George Ireland, portfolio manager with Boston-based Geologic Resource
Partners, believes in seeing what he invests in and his passport bears
witness: 80 countries visited in five years. From Africa to Argentina, from
gold to lithium and graphite, he and his team seek out companies with
experienced management, promising geology, good infrastructure and strong
cash flow. Ireland shares his views on issues facing the mining industry in
all corners of the world in this exclusive Gold Report interview.
The Gold Report: Your grandfather was a mining engineer. Your father
founded a coal company. You are a geologist, worked with Cliffs and ASARCO
and are on the boards of several mining companies. How much of your success
at Geologic Resource Partners do you attribute to your business acumen and
how much to your relationships in the industry?
George Ireland: Having grown up in a mining-oriented family, the
dinner table conversations from an early age steeped me in the lore and
intrigue of business. Based on that early interest, I have built up quite a
book of relationships and a broad knowledge over the years, but I attribute a
lot of the opportunities that have come my way to hard work and perseverance in
an industry that was, for quite a long time, out of favor.
TGR: What wisdom did you pick up at the dinner table that you use
GI: One of the first things I learned was to see for yourself what you
are investing in and who you are investing with. The second—and I give
this advice to companies that we invest in and to other fund
managers—is to talk to your investors, to the people who are giving you
their faith and money.
TGR: Does that mean you make regular site visits to projects?
GI: My team and I have visited about 80 countries over the last five
TGR: What are your "must-sees" on a site visit?
GI: Typically, we are looking at the lay of the land: how the project
sits in the political jurisdiction, the social environment, the environmental issues. We look at management, from the
senior level down into the junior ranks. We want to know if they are capable
of performing the work they are being asked to do. We look at the assets
themselves, reviewing public information found in various documents such as
NI 43-101s. We look extensively at the drill cores, site and plan maps and
other data to assess the quality of work being performed with regards to our
own assessment of value of the company.
TGR: Do you expect your clients to meet a certain annual performance
GI: We do not have a specific threshold. Our orientation is toward
compensation and performance over the long term.
TGR: Would it be fair to say that you look for at least double-digit
GI: Very definitely. Given the expected risks in the mining industry,
our investors look to us for rates of return comparable to other venture
capital or private equity businesses. We believe it is important to note that
the mineral exploration business, much like the pharmaceutical or tech business, can create substantial growth of value through
exploration and discovery. Our general focus is to capture those areas of
growth, rather than the commodity trends.
TGR: What is your time horizon?
GI: Our investment horizons typically stretch from two to five years.
We focus on a firm's capabilities and ability to grow, not its latest drill
or production results.
TGR: Are you concerned that equities have trailed the underlying
commodity, especially in the precious metal side, for close to 18 months?
GI: The market trends are changing. We are now seeing the precious
metal mining companies being valued using similar metrics to other mining
companies, whereas historically they traded at a substantial premium. We
believe this is both a natural evolution of the market and a direct result of
the widespread acceptance of the metal exchange-traded funds (ETFs) like SPDR
Gold Shares (GLD:NYSE.A). On a smaller scale, we see
a lot of opportunity in exploration and development companies. Fortunately
for us and unfortunately for them, these companies are having trouble getting
financed, which means we can pick and choose among the assets that interest
TGR: Are you paying more attention now to things like infrastructure?
GI: Infrastructure has always been a critical component of mining
investment. Our approach always includes taking into account all the
necessary factors for a mining situation to be developed. The infrastructure
demands of a mining project and how they will be financed are always crucial
factors in deciding to invest in any remote mining situation.
TGR: Are most of your positions private placements or do you buy
positions in the market?
GI: We do both.
TGR: In terms of your private placements, how important is a warrant?
GI: Not critical, although we like warrants. We particularly like
financings that are elegantly structured, meaning the warrants are tied to
the company's financing needs rather than an unrelated timeframe.
For example, if a company is raising money for a drill program it expects to
complete in 15 months, we like to see that the warrants are tied to the
completion of that program so they can be used to fund the next stage of
exploration and development.
A big problem for many junior companies is the potential dilution caused by a
large number of warrants outstanding with no implicit or explicit linkage to
the cash requirements of the company.
TGR: Can you give us an example of a recent private placement you did
versus the market price for the company involved, without naming a specific
GI: Typically, private placement terms are on the higher end of the
historic band for discounts, namely 10–15% off a recent
weighted-average price, as opposed to 5–10%.
TGR: Are you looking for companies offering a dividend?
GI: Absolutely. As a long-term investment fund, our focus is on total
return to our investors. That comes through both capital appreciation and
TGR: Does that mean you are looking beyond companies in the exploration
and development stage and into mid-tier and top-tier producers?
GI: Yes, we invest in companies in all phases of the mining sector. We
utilize our judgment to decide which companies are the most appealing based
on projected risk-weighted rate of return. In practice, that means you would
not expect the same returns in lower risk senior producers compared to higher
risk explorers once you remove the issue of the movement of the underlying
commodity price. As for capital reinvestment and dividends, it is logical to
expect that smaller, more rapidly growing companies would be less likely to
pay a dividend than their more senior competitors.
TGR: Has your asset base moved from companies with market caps less
than $200 million to larger companies, given that more of them are offering
dividends than they used to?
GI: For us, dividends by themselves are not a driver; they are part of
the total return on a particular investment. What causes us to change the
portfolio in one direction or another is where we see the best prospect for
total return relative to the level of risk inherent to an investment. It all
depends on our view of the potential return on an individual company, not a
particular segment of the business.
TGR: Would you be willing to name some of the dividend-issuing
companies you hold?
GI: We hold names such as Barrick Gold Corp. (ABX:TSX;
ABX:NYSE) and Goldcorp
Inc. (G:TSX; GG:NYSE), to name two of the larger ones in the gold sector. Outside of the
gold business, we hold Cliffs Natural Resources Inc. (CLF:NYSE)
and Cameco Corp. (CCO:TSX; CCJ:NYSE), for example.
TGR: What are your strategies for playing ETFs?
GI: Our strategy for metal and metal stock ETFs is to look at relative
return in the metal versus the equities.
For example, we hold platinum and palladium ETFs because we like the outlook
for the metal, but we do not like the outlook for most of the companies,
particularly those operating in Southern Africa and Russia.
TGR: Without naming companies, what have you seen on site visits that
made you decide not to invest?
GI: Our site review process has uncovered everything from operational
issues related to the geology or the quality of the drilling to engineering
challenges associated with site layout or metallurgy. There may be
infrastructure issues related to access to the project or, more importantly,
shipping routes away from the project. Political and economic issues in the
region or country can also come up. And finally, site visits allow us a
better chance to see the quality of management in their "home" as
opposed to being in a nice office or boardroom.
TGR: Brent Cook has suggested that there are too few people properly
trained in preliminary economic assessments (PEA) and prefeasibility studies
(PFS), leaving untrained people to plug numbers into models that cannot be
relied on to predict whether a project can be mined. If you agree, what are
some common errors retail investors should look for that might raise a red flag?
GI: We are deeply committed to doing onsite due diligence as we want
to be able to make our own assessments of the numbers being used in the PEAs
or PFSs being prepared. That said, it is important for retail (and
institutional) investors to read and understand these documents for what they
are: namely, preliminary estimates. If I had to characterize the most common
area for error at this stage, it would be the assessment of the geology of
the deposit and how it relates to the calculation of resourses and reserves.
Concurrently, the investor needs to understand how the economic numbers were
calculated, particularly such things as metallurgical recoveries and costs
such as the cost of electricity, fuel, labor and metals prices.
Investors need to understand the upside case, and more importantly, the
TGR: What are some of the common problems you see on site visits?
GI: One general theme is the lack of trained staff and labor, ranging
from engineers and geologists to skilled operators and trades people. This
continues to be a big problem worldwide.
The second would be the uncertainty associated with legal title and the
project investment climate. This includes the tax rates or ownership
structures being imposed by host countries.
The third is the temptation to use advanced technology where it is not
completely understood or is being misapplied. Too often, this leads to
failure or poor performance.
TGR: Once financed and in production a lot of mines fail to meet
production targets. A management change soon follows. Is this a result of
some of those factors?
GI: Very much so. It is the combination of, first, the expectations of
the original group not being met and, second, not having the depth of
experience to understand and correct for all the variables. It is no surprise
to see issues come forward that were not anticipated in the feasibility
studies. An axiom that one of my analyst partners loves to use is "there
has never been a failed mine without a positive feasibility study."
TGR: I like that. Can you tell us about some of your recent site
GI: My team and I have recently been to the Democratic Republic of the
Congo (DRC) to visit Banro Corporation (BAA:TSX; BAA:NYSE) and Loncor Resources Inc. (LON:NYSE.A;
recently visited Continental Gold Ltd. (CNL:TSX) and other companies in Colombia. I also visited a number of
non-precious metal names, including Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) in Argentina. In the rare earth space, I visited Great Western Minerals Group Ltd.
(GWG:TSX.V; GWMGF:OTCQX) in South Africa, where I just joined
TGR: In South Africa, calls to nationalize more of the mining industry
are growing. Why?
GI: South Africa is not alone. It seems that 80–90% of the
countries around the world want more of the patrimony to be shared with the
government and the citizens.
The history and economic ramifications of apartheid influenced the move for
local ownership in South Africa. There also are labor/management conflicts
over wages and profit sharing. We believe the South African political outlook
has declined substantially over the last five years.
However, South Africa is not alone. In 2010, the Australian government sought
a very large tax increase on the mining sector. The U.S. Environmental
Protection Agency has taken actions relative to the coal industry.
TGR: Let's go into more detail on your African visits. Banro recently
chose a debt financing over equity financing. What are your thoughts on that?
GI: It was entirely appropriate, given the cash generation capability
of its Twangiza project and the relatively accelerated development at Namoya,
its number-two project. Banro looked at the cost of capital of equity,
convertible debt and straight debt and decided the debt issue was the best
TGR: You have seen Namoya firsthand. What do you think?
GI: When I visited approximately 18 months ago, I was very impressed.
Namoya has a relatively easy physical layout to build, a good operating
environment in terms of climate and, relative to Africa, ease of access.
TGR: Banro has a position in Loncor, is that right?
GI: Yes. Many of Banro's early exploration team members were shifted
to Loncor to develop exploration projects in North Kivu. As North and South
Kivu became safer to explore, we noted their success with the Banro projects
and wanted to invest with them.
TGR: Loncor has an agreement with Newmont Mining Corp. (NEM:NYSE) on its Makapela project, a high-grade gold deposit
in North Kivu. Geologically speaking, can it be a mine?
GI: We believe so. The drilling is very early stage. There are two
development options. One would be a larger, lower-grade, open-pit
development. We are interested in the second option, a higher grade
underground mine. It would have lower capital costs and be easier and faster
to bring into production.
TGR: What are your thoughts on Peter Cowley and the management team?
GI: My teammates and I have known Peter for a number of years and have
a lot of respect for the job he and his team have done. On our site visits,
we have been pleased with the work being carried out under their direction.
As a non-technical factor, we have been very pleased with the training
programs that Loncor is offering its Congolese employees and the care being
taken to build social relationships locally through their charitable
TGR: Many people consider the DRC to be the riskiest district in
Africa. But the geology is irresistible. How do you balance those two
GI: High risk/high potential return is the mantra. While we believe
that a number of assets in DRC that offer potentially returns to investors,
the risk associated with each one must be closely scrutinized. For us, one of
the key risks comes back to the question of whom we are investing with. In
the case of Banro and Loncor, we believe the team, from the board down to the
men with feet on the ground, has experience and relationships in the DRC to
develop profitable mines with social and environmental sensitivity.
TGR: You visited Continental Gold's Buriticá Project in
Colombia. What can you tell us about that?
GI: We began investing in Colombia a number of years ago, principally
in the private company that evolved into Continental Gold. We initially saw
Colombia as a regional play, just opening up for exploration and
systematically underexplored by modern standards.
Developing Buriticá as the company's chief asset with the Berlin asset
in second place struck us as a very good strategy. We like the high-grade ore
reserves at Buriticá and the very high probability that it will be an
underground mine using bulk tonnage mining methods. This approach should
cause the project to have a relatively small footprint on the surface
environment, which eases permitting and causes less social disruption.
TGR: Ari Sussman is Continental Gold's CEO, as well as CEO of Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX). Is this a management team you follow?
GI: We also invest in Colossus, and, yes, Ari has attracted strong
people. We are particularly impressed with Sussman's ability to build up
management teams with people as they are needed at each stage: exploration,
development, construction, production.
In our evaluations, we ask how well management is prepared to transition
itself in terms of its skill set as the company grows in value and as it
develops its assets. That is one of the major risks in any kind of venture
capital or private equity business.
TGR: What are your investment themes for non-precious metals equities?
GI: One of our major themes is in what we call "green
metals," metals that will benefit from the environmental issues
associated with global warming and climate change. An example is the
Lithium Americas is one of the most advanced brines project in South America,
producing lithium using brine technology and solar evaporation—a very
low-cost production method. We expect it to be among the first to market, in
relatively due course.
And because lithium batteries utilize graphite in their anodes, we started to
look at graphite producers. One of the most intriguing projects is Northern Graphite Corp.'s (NGC:TSX; NGPHF:OTCQX) Bissett Creek in Northern Ontario. The management
team has the right combination of geologic, mining and marketing smarts. We
became a cornerstone investor.
TGR: You have done well; since August Northern Graphite's share price
probably rose about 300%.
GI: There is an old adage, "never mistake intelligence for a bull
TGR: So, is it a bit too frothy right now?
GI: It depends on your view for graphite. We fundamentally believe in
the green metal theme and have decided that the lithium/graphite complex will
be a winning technology.
If you believe market penetration for electric vehicles will be in the
3–4% range over the next 5–10 years, graphite prices will have a
lot of upside. If you believe in market penetration rates of 10–15%,
graphite prices will have to be that much higher in order to bring out the
amount of material needed.
TGR: As an institutional investor, can you offer any wisdom to retail
investors wondering if they should stay in the mining equity space?
GI: The generic advice to any investor in any business is to know what
you are investing in. Know whom you are investing with. Do your homework.
Structure your investments appropriately relative to your risk profile. That
is essential for institutional or individual investors in this high-risk,
potentially high-return sector.
TGR: George, thank you for your time and your insights.
Geologic Resource Partners LLC in 2004 and serves as its chief investment
officer and managing member. He serves as portfolio manager of the associated
Geologic Resource Funds and has been president of GRI Holdings LLC since June
2000. Ireland has 30 years of experience in all aspects of the resource
sector, ranging from field geology to banking and venture capital.
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1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Goldcorp Inc., Banro Corp., Loncor Resources Inc.,
Continental Gold Ltd., Lithium Americas Corp., Northern Graphite Corp. and
Colossus Minerals Inc. Streetwise Reports does not
accept stock in exchange for services.
3) From time to time, Streetwise Reports LLC and its directors, officers,
employees or members of their families, as well as persons interviewed for
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