Engquist.

Engquist is a technical guy with a very relevant skill set and resume.

Personally, having heard Engquist’s pitch on the path of the company, I’m interested to see how they develop their portfolio of projects over the next year.

With that said, it only goes so far.

As I mentioned, with a $5M per year burn rate outside of value-added work, they will be coming back to the market most likely before the end of the year.

Further, if First Mining were to finance under $0.22 in the future, I would consider it a colossal failure.

Concluding Remarks

As I said, I will not be adding First Mining Gold to the Junior Stock Review Premium portfolio.

With that said, I will be following the share price, as there may be opportunity to add it to the portfolio if the share price were to fall further.

You will be alerted if I change my mind.

To close, this is how I break down the value opportunity in First Mining Gold:

  • Springpole’s Valuation – Springpole is not perfect, there is definite environmental permitting risk, but conversely, we are talking about a deposit that has 4.6 Moz (M&I) of gold and an estimated production capacity of around 400,000 ounces per year.

The fact is, there are just not many development projects like this.

At US$1500/oz gold, Springpole’s after-tax NP@5% is US$1.22 billion with a 28% IRR. Let’s assume that Springpole’s value is 10% of its NPV, which is, therefore, US$122 million. With the current USD to CAD exchange rate that is roughly $168M CAD.

The company has a MCAP of approximately $107 million CAD. Conservatively, there is almost 70% upside in the share price just in considering Springpole, never mind the other projects.

  • Goldlund’s Valuation – Goldlund has an Indicated and Inferred resource totaling around 1.6 Moz of gold. Currently, there is no economic study on the project, but in my opinion, you can clearly see the value in owning a gold deposit next to the highway and power.

Because of this, Goldlund is easily the best bargaining chip First Mining has to play with moving forward.

Treasury Metals’ Goliath project is located in close proximity and shares some commonalities as far as I can tell. Many analysts that I know believe that Goliath and Goldlund should be in the same company at some point in the future.

However, we probably need a better market to make this happen.

For now, I think that assigning a value equal to Treasury’s current market valuation makes a lot of sense.

At the end of trading on Friday March 13th, Treasury’s MCAP was roughly $30M.

  • AuTecto Minerals Joint Venture on the Pickle Crow project – AuTecto is led by a team with a history of success – Bellevue Gold Ltd. and Gryphon Minerals Ltd. Considering Pickle Crow is a 3rd string asset in First Mining, I think this is a great deal with a lot of potential to pay dividends on something that would otherwise be sitting on a shelf.

In terms of valuing the JV agreement, I will discount the $3 million spend over the next 3 years and say it is worth $2 million. This only assigns value to the spend, no value to the project.

  • Other projects – Hope Brook, Cameron, Pitt, Duquesne, Duparquet and Mexican assets. There is a lot of value here, but considering there will most likely be no real value-added work completed here, I will view it purely as icing on the cake.

Putting it all together, First Mining Gold is trading at half of its intrinsic value, conservatively speaking.

While this gives us as investors plenty of downside risk protection, given the risks associated with the company, I believe there are better places to invest our money.

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review Premium

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I have NO business relationship with First Mining Gold, however, they did, along with Soar Financial Partners, pay for most of my travel expenses.



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A Conversation with David O’Connor, Chief Geologist at AbraPlata Resources

NOTE: This interview was completed on Feb.21th, 2020 and was published for Junior Stock Review Premium subscribers on Feb.24th. Become a Premium subscriber now and save 40% by using the Promo Code PREMIUM by March 31st.


I first wrote about Aethon Minerals in the spring of 2019, when it was trading at roughly $0.125 per share (Or $0.033 per share of AbraPlata Resources post merger).

Aethon had just announced that they struck a deal with AbraPlata Resources, which would give them the exclusive right to perform technical due diligence over a 5-month period on AbraPlata’s Diablillos silver-gold project in Argentina.

Fast forward to September 4th, 2019, around the time of the announcement of the definitive agreement between the two companies, and I wrote a full article outlining the investment thesis.

Currently, AbraPlata is trading at $0.11, making it a triple for readers and myself. Even today, with a MCAP of close to $30M, I still believe that AbraPlata is undervalued, especially when you consider their latest drill results – this is a rich epithermal system.

Why is it still undervalued?

In my view, it’s solely based on Diablillos’ location – Argentina.

Jurisdictional Risk – Argentina

Jurisdictional risk should be a major part of any junior resource sector investor’s investment analysis.  Understanding the risks of a particular jurisdiction can be helpful in understanding why a certain company’s MCAP is discounted.

Jurisdictional risks can range from political instability, to a lack of rule of law or potentially any number of environmental concerns which today, seemingly, can become an issue or risk anywhere on the planet.

In my view, it’s ultimately the culture of the people who live in the country who dictate how the country conducts itself.

For example, the people of Ecuador have major ties to the rainforest and the environment in general.  Thus, I believe, they will always pose some sort of risk to mining.  Now, I’m not saying this is right or wrong, just that in terms of mining companies, you must realize that this social issue isn’t going away.

Cultures take hundreds of years to form and hundreds of years to change. Therefore, what you see is basically what you get.

In saying this, reading about a culture can only get you so far in terms of understanding it. In reality, I think that you need to live in a country for a period of time to really get a real feel for the culture and how it ticks.

David O’Connor on the Far Left

With this said, today I’m sharing a conversation with David O’Connor. O’Connor is Chief Geologist with AbraPlata Resources (ABRA:TSXV) and has over 40 years of experience in mineral exploration.

Most importantly, O’Connor has called South America home for 27 years having first lived in Bolivia, then Chile and now, most recently, Argentina.

Let’s hear what O’Connor has to say about Chile, Argentina and of course, AbraPlata’s flagship project – Diablillos.

Enjoy!

Brian:  You have a lifetime of experience within the mining industry with over 40 years to date. I think it is safe to say that you have experienced every facet of mineral exploration and, of course, the nuances of exploring for mineral deposits beyond the confines of the country you were born in.

For context, can you give us a little bit about your background – education, where you got started in the mining industry, where you have lived, etc.?

David: I did my undergraduate degree at Cape Town University, then worked in the Messina copper mine in South Africa for a year before moving to Australia where I worked for several years with Western Mining Corporation. I took time off to complete my Master’s degree in Mineral Exploration at the Royal School of Mines in London, following which I returned to Western Mining, ending up in charge of exploration in South Australia, where we discovered the Olympic Dam deposit.

I then moved to Peko-Wallsend (Geopeko) where I became their chief geologist. Later, I moved to France, where I established a subsidiary of Nicron Resources, which was an Australian lead-zinc miner. We explored the old lead mines in France and Belgium for their zinc content. I then wrote a multi-client study called “Development Opportunities in Lesser Developed Countries” and decided to move to Bolivia, where the World Bank was assisting with privatisation of state mining projects.

In Bolivia, Ross Beaty (old friend from the School of Mines) and I established two junior exploration companies, the first being Da Capo and the second Altoro. With Da Capo we developed resources to the feasibility stage on two mining areas, the main one being Capacirca. We merged Da Capo with a mining company called Granges, to form Vista Gold. With Altoro we concentrated on a platinum-paladium project in Brazil, on the strength of which we merged with Solitario Resources.

I moved to Chile when things went ethnic in Bolivia and established Explorator Resources, with which we developed the El Espino IOCG resource to feasibility stage and sold it to a local copper miner called Pucobre.

I joined Aethon Minerals in 2018 and moved to Argentina a couple of months ago when Aethon merged with AbraPlata. I now live in Salta, which is conveniently close to the Diablillos silver-gold project.

Brian: I’m particularly interested in hearing more about your time in South America. Starting with Chile, in your opinion, why do most mining people continually rate it as the best place to do business in South America?

David: Chile is well endowed with mineral resources, with the porphyry copper deposits there supplying roughly a third of the world´s copper, together with substantial gold and other metals, more recently including lithium. Mining is very important to the Chilean economy and has become so because of the government´s policies, which have attracted the needed foreign investment to explore and develop the mines. The country is advanced regarding infrastructure and services, even though the exploration areas in the high Andes mountains can be challenging.

Brian: AbraPlata has a few JV ready projects in Chile, one of which has a great JV agreement with Rio Tinto.

Can you give us an outline of these projects and their potential?

David: The Arcas mineral rights block, on which Rio Tinto has entered into an agreement, is located in the porphyry belt north of the mining city of Calama, which services the major porphyry copper-gold mines in the area. The Arcas block has outcropping porphyritic intrusions, together with the relevant anomalous geochemistry to host copper-gold deposits. However, exploration in the relatively remote area is more appropriate to a major company with the finances to handle it, which is why we joint ventured it to Rio Tinto.

Brian: There is great potential in AbraPlata’s Chilean projects, but the main attraction or pillar of the investment thesis in AbraPlata revolves around the Diablillos project, which is located in the Salta Province of Argentina.

Having now lived in Argentina for a few months, what would you say are some of the differences between living in Chile and living in Argentina?

Do you see there being a correlation between those differences and the mining investment attractiveness of each of the countries? Please explain.

David: As mentioned, I live in Salta, which is a delightful little city in Northern Argentina, convenient to the Diablillos project and well serviced with flights to Buenos Aires etc. Argentina has had its political challenges in the past, but the new president has stated his support for the mining industry, realising that attracting foreign investment is an important means for supporting the economy. In Argentina, each province has its own minerals policy, with certain provinces being more pro-mining than others. It is important to note that mines and mineral exploration in the pro-mining provinces has continued through several changes of federal government.

Brian: Unlike Chile, Argentina has a stigma for being one of the riskier jurisdictions to invest in within South America. To a certain extent, I can’t disagree, as politically there have been some major gaffs over the last 20 years.

However, in terms of mining law and regulation, Argentina is different than most of the other South American nations, because it’s governed at the provincial level.

With that said, Salta province has a good history and reputation as being a stable region for operating mining companies.

From lithium brine operations to other hard rock mining projects, there is a lot going on in Salta.

Can you give us more context as to what is going on in Salta right now? Are companies moving forward with their projects?

David: Salta province is particularly pro-mining and the provincial government recognises it as an important source of income for the province. As well as the historic borax mines and the more recently developing lithium mines, Salta hosts the major Taca Taca copper porphyry and the Lindero mine which is currently being constructed not far from Diablillos. We are in a mining friendly environment.

Brian: Having just gone through the process of getting drilling permits and the other work that goes into developing a mineral exploration project recently, how did you find the process?

David: Fortunately for us at Aethon, when we merged with Abraplata, that company was very well prepared regarding permits, community relations etc. And we were able to move immediately into drilling at Diablillos. I think AbraPlata is competently represented with its legal and administration team, who pay close attention to legal and community issues. Having recently met with the new Secretary for Mines and Energy for the province, who ensured us of his department´s continuing support, I feel confident that we will be able to proceed smoothly to develop and expand resources at Diablillos.

Brian: You have touched on a lot of positives, but there is always risk.

Where do you see the potential risk for exploring and developing a mineral project in Argentina?

David: Frankly, I think that there is undue concern about potential risks in the mining friendly provinces, but that is not the case in provinces, or parts of these provinces, where agriculture and tourism compete for space. In these mining will always be up against local community issues. An overall concern, if you insist on looking for one, is if the Federal government might consider raising taxes in the future. However, it seems that common sense will prevail and they will not kill the goose that will continue to lay bigger and bigger golden eggs.

Brian: Recently, AbraPlata released some great drill results, which were highlighted by some stellar intervals – 17.5 metres of 604 g/t silver and 7.0 metres of 20.6 g/t gold and 202 g/t silver.

Can you summarize the results and give us context as to how it fits in with the overall geological model of the Oculto deposit?

David: The Oculto deposit is a high sulphidation epithermal system which hosts silver and gold resources that were the basis for a robust PEA on an open pit project. However, a preliminary desktop study by RPA indicated that an underground mining scenario could potentially be attractive, because of substantially lower initial capital cost (no pre-stripping, smaller plant etc.), rapid payback time and better metallurgical recoveries due to a higher head grade. While this study remains preliminary at this stage, the main objective of the current drill program is to expand the deeper gold resource and then complete additional work which would enable us to release a new optimized PEA, planned on an underground mining scenario.

We decided to drill a bit deeper than previous campaigns and have intersected substantial copper sulphide mineralisation beneath the oxide gold and silver resources, with associated gold and silver with the copper in places, as announced this week.

Brian: Outside of the Oculto deposit, are there any other targets of interest? Please explain.

David: Outside of the Oculto silver-gold deposit in the shallower oxide zone, a new target is the underlying copper and precious metal Zone beneath it in the sulphide zone.We will keep chipping away at this with our current drilling program, as we drill to expand the overlying oxide gold resource. The breccia zones hosting sulphide mineralisation at Oculto are probably related to outcropping breccias in the Cerro Viejo and Cerro Blanco areas within the Diablillos project area, where they are related to outcropping porphyries. These are additional targets which I plan to explore in due course.

Brian: Thank you very much for your time and your views, it’s much appreciated!

Until next time,

Brian Leni P.Eng

Founder – Junior Stock Review Premium

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I have NO business relationship with any of the companies discussed in this article. I do own shares in AbraPlata Resources.

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A Conversation with Justin Tolman, Economic Geologist at Sprott Global Resource Investments

NOTE: This Interview was completed at the end of January 2020 and was published for Subscribers on Feb.18/2020. Become a Premium subscriber today and save 40% until March.31st using the Promo Code – PREMIUM

Your decision making ability will ultimately determine the course of your life.

Personally, I believe everyone needs to be anchored in a core set of principles or rules that shape their decision making process.

Without the anchoring, emotion or outside influences can take over and could ultimately steer you in the wrong direction.

So what’s my point?

It goes without saying that those who choose to invest in the stock market, especially those who invest in the junior resource sector, are continually tested by the decisions they make.

Very quickly, bad decisions will lose you money.

Understand yourself and form a set of rules or principles to invest by. Additionally, when given the opportunity, learn everything you can because applied knowledge is power and profitable.

Today is one of those great learning opportunities, as I bring you an interview with Justin Tolman. Tolman is an economic geologist and is a part of a world-class technical evaluation team at Sprott Global Resource Investments.

Justin Tolman

In our conversation, we cover a number of topics including his view on the current gold equities market, where the next big mining innovation will come from, how to avoid value traps and much more.

Enjoy!

Brian: 2019 was a great year for the gold price with it hitting a high above US$1500 per ounce for the first time since 2013. Many headlines throughout the media equate the strong gold price with the beginning of a new bull cycle in the junior equities.

However, for those who watch the junior gold equity market closely, you will see that the equities have lagged the metal prices.

What is your view on the current junior gold equity market?

Justin: Before I opine on this, I should say from the outset that we have a wealth of professionals within the Sprott group who spend much more time than I do thinking about our industry from a macro view and broad market trends. I get a lot of value from what they say and people could sign up for that information for free – Sprott’s Thoughts.

That being said, I will opine; I do think that junior equities are lagging the gold price and there’s good reasons for that, following the excesses of the last bull market.  The onus is on us in the industry to close that gap and show that we’re responsible stewards of invested capital. Now, sustained higher gold prices are always better than the alternative, and should be a good leading indicator for a recovery in gold equities.

I don’t think all junior gold equities will necessarily appreciate in value at the same rate, if at all.  There’s a spectrum of both quality and risk across that universe of issuers, and personally I am most interested in those projects that have potential to go on and become profitable mines.

 In that context, there are some compelling opportunities we’re actively allocating towards now.

Brian: Protecting my downside risk is a major part of my investment strategy. For companies with existing discoveries or outlined deposits, it’s fairly straightforward in how to construct a valuation model and compare against the company’s current MCAP.

However, as of late, I have had a hard time deciding how to construct a fair valuation for exploration projects and, on a grander scale, the value of an exploration company.

Generally speaking, how do you calculate the fair value of an exploration project or company that, for all intents and purposes, has nothing of quantitative value – excluding cash? Please explain.

Justin: That’s the trick, isn’t it? We’re always dealing with incomplete information and we’re always trying to quantify intangibles.  Especially with early-stage exploration companies where often the short answer is, it depends.

One of the metrics I see used a lot by junior explorers is to compare themselves to their peers in a nice bar graph and it inevitably leads to the conclusion that the company in question is woefully undervalued. Now, this obviously has potential to be a very flawed way of doing this, especially if you’re gonna let the company hand pick its own peers.

If you have some knowledge of the inputs and the nuances and pick the peer comparison yourself it can work better. 

A couple of petroleum industry guys, Paul Newendorp and John Schuyler, pioneered some really good work on decision making for exploration, I’ve got their text books on my shelf in front of me here. I’ve used some of their principles before to help deal with risk applied to hard rock exploration – using decision trees and some other tools.  But to make it work you need to understand the exploration process and be prepared to make some assumptions about the probability of different outcomes.

 At the end of the day, though, as I’m thinking about this, part of any exploreco’s valuation comes from the team; some groups are just going to be better at coming up with well-thought ideas, testing them efficiently, and when it doesn’t work, moving on.

When you can identify those people or teams that demonstrate competence in execution, both in the field and the boardroom; who experience in a given geography and deposit style; who show integrity in looking after shareholders, those guys out-perform over time and command a premium.

Brian: Most of the major innovations within the mining industry occurred many years ago. First, in the late 1800s, with major advancements in mineral processing, and then the birth of geophysics in the mid 1900s.

It would seem to me that the mining industry is due for another major step forward.

In your opinion, where will the next major innovation in mining be?

Justin: Due for a step forward, I’d love that. It’s been a while since we had a step change in the tool box available to us. In fact, it’s been a while since we had a step change in our understanding of ore deposit controls, but just because it’s due, doesn’t mean it has to happen.

It’s a bit fashionable now to talk about the machine assisted learning, artificial intelligence in exploration, I see that popping up in the vernacular of junior press releases. I don’t tend to put too much emphasis in them except for very special cases.  Those sorts of systems tend to work best in data-rich environments and they certainly don’t tell you when to stop spending money.

On the exploration side, I think in the future we’re going to see more discoveries made at depth, beyond the range of what we can directly detect from the surface using traditional tools, so that implies an increasing reliance on the drill bit and vectoring from there.

There’s a bunch of neat down-hole applications which are evolving from this. Short wave infrared scanning of core and increased sensitivity of down hole geophysics are getting gradually more sensitive and affordable every year.

On the mining front, I see an increasing role for equipment automation using combinations of existing technology. Not just to incrementally improve productivity or lower costs, but to drastically improve site safety and working conditions.

I’m seeing more and more adoption of this picking up globally, it enables mine equipment to operates in extreme temperatures, confined spaces and other hazardous work environments autonomously or remotely.  Meanwhile people can oversee the operations from somewhere comfortable and safe. 

Brian: In our conversation earlier this year, I asked you about jurisdictional risk and how it fits into your investment analysis. One comment, in particular, that caught my attention was,

“You need to be quite judicious in applying broad risk categories to entire jurisdictions, whether it’s countries or provinces, the reality is that often it depends. Some superficially low risk places for mining investment, like Peru, in actuality can be a very complex patchwork of attractiveness depending on local community attitudes, legacy issues, and a host of other things. That’s one of the things that we like to think differentiates us at Sprott we get out on the ground in these areas early and develop a deeper understanding for this aspect. A big part of my job is spending time on the ground at lots of these projects first-hand.†~ A Conversation with Justin Tolman, Economic Geologist at Sprott Global Investments

I completely agree and think that it’s vital that investors heed your advice in looking as deep as possible into the jurisdiction they are planning to invest in.

With that in mind, I think it’s a great opportunity to discuss a country that you most recently visited, Brazil.  Brazil, on a whole, I think, has been painted with a high-risk brush.

In terms of mining investment attractiveness, how do you view Brazil?

Justin: Well, if you remember the last interview, you’ve kind of done exactly what I advocated against.  You just asked for a comment on risk regarding the 5th largest country in the world.  On balance, I am pro Brazil as an investment jurisdiction, but it’s always going to carry the caveat of “under the right circumstancesâ€. Given the mineral endowment,  there’s plenty of opportunity across the country for groups who can execute on the ground.  My recent trip that we were talking about, I visited a number of projects in Para, Bahia and Maranhão  states. All of them had some mining history and some exposure to large-scale mining operations. At the time, I was looking at gold, copper, and nickel projects.  Some we own in house, others we were considering investing in.  None were large-scale iron ore operations which obviously have come under increased scrutiny in the wake of the tragic tailings dam collapse last January at Brumadinho.

Brian: Executive compensation within the junior mining industry is an interesting topic, as I have heard a variety of opinions on what is appropriate and what isn’t.

As an investor, of course, I would rather see low executive wages and their compensation focused on share price appreciation – options, etc. However, I do see the other side of the coin, when it comes to attracting and keeping top talent.

So, it begs the question, where is the appropriate balance between the interest of the shareholders and the adequate amount and type of compensation for the team which is running the company?

Justin: Those two things don’t have to be diametrically opposed. Why can’t it be both? The goal perhaps should be to structure incentives to align between investors and executives. Maybe that’s a bit utopian but it’s a worthwhile discussion. I can tell you that how a management team is incentivised is absolutely something that we are conscious of, look at and factor that into our investment decisions and recommendations internally.

Fundamentally, what gets measured and rewarded drives decision making and outcomes.  So consider if somebody is financially motivated to sell their company via a generous change of control clause, does a higher share price help or hinder that outcome for them?

Striking the right balance of short and long-term performance incentives is important, what’s the criteria for determining their short-term bonus pay outs?  How much stock does an executive own and what price did they acquire it for?

These are questions that we ask routinely, and investors should ask more.  One way to encourage an aligned compensation package is having independent directors on the compensation committee that are actually independent.  

Certainly, we love it when company executives eat their own cooking, buying shares alongside us in the market.

Brian: During university and the days of +US$100 per barrel oil,  I can remember one of my professors stating that he thought peak oil was one of the biggest concerns for humanity moving forward, and that the price was only headed up because of it.

Today, with the use of horizontal drilling and other factors, the oil price has plummeted and the talk of peak oil seems to be a thing of the past.

 Moving to the hard rock sector of the mining industry, much of the ‘peak’ talk I have heard has focused on gold, with a few pundits suggesting that we are in peak gold – we will never again reach the production or new discovery numbers seen in the past.

In your opinion, is peak gold legit?

Justin: I don’t know? There’s lots of variables that go into peak gold and some of them are beyond my ken and I don’t really pretend to have an opinion.  Wasn’t US peak oil originally supposed to be in the seventies and then hydraulic fracturing came along and that all changed? I subscribed more to the necessity-is-the-mother-of-invention type philosophy for these things.

With that said, we do work in a cyclical business, and if we’re willing to shorten the time horizon for peak gold to something shorter than forever I happy to comment.  Certainly in the last few years it’s apparent that mining companies have underinvested in Greenfield exploration, and have been ruthlessly squeezing the existing operations for additional, increasingly marginal production.

This has led to declining discovery rates. The very attractive tier 1 deposits, that are so sought after are increasingly scarce, and when you couple this with the increased timelines to permit new operations, future global production is under a lot of pressure.

So, barring a paradigm shift in technology, like you asked about before, this obvious implication is that the demand for quality deposits and genuine new discoveries is only going to increase.  Which makes me kind of happy. It’s the reason I get up in the morning and come into the office.

Brian: In my view, to be a consistently successful investor in the junior resource sector you need to buy companies with good management teams, and that are selling at a price which is less than their intrinsic value.

In saying this, investors do have to be wary of value traps, which I define as companies that have the potential to never escape the market discount.

First, do you agree that value traps exist or it is just a matter of the investor getting the thesis wrong?

Secondly, if you do agree that value traps are out there, do you have any advice for steering clear of them?

Justin:

Great Question.  It dovetails nicely with your earlier one on trying to calculate fair value for exploration companies.  There no question value traps exist, in face our industry is littered with them. 

Just because something is cheap on whatever metric you happen to be using, doesn’t mean it has to go up.  One clue that a stock might be a value trap is that it will appear to have been cheap for an extended period of time.   What changed to make it appear cheap?

When you suspect you are dealing with a value trap the think about stress testing your assumptions and valuation metrics.  Is the asset in an inherently risker part of the world demanding a higher cost of capital?  Is there an issue with the orebody not immediately apparent that might prevent the asset from being mined profitably?  Like a remote location or a lack of water or community support for example.

Next you need to see a way forward for the project, some measurable catalyst that will work to unlock value.  Permitting a road, changing the mining/processing method, or in some cases rebooting the corporate structure.   

Then think about to what extent the outcome of that catalyst in in the control of the company.  If not at all then I fear your plan is based on hope.  Which tends to be unpredictable.

Brian: Sprott USA offers a wide range of the best services and products in the natural resources market. From full-service brokerage accounts to private placement opportunities and exchange traded products and bullion trusts.

Can you give us an overview of what is new at Sprott and what opportunities are available for interested investors?

Justin:  You’re right, there is lots going on at the moment. We just completed our acquisition of Tocqueville earlier this month, which was really exciting for us adding an additional $2 billion or so in assets under management.

The bit that I get excited about however is that it consolidates and build on our in house technical and sector expertise in the gold business. 

Here at Sprott Global , we’ve got some really exciting actively managed products available; the Rule Managed Account has been running for a year now as resource portfolio and gives participants a chance to participate in investment themes that Rick [Rule] is tactically trading in.

One of our most experienced advisors Jason Stevens has been running the Sprott Real Asset Value+ Strategy which has put together some really impressive returns which is great for long-term alternative investment exposure.  Jason pays a lot of attention to balance sheets and the business’ value drivers to identify core positions.

Personally, I’m as busy as I’ve ever been working with our teams and PM’s to identify undervalued high quality projects and new discoveries that we can get out in the market and support.  

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Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review