Walter Berukoff, CEO of Lion One Metals, illustrates in two
sentences his fondness for precious metals. “My grandparents came here from
Eastern Europe,” he explains. “What they brought with them was their gold.”
Berukoff’s grandparents weren’t alone. Decedents of slews of
political and economic refugees relate similar experiences.
They explain in part Berukoff’s penchant for international
opportunities, the latest of which is the Tuvatu gold play in the South Pacific
Fiji island chain.
Despite recent pullbacks, junior mining stocks, like Lion
One Metals, - which is up nearly 300% since January - have made big gains this
year. Many provide surprising diversification characteristics and excellent
upside leverage to price increases in the underlying metals.
Lion One Metals stock price. (LIO:CN)
“The value of paper money is disappearing and I own physical
bullion.” says Berukoff. “I don’t keep it in a vulnerable place where
governments can take control. That gold in the ground (Tuvatu) is my (money) in
the bank.”
A Lion in Fiji: buried gold
Berukoff’s parallel between an undeveloped gold resource
like Tuvatu, and metaphorical “buried gold,” is a useful one.
That’s particularly true for precious metals investors, for
whom the collective memory of FDR’s seizure of Americans’ gold during the Great
Depression – the country’s last period of “secular stagnation” - is forcing them to be increasingly creative in
their hedging strategies.
Junior mining stocks, - despite recent pullbacks, - are thus
emerging as increasingly popular diversification options.
GDXJ
as at November 4
th, 2016
Big opportunities: but not for everyone
While junior mining stocks have excellent qualities,
they are not for everyone. Fiji, for example, where Lion One Metals’ Tuvatu
play is located, underwent a coup as recently as 2006. The situation has
stabilized somewhat. Elections held in 2014 were
reported
by a multinational observer group
to have been conducted fairly.
Yet while international investors fled the country in the
wake of the coup, Berukoff headed straight there.
“I got the deposit for pennies on the dollar,” said Berukoff,
who has done business in areas ranging from developed economies to trouble
spots like Russia, Sudan, East Africa and Cuba. “Fiji has a long history as a
British colony and a rule of law tradition. There is political risk anywhere
you go. But I had a good feeling.”
Berukoff’s patience looks to be paying off.
During recent months Lion One Metals officials claim to have
significantly de-risked Tuvatu, which is located adjacent to the Vatukoula gold
mine, one of the oldest and best producing mines in the South Pacific.
In August, Lion One Metals inked a memorandum of
understanding with Ansteel-CapitalAsia, which would see the China-based player
finance 80% of the capital expenditures needed to get the project up and
running. In September Lion One Metals announced a $38 million private
placement, by several large institutional investors, to help fund the rest.
Upside leverage to gold price increases
That said, starting up a gold mine, even a fully permitted
one like Lion One Metals’ Tuvatu project, which is next door to a long-term
producer, and thus can benefit from considerable existing road and other
infrastructures, is no easy task. Input costs can go up, gold prices could
fall, and even a minor official, who is slow to stamp the most mundane piece of
paperwork, could prohibitively derail the process.
Experts thus say that when you buy stock in a junior mining
firm, what you are really buying is not the asset itself, but the management
team.
CEOs like Berukoff, who owns nearly 20% of Lion One Metals,
and thus has “skin in the game,” are particularly prized, because – unlike the
bonus-bumped “hired help” that runs the majors – they ride in the same car as
shareholders.
Berukoff also has another asset prized by investors: strong
hands-on experience in the sector. He was an early investor in a slew of
projects and companies ranging from La Mancha, to Northern Orion and Miramar. “I
do everything,” says Berukoff. “I put together my management team, talk to
local officials, make sure we get power (electricity access is a major issue in
much of the developing world) … I even go underground.”
In fact, even Berukoff’s most public challenge – his
ill-fated investment in Leisure Canada, which sought to develop hotels and
other properties in Cuba – isn’t necessarily the setback it may appear to be.
In fact one of the best predictors of entrepreneurial success… is a previous failure.
The good news, is that once first pouring approaches,
juniors - particularly those like Lion One Metals that don’t sell their
production streams away – generally have strong upside leverage should the
price of gold increase.
For example Lion One Metals officials project that the
Tuvatu play will produce an internal rate of return of 52% if gold trades at
USD $1,200 per ounce. However at USD $1,300 – an 8% increase – the company’s projected
IRR rises to 62% - a 20% increase.
As if that was not enough, that upside leverage doesn’t
include exploration opportunities on adjacent properties, which in the case of
Lion One Metals, Berukoff believes are substantial.
Few good deposits being discovered
Whether Berukoff can keep the Tuvatu project moving forward
remains to be seen. If he does, early investors, particularly those who
participated in the company’s private placements and will thus generate
increased upside from the warrants they were issued, will benefit big time.
Brent Cook, editor of Exploration Insights summarizes the
stakes. “Very few deposits that are identified are eventually developed, due to
costs, complexities and political hurdles,” says Cook. “That means you need
access to a good independent assessment of the geology of a formation before
you decide to invest. However there are few good deposits being discovered so
the upside can be substantial.”
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Peter Diekmeyer is a business writer/editor with Sprott Money News, the National Post and Canadian Defence Review. He has studied in MBA, CA and Law programs and filed reports from more than two dozen countries.
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The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
