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Trey
Wasser, who designed the Mexican Gold & Silver Explorers Model to track
junior explorers and producers as they define and develop precious metal
assets and bring them into profitable production, took a breather from his
frequent travels south of the border to spend some time with The
Gold Report. Trey's model-based index has enjoyed a 250% increase since
inception in January 2007—including no loss in the 2008 crash—so
he clearly has a keen eye for what it takes to make a winner. Better yet, he
willingly shares insights on lots of his favorites in Part I of this
exclusive interview. More to come later this week.
The Gold Report: You've visited more than 75 projects in Mexico over
the past couple of years. How did you come to focus on Mexico?
Trey Wasser: I love Mexico. I grew up in San Diego and have traveled
there my whole life. I have watched the country grow up and now see some
distinct parallels to the U.S. in the '50s and '60s, although
Mexico—like many of the emerging markets—is evolving much faster
due to globalization and technology. Mexico is now so tied to the U.S. and
Canada through NAFTA that I believe most of the political and business risk
has been removed. The country has a very bright future.
TGR: And you've managed to tie all of that in with your interest in
gold and silver.
TW: The mining history in Mexico intrigues me. No one really knows how
long ago the Incas and Aztecs first started mining gold and silver, but the
Spaniards really cranked things up in the early 1600s. Every state in Mexico
is mineralized and has some type of mining history. Yet Mexico has seen very
little modern exploration due to property laws that did not change until mid
'80s. I expect that mining will be a major growth industry in Mexico for many
years to come.
TGR: How did Pilot Point Partners and Due Diligence Tours evolve?
TW: Pilot Point Partners really evolved from a venture capital company
I started in 1993 when I retired from the brokerage business, called III-D
Capital. I consulted with several early-stage technology startups, helping
them raise their first venture capital investment. By 1999, when the
technology and internet business plans that I was seeing (and that were
getting funded) had gotten way too speculative, I began to focus on natural
resources, specifically mining and energy. I learned that there was very little
independent research available in the junior mining sector and few U.S.
investment banks involved in the space. I saw an opportunity to apply my
research and consulting experience to junior mining companies operating in
Mexico.
TGR: Where does Due Diligence Tours fit in that picture?
TW: Mark Twain once defined a gold mine as "a hole in the ground
with a liar standing by it." All the companies look good at the trade
shows and on their websites. I thought that there couldn't possibly be that
many really good projects. It reminded me of the tech market of the late
1990s. I decided I needed to start visiting the properties.
Of course, many mining properties are very remote and it often means long
rides on bad roads to reach them. Add the travel time to and from Mexico and
you could spend four days to see a single project. Goldcorp (GG) had
a great way to go about it. They'd arrange a tour of three or four of their
Mexican mines and charter private aircraft to make the trip efficient, send
out invitations and fill up the planes with analysts. I saw an opportunity to
adapt that model and visit several different companies' properties on a
single trip. Hence, Due Diligence Tours.
I've developed a model that helps identify the better projects and tracks the
progress of their development. The people who travel with me know I have
vetted the projects and companies on the tours and that I can generate an
initial analysis from the model for them prior to the trip. This format is
why several analysts have traveled with me multiple times since our first
trip in 2007.
Generally speaking, companies sponsor these trips to their sites to generate
analyst coverage and investment interest in private placements, so I don't
typically travel with individual investors. However, I have had several
inquiries and it looks like we may try to organize something later this year
for individual investors.
TGR: Keep our readers posted on that.
TW: Of course.
TGR: Could you describe your model for following the companies?
TW: It's a proprietary model that I developed to evaluate companies,
their properties and the development of the projects. It is called Mexican
Silver and Gold Explorers—MSG. It compares the companies and the
deposits on several different quantitative and qualitative dimensions on a
matrix. The model tracks exploration companies from the grassroots stages as
they develop their assets and move into production.
TGR: How long have you been using this model and what does its track
record look like?
TW: Since its launch in January 2007 it is up over 250%. Unlike many
gold stocks and indexes, the MSG did not drop below its initial value in
2008. Of the 20 companies included in my model earlier this year, five
companies have been bought out or have done a significant strategic
transaction with a larger company and a sixth turned down a low-ball offer.
Three other companies have fully funded their projects and are moving into
production.
TGR: Let's break those down into groups. Which three companies are
moving into production?
TW: Timmins Gold (TMGOF.PK), SilverCrest Mines and Gold Resource Corp. (GORO.OB)
—which also formed a strategic alliance with Hochschild Mining just over a year
ago—have all fully funded their projects and are moving into
production.
TGR: Which one turned down an offer?
TW: MAG Silver (MVG). Fresnillo plc (FNLPF.PK) made a low-ball offer at the worst of
the 2008 market correction. MAG management termed it a "take-under"
and shareholders turned it down.
TGR: And finally, which five have been bought out or completed a
significant strategic transaction?
TW: West Timmins Mining, Canplats Resources (CPQRF.PK), Orko Silver (OKOFF.PK), Gold Resource and Castle Gold (CSGLF.PK).
TGR: Had you added these five companies to your model because you
anticipated such transactions?
TW: No, they just measured up very well in the model. They were
successfully growing their resource without significant dilution and were
doing everything on the ground to move their projects toward production.
TGR: That suggests some of metrics you use to evaluate companies. What
other criteria do you use to place a company into your MSG Model?
TW: Anticipated stock performance is the overriding criteria, because
once a company is included in my model, it also becomes part of the MSG
Index. In most cases, a stock being included (or dropped) from the model will
be the result of a site visit. On the ground, I can usually get a pretty good
feel for the project, the team in Mexico and their plans for development. The
main thing I'm looking at with management is experience and the way they
spend money. I look at how much money goes into the ground versus how much is
used for promotion and corporate G&A. While that won't necessarily
exclude somebody, it's a pretty good initial criteria. It generally will
reflect on management's ability to move a project forward without blowing out
the capital structure of the company. The capital structure is very important
in determining what the company has accomplished with equity they've already
raised and their ability to raise additional capital. So I track the stock
dilution for the past five years versus the advancement of the project and
growth of the stated resource.
TGR: Can you elaborate on what criteria you use to confirm that a
project is developable?
TW: Some properties are just very remote or have other issues that
will impede the economic viability of the known resource. They might look
good on paper as the company reports good drill results and puts together a
huge resource. In Mexico, surface rights and mineral rights are separate.
Having mineral rights does not guarantee access and use of the land for
mining. Most of the surface rights were granted to local communities called
"Ejidos" by the federal government after the Mexican revolution.
Securing these surface rights and access is very important and has been an
issue at several mine developments. Water rights are also a big issue in many
parts of Mexico, especially in Sonora and Baja where no new water rights are
being granted. Permitting, in general, is not a problem in Mexico, but it can
be an issue with certain projects if they are too close to an urban area, a water
source or an archeological site.
Underground mining in Mexico can also be challenging. The veins are generally
very narrow. They are notorious for pinching and swelling in both width and
grade. Feeding a mill from a long narrow underground vein can be difficult
and get very expensive. Building and operating a mill also adds significantly
to the cap-ex of a project. Raising the capital to develop an underground
deposit may be difficult for a junior company. I generally prefer to see
juniors working on open pit projects that can be heap-leached and developed
at a lower cost, without significant dilution. I am not a geologist or a
mining engineer, but I travel with a pretty elite bunch through Due Diligence
Tours. We have some pretty frank discussions about the projects. The main
issue is always whether the project is developable. Ownership is also an
important issue. I try to evaluate whether the company is capable of
financing and developing the project on their own or if they'll need someone
else to step in and develop the project through a sale or joint venture.
Ownership of the project is very important. I like to see 100% ownership.
TGR: Why is that?
TW: If a company is already joint venturing the project to earn only
60% or 70%, it will be very difficult for them to find another partner or a
buyer. Financing will be more difficult as well. If the joint venture is with
a major company, there are often "claw-back" rights where the
junior can be bought out of the project. This can mean that as a shareholder
I am taking all the development risk and may not ever see the rewards of a
fully developed project.
TGR: Does your model evaluate the ore bodies or do you rely on 43-101
reports?
TW: I read dozens of 43-101s and I encourage any investor to make these
reports part of their due diligence on a junior mining company. They are
important, but they aren't enough to fully evaluate a deposit. As you may
know, the 43-101 is a mineral resource classification scheme supervised by
the Canadian Securities Administrators and developed to regulate how public
companies disclose scientific and technical information about mineral
projects. This came about in response to a scandal in the late 1990s. The
idea was to make each report a fully independent evaluation, but in reality
the companies still have a lot of input into the reports.
The problem is that there aren't standardized calculations for modeling
deposits, establishing cut-off grades and stating gold or silver equivalents
from other metals. Much of the silver in Mexico is in poly-metallic ore,
meaning it is mixed with lead and zinc. The companies like to convert the
lead and zinc to "silver equivalent" ounces to state a bigger
global resource. Converting lead and zinc to so-called "silver equivalent"
ounces can be very deceiving. At current prices, 1% lead and 1% zinc would
add about 3.5 ounces per ton to a silver resource in a "silver
equivalent" calculation. But after typical recoveries, smelter charges
and penalties, 1% lead and zinc aren't really economical. So a typical
"silver equivalent" resource in Mexico might overstate the
recoverable silver by a very significant amount.
Companies also like to play with the gold/silver ratios and state "gold
equivalent" or "silver equivalent" ounces. This can make it very
difficult to understand the ore body and model cash flows. Recoveries of the
two metals may vary significantly and may not be considered in the resource
estimate. This makes it very hard to compare one company to another because
everyone uses different math. I do a lot of work to break down all the rock
values to come up with my own economic and developable resource numbers. The
companies don't always like it, but when their feasibility studies are
published, my numbers are usually pretty close.
TGR: In addition to your model and index, you also have a watch list.
Are the companies on your watch list part of the MSG Index or are you looking
to see whether they'll make it into the Universe?
TW: I use the watch list as a way to start to look at new companies or
companies that come onto my radar screen and follow them for a while. They
may be ones that I'm planning to visit before I decide to add them to the
index and the model. For example, I added Oro Gold Resources and Rochester Resources to the watch
list somewhere around October. Once I saw what they were doing, met with
management and checked out the deposit, I upgraded them from the watch list
to the model and the index.
Meanwhile, if I don't like the way something is going at a
company—maybe some problem with the deposit itself or the development
of the project—I may drop it from the model to the watch list, which
means I'm still covering it and watching progress, but it won't be included
in the index.
In the same way, I also keep an eye on the mid-tier Mexican producers such as
Minefinders (MFN) and Alamos Gold (AGIGF.PK) and others. I don't really follow them
per se, because they're already widely covered and for the most part, they
don't fall into my exploration model. I do use them in some other comparisons
on valuations with the other smaller producers that are actually in the
model.
TGR: Do you always add new companies at the Early Explorer level?
TW: No, I will add companies at any level as a new addition or an
upgrade from the watch list. But it is the Early Explorers that add the real
leverage to the overall MSG Index. Since January 2007, the Advanced and
Producing Explorers are up 166% and 103% respectively. The Early Explorer
category is up 770%.
TGR: Wow, that is impressive. To what do you attribute those returns
for Early Explorers?
TW: Without question I attribute it to Due Diligence Tours and a lot
of boot leather on the ground in Mexico.
C.F. (Trey) Wasser III spent 20 years as a bond salesman and trader with
Merrill Lynch, Kidder Peabody and Paine Webber, specializing in corporate
cash management for many Fortune 100 companies and institutional money
managers. He counts some of those same institutional money managers among his
clients today, in his capacity as President and Director of Research for Pilot
Point Partners LLC and President of Due Diligence
Tours. It is via DD Tours that Trey takes analysts and fund managers on
periodic site visits to junior miners' properties in Mexico. An entrepreneur
who is also active in the Dallas real estate development market, Trey formed
III-D Capital LLC in 1993 to assist early-stage technology companies develop
business plans and secure venture capital financing. That work evolved into a
range of consulting assignments and finance activities for mining companies.
He also serves as a pro-bono consultant for a number of regulatory agencies,
including the Financial Industry Regulatory Authority (FINRA), which
is the largest independent regulator for all securities firms doing business
in the United States.
DISCLOSURE:
1) Karen Roche, of
The Gold Report, conducted this interview. She personally and/or her family
own none of the companies mentioned in this interview.
2) The following
companies mentioned in the interview are sponsors of The Gold Report:
Goldcorp, Timmins Gold, SilverCrest Mines, MAG Silver, Canplats Resources and
Minefinders.
3) Trey
Wasser—I personally and/or my family own or am paid by the following
companies mentioned in this interview: Capital Gold, Silvermex, Gold
Resource, First Majestic and Excellon.
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