Mix one part mining analysis
with one part corporate finance, then add 25 years of investing experience to
get executive chairman and founder of Augen Capital
Corp., David Mason. In its first 10 years, Mason's merchant bank completed
250 investments and financings and emerged as an industry leader in
tax-advantaged flow-through investments in Canada's resource sectors. In
this exclusive interview with The Gold Report, Mason discusses market fears,
a weakening U.S. dollar and "the most important factor" that will
drive gold ahead of the commodities pack in 1Q09.
The Gold Report: Why don’t you give us some of the reasons that you’re
bullish about '09?
David Mason: First of all, I ascribe to the idea that the world's still going to
require basic materials. We still have a very strong economy in China from
all accounts. I read that China
is going into a “recession” and will only grow by 8% or 9% in
'09. “We would be so lucky!” I think it's going to be true of a
lot of the emerging economies.
The Chinese are extremely good
commodity traders; I think iron ore is probably a very good example. They’ve
basically walked away from the iron ore market, and I would expect they would
be back in again this spring because it is certainly an essential for their
economy.
I noticed the same thing with
some of the base metals in January of '04. You recall we had a really strong
run up from August of '03 through to about the end of January, and I saw the
Chinese traders walking away from the market for about six months before
coming back in again.
This is probably going to be the
leading event that will happen in '09. The emergence of Asia
as a prime buyer of basic commodities and, at the same time, people are
absolutely worried about liquidity. One of our directors who has a home near
Zurich was at the Munich Resource Show in November, and he came back with the
idea that there was only one interest in the whole show—and that was gold
and silver coins (i.e., very conservative).
So it shows that people’s
only interest, at this point in time, is in what they can liquidate. And gold
producing companies, I think, are going to be the winners in the first part
of '09. But I think that the other commodities are going to take off after
the first half of this year.
TGR: Do you
mean the base metals or the juniors?
DM: No, I
think base metals and steel additives. Coal, I don’t think so, but I
think the base metals—being copper, lead, zinc and steel additives
(primarily nickel and moly)—will have their day again later in '09.
TGR: Why
later? Why not February?
DM: Because
of the lag between the buying of materials and actual processing; it usually
takes some time for it to feed through the system.
TGR: Now you
mentioned you think the gold producers are going to enjoy the first quarter
of '09?
DM: That's
right.
TGR: Do you
see that continuing? We talk to a lot of different people, and I’m
hearing all sorts of comments regarding the first quarter of '09 being strong
for gold and gold producers. Do you see it continuing, or do you see it
pulling back with some down draft in the markets overall? Do you think we'll
see that same need to liquidate that we saw in '08?
DM: I don't
think so. One of the big drivers in the world economy, of course, is what's
happening with the U.S.
real estate market. I noticed the latest numbers indicate that the prices are
down again in November. But, as someone pointed out, this is largely because
the liquidation is still going on. People have thrown in the keys and have
decided to just walk away and the mortgage holders are selling it for
whatever they can get. That's bound to be a downer, but it doesn't mean that
the overall real estate market's going to be anywhere near as severe. Is
there any more than two or three months of that liquidation in real estate in
the U.S.?
I kind of doubt it, and that's been a primary cause for uncertainty in our
whole economic environment. That's my view.
TGR: What do
you think is going to be the driver for leading gold and gold producers
higher in the first quarter of the next year?
DM: Well,
there's still a huge amount of money sitting there ready for speculation. Everybody
that I talk to, very astute investors, are sitting there just waiting for the
next move. When it happens, I think you'll find a major turn in speculation
again. We've never seen so much capital sitting on the sidelines as this time
around.
TGR: That's
true. What do you mean by a 'turn'? I look at a lot of the producers like Goldcorp (TSX:G)
(NYSE:GG) or Hecla Mining Company (NYSE:HL) that have more than doubled off the bottom of October. That’s a
pretty significant move. What do you think these people are looking for?
DM: The
first to move is always the majors. Then you have your second-tier gold
producers and then your explorers. We haven't seen the second-tier gold producers move yet, so I think that would be an obvious
area to target. It's not the focus of what we do; we're involved at the
exploration stage.
The exploration stage companies
have been absolutely devastated, so a significant turn in speculation in the
gold market—which has been strong right now—but a move to, let's
say, $1,050 gold, will pump up the first-tier gold a little bit, the
second-tier gold a lot, and the explorers will get back into orbit again. I'm
sure, like me, you've looked at all the stats.
On the Toronto TSX Venture
exchange, there are about 750 companies that are really active. There are a
lot more than that, but as for the really active ones, most of them are down
significantly; and the majority is down as much as 90% from their peak in '08. A lot of those
companies—meaning at least 30% to 40%—are even trading below
their working capital. So they're sitting there with working capital less
than their market price, good enough cash to keep the company going for the
next few years, and a great resource. So any kind of a turn in gold or
silver, as a commodity, is going to have that ripple effect throughout our
whole business.
TGR: What
specifically are you looking for to drive gold to $1,050? What sort of events
would drive this?
DM: I'm of
the opinion that fear and the relationship with the
U.S. dollar is, quite frankly, probably driving no more than 40% of the gold
market. Fear will drive it, and a weakening in the U.S. dollar, which some
people are betting will happen—those are only two components. Now the
most important factor is just straight supply-demand imbalance.
The major companies are having
one heck of a time finding enough reasonable targets. It used to be that the
majors were looking for million-ounce deposits. Now that isn't enough. In
order to get the growth they need and to support their infrastructure, they
need three million-ounce deposits and those are extremely hard to come by.
I once did a calculation that if
every wealthy individual on this planet (say 5% of the population) were to
put 5% of his/her assets into gold, it would take something like 30 years of
current production for demand to meet supply. So I think, because it is a
store of value, it doesn’t necessarily have to be fear driven. During
the 1930s, one of the greatest professions was being a geologist because gold
(aside from the fact that it was fixed at $35 an ounce) was one of the few
commodities that was stable; and I think we might see this even with freely
traded gold markets.
TGR: What is
the difference between your merchant banking portfolio and your consulting
assets?
DM: You're
familiar with the flow-through program in Canada?
TGR: Yes, I
am.
DM: And
what we did going back almost from inception — I've been involved in
flow-through financing since the early '80s, actually — I started doing
small limited partnerships and we grew it from, basically, our shareholder
base buying the limited partnerships to a much bigger platform.
What it amounts to is if you
have a limited partnership that buys a portfolio of flow-through shares,
everybody gets the write-off — it's passed on to the individuals. So,
even though all the companies that are being bought are small companies, it's
become really big business in Canada.
Above all else, our strength lies in organizing, financing and promoting
junior resource companies. We do that better than
any other country in the world. At this last peak, we were raising about $6
billion a year, which was, and remains, more than all other countries
combined. So, considering that we're only a population base of 33 million,
which is about one-twelfth of that of the U.S., it's quite a feat.
Funds like CMP and Front Street raise between $100 and $200 million annually in their
flow-through funds. As a business model, it's a very good one for us to have.
We've been able to grow it from almost a mom-and-pop business to one that's
widely sold. We also took on a partner, BluMont Capital; and, through them,
we got into four of the five major banks in Canada, which is quite a big move
for us as a company. The banks in Canada control most of the
businesses. It's very different than the U.S.
and the banking system in the U.S.
In 2007, we raised about $30
million. In a good year with the syndicate that we’ve put together, I
would expect that it could be much, much higher than that. There's no reason
why we can't be really quite competitive with CMP and Front Street. So that's one significant
part of our business. I look on it as being a good source of funds to keep Augen Capital (TSX.V:AUG), a public company, alive
and healthy. It's very profitable and not only pays the bills, but we get a
good rate-of-return on it. At the same time, when you have a public company,
you have to be able to create some excitement and the real excitement is
going into companies like Energy Fuels
Inc. (TSX:EFR), which we created a few years
ago. I don't know if you're familiar with the Energy Fuels story.
TGR: I am.
DM: How it
started was in the late 1990s we bought a company; it didn't work out too
well, so we took it over and reorganized it and went out to seek new
opportunities. Energy Fuels came out of that looking for opportunity. So what
was a 9-cent company in January of '06 became a quarter billion-dollar
company within a year. And that kind of excitement is what really does
attract people to Augen Capital.
The majority of investors don't
have the opportunity to buy into things like that. If they see a company
that's well managed and is going to be profitable (particularly through times
like we're going into), and will capture upside in some of these merchant
banking type investments we're making, it's pretty attractive. Quite frankly,
I find more investors outside of Canada than inside. There are a
lot of experts here; but, because people look on Canada as being a leader in the
junior resource financing business, the thought of having one investment that
does what they're looking for is quite attractive. Augen
Capital has a large number of European shareholders. Our U.S.
shareholder base is also growing.
What we look for, in a nutshell,
in the resource LP type investment, are companies that are going to be very
liquid so we can trade the shares or get cash out within a year to 18 months
— that's the name of the game. Most investors are in the LP for the tax
write-off and at least a modest rate-of-return. The companies we invest in
appreciate that.
We work with the issuers to
ensure there's an orderly transition out. Our rates-of-return in the LPs are
consistently in the top three; the two we did in '08 are number one in Canada and
we've held that position. Some have not done well, but that's the name of the
game; we've very consistently been in the top three, which I feel good about
because we're competing against — well, for instance, CMP has reams of
people working for them, plus they have a sister company, Dundee, looking for
resource opportunities, and portfolio managers and so on. For us to
consistently be at least as good as them is quite a feat, even though they're
raising many times more money than us. I feel good about that. With the
merchant bank’s types of investments, what I'm really looking for is
how to make an investment in a company that will become the next new mining
district. In essence, Energy Fuels was that; the district, in that case,
being through Western Colorado, Utah and
down into Arizona.
TGR: Yes,
the uranium belt.
DM: The
uranium belt there. With Augen Gold
Corp. (TSX.V:AUJ) (we
started it as a private company and took it public via an IPO) we've got a
45-kilometre long belt of contiguous claims in some of the most prolific gold
producing areas in Canada, and it lies along the western extension of the
prolific Kirkland Lake—Larder Lake break, parallel to the Porcupine
Destor fault. There's no reason there can't be some major discoveries along
that belt. We've already have a historical (non-NI 43-101 compliant) resource
we're working on at the old Jerome Mine, where we've done some drilling and
increased the potential resource. So that's typical of our type of
investment.
We've also created a company
called Polar Bear Exploration, another private company, and it's in the
Hudson Bay/James Bay area of northern Ontario, which contains a suite of
magnetic anomalies in favorable rocks that lie within the same geological
belt that contains the nickel mines at Thompson in northern Manitoba and
Raglan in northern Quebec. We staked our claims in Polar Bear following
interpretation of an airborne geophysical survey over an area some 140 by 50 km.
TGR: I
noticed in your reports it looks like New Nadina
Explorations Inc. (TSX.V:NNA), under your merchant banking division, shows shares and warrants of
136,500; but, then in your consulting assets, it shows over 2 million shares.
DM: That's
correct. One of the things that a lot of the flow-through funds can't do is
to buy hard dollar assets. In most public companies, it's much harder to
raise hard dollars than it is tax-assisted dollars. You can appreciate that.
We will often co-invest along with our limited partnership. We disclose the
fact that both sides of our company are invested and give the flow-through
position the first priority when it’s time to sell. But if we can use
the lever of having some cash to buy a major position in one of our
flow-through investees, then often it means a better deal on the flow-through
pricing side.
The reason we call it consulting
assets is because it used to be 100% ours. But, technically, we sold the
ownership of the mutual fund to BluMont, and also the general partner of new
LP’s incorporated are owned by BluMont, a subsidiary of Integrated
Asset Management (TSX:IAM). So we're acting as portfolio manager on that side
now as opposed to owning 100% of it. Consulting assets is probably the best
way to describe it.
TGR: What
can you tell me about New Nadina Explorations?
DM: It's a
very interesting play. Diamonds, as you know, are very high risk. Either
you've got a winner or it's a turkey and there are millions of kimberlite
pipes across the globe. The thing that attracted us to New Nadina was the
fact that two of the best minds in the diamond business are actually putting
up their own money, and I had the opportunity to go up and pick the brains of
both those individuals. I'd known them professionally for a number of years,
but there is a big difference between talking to the people casually and
working on the same project. I'm quite convinced that they're going to come
up with a find here; they've got all the right ingredients.
Almost all of the kimberlite
pipes in that part of the world around Lac de Gras, you can pick up from
topography. The round lakes are a dead giveaway. Then, if the indicator
minerals, largely the garnet grains, look like you've got some of the right
mineral ingredients in the pipe, plus a strong magnetic anomaly (actually, in
some cases, you can have a reverse, a negative magnetic anomaly with a
kimberlite), you've got a pretty good bet there. Some of the targets they
have on the Monument Property are known to run in diamonds, so with all those
things you've reduced your risk by a huge amount. I think it's a good shot.
TGR: And
their assets are primarily where again? In British Columbia?
DM: No, in
the Lac de Gras area of Northwest
Territories, and that's where our whole diamond
business got started. It was interesting, for years geologists knew there was
a good potential for diamonds in Canada but we couldn't get any of
the major players interested. There's the odd discovery of diamonds here and
there, but the big players, De Beers and BHP and so on, just weren’t
interested. It really took people like Chuck Fipke, who had an absolutely
unrelenting desire to find diamonds, and finding the Etaki deposits was a
major coup. After that, the majors couldn't ignore Canada and now I think
we're going to rival almost any other country in the world. Our diamond
business is growing by leaps and bounds.
TGR: What
sort of event? What's the timeline? I'm assuming that, with a diamond mining
company, it's drilling, then the results go to the lab and the assays come
out. What sort of cycle are we on with New Nadina, in terms of the stock
having some news?
DM: Like
everybody else, they're going to have to raise some more money. I would think
that their program will get back underway this spring, so that would be the
time for some more action.
TGR: I
haven't seen any news in a while.
DM: A lot
of companies have asked, "What's the point in putting out news in this
market because everybody's ignoring it?" In fact, keep your powder dry
and don't spend the money you have until the market turns, because you can't
send out results if it's old news and the market's turned. Six or seven
months from now it's not going to do much for your shareholders.
TGR: You
think there's going to be an increase in news flow as the new year gets
underway?
DM: I would
think by mid- to late-spring we're going to see a lot more action in all of
these stocks.
TGR: American Bonanza Gold Corp. (TSX:BZA) — that's another
company I'm not familiar with.
DM: It has
an interesting gold deposit down in Arizona. It's one of the companies that
have almost made it on to the institutional list, but not quite. It's not one
that I'm as familiar with as others because one of our associates was more
involved in negotiating that deal. We've obviously got a big position in it.
It was bought when the stock was cheap in a good market and hasn't really
come off that much.
TGR: And
another one that looks like it is in Nevada
is Staccato Gold Resources Ltd. (TSX.V:CAT). What can you tell me
about that one?
DM: It was
a very interesting play. It's almost at a resource level. We got in at a much
higher price, unfortunately. The company did get rid of three of its non-core
Nevada projects recently and retained the larger potential properties in that
state. This downsizing is typical of most of the smaller gold explorers in this
difficult market. It's not one that I would say is a core position of ours,
but it's got good management.
TGR: What
other companies in the gold area come to mind that you'd like to talk about? How about Bravo
Venture Group (TSX.V:BVG)?
DM: Bravo
is a well-managed company. We've made some very good investments with many
things that Larry Page has put his mind to. It's just a very well-managed
company.
TGR: Any
others?
DM: What we've
done, to be very succinct, is gone from a model where we had a lot of smaller
positions to moving toward more of the Energy Fuels type of investment. We're
concentrating on six companies that are really going to make it for Augen
Capital on the merchant banking side.
TGR: And
what are those six companies?
DM: We
still have a significant interest in Energy Fuels while taking considerable
amount of profits in it. Augen Gold would probably be the largest single one
that's going to move our company, followed by Polar Bear (and I've already
explained what we're attempting to do there).
We've got a very large position
in a private company called Rukwa. Its properties
are prospective for uranium in an area of northern Quebec
stretching from James Bay to Labrador. The
nickel belt to the north includes properties of Xstrata. The uranium belt
contains Rössing-type deposits that are large low grade South African
type. Rukwa was founded by an individual called J.C. Potvin, who's been
extremely successful in the resource finance business. One of his companies,
Pangea Goldfields, was taken over by Barrick Gold
Corporation (NYSE:ABX) several years ago, and
he would like to do something similar in the uranium business, so we're
backing him on it. That would be another major holding of ours. AREVA (CEI:FP), the French uranium company, is very heavily invested in a number of
properties in the area Rukwa is involved in. They believe in it. They're
short of uranium, so they will pump a lot of money into the exploration
there.
We've got a holding in a company
called Nordic Diamonds Ltd. (TSX.V:NDL) and it has, like many
things in this market, hit some tough times. It has a gold deposit in Africa,
in Mali, which it has recently optioned off as well as uranium in northern
Sweden and interest in potash in Alberta and Saskatchewan.
International Kirkland Minerals
Inc. (TSX.V:IKI) has
good potential to become a significant uranium explorer. Since the third
quarter, we've done a deal with International Kirkland where we now own close
to 10% of the company, so it has great potential to be another one of our top
six. In International Kirkland, there's a property that we actually vended
into the company and it, in my own opinion, is similar to Elliot Lake (at one
time the major uranium producing district in Canada). I'm quite familiar with
what the Elliot Lake conglomerate looks like, and I went on to the property. A
prospector showed it to me back in 2006. It's near Capreol, Ontario, which is
quite a bit east of Elliot Lake. At Elliot Lake, the conglomerate dips around
30 degrees, which from a mining standpoint is not very good. You have to get
into slushing equipment, which means when you blast you have to have a
scraper on cables to bring the ore back down to the hole and the costs are a
lot higher. As you go further east, the dip becomes almost vertical, which is
a much better mining situation. The property we vended into International Kirkland
has some samples that assayed with grades at least as good as Elliot Lake.
When the market turns, that's
when to watch Energy Fuels, Rukwa, Nordic, Augen Gold, Polar Bear and International Kirkland. We're
looking at iron ore; and probably will be very, very cautiously going into
the iron ore market, but at some time over the next year we expect to have a startup in the iron ore business.
TGR: Great.
Thanks David. We appreciate your time this morning.
J. David Mason is Executive
Chairman and founder of Augen Capital Corp. (TSX-V:AUG).
Augen's principals and advisors have many years of experience and expertise
in identifying properties with substantial mineralization, and, an
outstanding track record in sourcing, structuring and executing merchant
banking investments in the natural resource field. In its first 10 years,
Augen has completed 250 investments and financings.
Mr. Mason graduated with a
B.A.Sc. from the University of Toronto in 1967 (Engineering & Economic
geology), and from McGill University in 1969 with M. Eng. (Mining),
specializing in management sciences and mineral economics. His work
experience in the mineral business included positions with Noranda Mines and
Rio Algom, as well as being a policy analyst for the Ontario Government. Mr.
Mason spent 25 years in the investment business, 10 of which as a Mining
Analyst (Wood Gundy & Walwyn Inc.), approximately 11 years in corporate
finance, plus IDA Member Firm branch management, and four years as an advisor
to individual investors.
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