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It is
difficult for retail investors to sift the wheat from the chaff in the junior
miner sector. In this interview with The Gold Report, Rick
Winters reveals how RMB Resources, a resource merchant bank, figures out what
projects to invest in and those to pass over and talks about some of the
companies that made the cut.
The Gold Report: Rick, RMB Resources invests in resource
companies throughout the world. Why is RMB flocking to resource companies
when most investors seem to be running in the opposite direction?
Rick Winters: RMB Resources is the resource
merchant banking division of the FirstRand Group, one of South Africa's major
financial institutions. We've been in the business of providing finance to
the junior resource sector for 18 years. We look at junior resource
opportunities everywhere in the world outside South Africa.
As resource investors, we're always in the game, even when the market
doesn't seem to care. Our product mix may change with market conditions, but
we stay in the market and are always active.
TGR: With the risk-off sentiment that's
prevalent in the market right now, are you making changes to your overall
strategy?
RW: As a merchant banking operation, we
look at junior resource finance and focus on relatively higher-risk,
higher-return opportunities. In times like this, when junior resource
equities and mining equities aren't in favor, we look more toward
quasi-equity and quasi-debt investments as a way of providing finance to
companies. We do this when we have confidence in their projects, using their
projects as security for a debt structure. This saves companies from dilution
in a time of very low share prices.
TGR: Can you talk more about quasi-debt
and quasi-equity investments?
RW: We invest all along the spectrum,
from pre-initial public offering seed capital through to corporate debt and
project finance. When we talk about quasi-equity and quasi-debt, it's a
reflection of the stage that a project or a company is at. Quasi-equity tends
to be higher risk.
"We
focus first on people and identifying good management that we've done
business with in the past and that currently has good opportunities."
One example of such a transaction is Bullfrog
Gold Corp. (BFGC:OTCBB). We have funded Bullfrog Gold
as a quasi-equity opportunity because it has a very attractive project that's
had a significant amount of work done on it in the past—a feasibility
study, initial permitting and the like. But now, it needs funding to confirm
what was done in the past and to expand the project. The transaction uses the
project as security for the facility. We have a significant warrant package
associated with that facility that represents the return we need for the risk
profile.
An example of a quasi-debt transaction would be Solitario Exploration &
Royalty Corp. (SLR:TSX). It has a project in Nevada, a
gold heap-leap project, Mt. Hamilton. That project completed a final
feasibility study in 2012, so the project is well defined. Solitario
continues to optimize that feasibility study. Once again, the project is used
as security for a debt facility but because the project is well defined it
has a lower risk profile and our required warrant exposure is consequentially
lower than a quasi-equity opportunity. That facility is to provide working
capital to complete the permitting process so that the company can go forward
with obtaining project financing and put the project into production.
TGR: What is the total amount of your
investments in resource companies, both in 2011 and in 2012?
RW: We have a lot of movement in and out
of our portfolio but, generally speaking, we have a portfolio of about $100
million (M)in equity and around $200M in debt.
TGR: Do you expect those levels to
increase in 2013?
RW: Not necessarily. But we'll probably
see our debt portfolio grow in 2013 because of the nature of the market.
TGR: With all the companies knocking on
your door, how do you decide which ones you're going to invest in and which
ones you're not?
RW: We really stay with the fundamentals.
In a buoyant equity time, the spectrum of the projects that we look at is
much broader and we do look at exploration and very early-stage projects and
seed capital. But we're doing much less of that these days.
We're focused now on projects where we can assess the project and the
opportunity technically. We assess the tradeoff between what we believe will
be the fundamental value and the opportunity for the project to actually
become a cash-flow generator. In other words, we're looking at the
feasibility stage and above.
TGR: What are some investment themes that
you expect will govern most of your investment decisions in 2013?
RW: The last year and a half has been an
unprecedented period for the industry. We expect 2013 to be the same. We seek
to patiently invest. We continue to have a minimum three-to-five year
investment horizon.
"Retail
investors need to look behind the retail promotion and see where serious
money is getting invested."
We focus first on people and identifying good management that we've
done business with in the past and that currently has good opportunities. We
focus on projects and make sure there's sufficient asset value to justify the
risk-return profile. We also focus on our companies' abilities to promote and
raise capital because the mining business is very capital intensive.
TGR: Are your investments geared toward
rising commodity prices or are you looking for specific situations that merit
your expertise and your cash?
RW: We're happy to participate in the
equity upside that comes along with rising metal prices, but we have more of
a banking mindset than an equity investor mindset. We're always looking for
the recognition of fundamental value at rational metal prices, which are
often lower than the current price. In other words, we focus on project
fundamentals.
TGR: Where do you see metals prices,
particularly precious metals prices, in 2013?
RW: Prices will be relatively stable.
There will be volatility within the metal prices, precious metals in
particular. We're in an environment where fiat currencies and the major
economies in the world are in trouble. The debt situation has to be dealt
with, and is not going to go away for at least a few years. That's why I
don't see a precious metal environment that's much different than what we've
seen over the last couple of years.
TGR: RMB Resources is an investor in Sutter Gold Mining Inc.
(SGM:TSX.V; OTCQX:SGMNF) and you are a
director of that firm. Is it common for RMB to have a position on the board
of a company that you're investing in?
RW: No, it's not typical for us. One of
our most treasured mantras is not to become involved at the board or
management level. We believe that if we can't have confidence in the boards
and managements of the companies we invest in, we probably shouldn't invest
in the first place.
"When
this market turns, it will come back with a vengeance."
We became involved in Sutter when the former largest shareholder
decided it didn't want to be in the gold business anymore. We purchased half
the company from that shareholder and then sought to move the company and the
project in California forward. When we started, we had 49% of a junior public
company and had to build a management team and a new board from the ground
up.
TGR: Sutter just poured gold, its first
doré, at the Lincoln project in northeastern California. Will this
news move the share price?
RW: Sutter's price graph shows that it's
one of the better-performing junior stocks and has been over the last year.
With the mine being built and coming into production, the value of the
company has more than doubled over the last 12 months.
TGR: But the share price has been roughly
the same since March.
RW: Now that the company poured the first
gold in the Mother Lode in 54 years, the market is waiting to see the mine
start to generate cash flow. The first six months of 2013 will be the ramp-up
phase and the mine should be in full production by midyear. Then we'll see
what value the market assesses for the Lincoln-Comet project.
That initial project is based on a five-year resource of about 180,000
ounces (180 Koz). What the market will come to appreciate is the immediate
upside for Sutter. There is a second project, the Keystone project, which
lies immediately north of the current mining resource. That's about a 400 Koz
resource. The mill has been designed and built so its capacity can be doubled
at a cost of about $700,000–750,000.
TGR: Has Sutter provided any production
guidance for the first year?
RW: Not yet. It will going forward, but
that will be a function of how the ramp-up goes. Once the Lincoln-Comet
project is in full production, about 23 Koz/year is anticipated. There will
be less than that in 2013 given the ramp-up for half the year.
TGR: Has any of that gold been forward
sold?
RW: It has—RMB Resources provided a
prepaid gold facility. To fund the project and get the mill built, we sold
forward half the production of the current mine plan at a price of $942/oz.
Sutter got—this was at a time when gold was around $1,540/oz—$20M
in finance to sell 54 Koz forward for which it will receive $942/oz. In
effect, it got a price of about $1,320/oz, selling forward in July 2011.
TGR: Do you know its cost per ounce?
RW: It should be around
$700–725/ounce.
TGR: What are some other junior mining
companies that RMB helped finance?
RW: Another recent one was Bullfrog Gold.
It's a relatively new company and has a current market cap of about $11M. It
has an advanced exploration project in Arizona called the Newsboy project.
In the 1990s, an Australian company did quite a bit of work and actually
defined a resource of about 5 million tons (Mt) at about 1.5 grams/ton (g/t)
gold. It completed a feasibility study and started all its permitting work in
Arizona, so the state regulators are aware of the project. It then fell by
the wayside in the mid-1990s. A Canadian company had it for a period of time,
did a bit of work and then dropped the project in the late 1990s. In the
early 2000s, a private group restaked it, and Bullfrog optioned the property
from that private group.
Bullfrog is now working hard on it and is doing a lot of drilling to
confirm the historic resources. It's gone a long way in doing that. It
started to expand the deposit beyond the limits that were known in the 1990s.
We think there is likely a deposit there that will be around 7 Mt at 1.5 g/t.
Our facility, which is $4.2M, is to fund work at the project for the next 18
months. The work is intended to do the additional drilling and resource
evaluation to complete the initial resource re-estimations and to begin, if
not complete, feasibility and get the final permitting under way. It's a new
opportunity that the market hasn't known about because it was in private
hands, but we think it will become a mine.
TGR: Do you think that the management at
Bullfrog has what it takes to go beyond what previous operators could do?
RW: Yes. The management is led by a
gentleman named Dave Beling, who is a very experienced mining engineer. He's
been involved with several different junior companies and has done lots of
consulting work. We see eye to eye with Mr. Beling on what work needs to be
done to bring a project to a development decision. Right now, it's a very
lean and mean management team, but that's by design. At this point, the focus
needs to be on the geology of the project area in the drilling and the
resource estimation. But Mr. Beling also has all the experience to bring a
development team together when the time comes.
TGR: Sounds like a lot of what your job is
in this business is not to see what a project is but what it could become.
What could the Newsboy gold-silver project in Arizona become?
RW: If it develops as we think it should,
it will be a project that should be producing around 35–40 Koz/year and
probably generating annual earnings before interest, taxes, depreciation and
amortization of about $25M. On paper at $1,700/oz gold, it preliminarily has
a net present value (NPV) at a 5% discount of around $90M in comparison to a
market cap of around $11M.
It's a good example of how we try to assess fundamental value. It's
also what allows us to have patience in our investing because with most of
the companies that we're involved in we're looking at the opportunity for a
four or five time increase in value.
TGR: What are some other companies you're
invested in?
RW: Along the same theme is Solitario,
which I mentioned earlier. It has a current market cap of about $50M, but its
Mt. Hamilton project at $1,700/oz gold has an NPV of $260M. That's another
deep value discount situation.
We recently became involved with Mercator Minerals Ltd. (ML:TSX) out of
Vancouver. It has an interest in an operating copper-molybdenum mine in
Arizona, the Mineral Park mine, as well as advanced development-stage assets
in Mexico. We were a part of an overall balance sheet restructuring of the
company. It had to restructure the debt associated with Mineral Park.
Mercator just completed a major expansion at that mine to 50,000 tons per
day. It's a large-tonnage, low-grade mine that produces around 40 million
pounds (Mlb)/year copper and about 10 Mlb/year molybdenum.
Mercator is currently trading at about $0.58/share, down from over
$4/share two years ago. It's a situation where the market has lost confidence
in that company's ability to service its debt, so it needed to restructure
its debt more in line with the long-life nature of the Mineral Park asset.
We refinanced a $30M facility that it had with a group of Canadian
investors for its El Pilar project in Mexico, which is a large, low-grade,
heap-leach opportunity in northern Sonora, just across the U.S. border. That
project, which is where our security lies, has a final feasibility study
completed. It's fully permitted to go into production. It only needs to
obtain project finance to move the project forward.
The El Pilar asset really is one of significant value. That project
has an after-tax, all-equity NPV8 of $460M at an average copper price of
$2.82 per pound over the life of the project in comparison to a current spot
price of $3.67 per pound. It's in a very good location with very good
infrastructure, so it has a relatively low $280M capital expenditure
requirement to put it into production. But with that sort of NPV after tax
and with the current market cap of the company at about $180M, the value of
El Pilar is over 2.5 times the current market cap without giving any credit
to cash flow from its mine in Arizona or its other projects. That's another
example of the type of things we look at.
TGR: Is El Pilar close to any larger
producing companies in Mexico?
RW: Yes, it's about 45 kilometers
northwest of the Cananea mine, the largest copper mine in Mexico. It's also
about 50 miles southeast of some of the large Arizona copper mines, such as
Sierrita/Twin Buttes. It's a unique deposit, but it's in a very good address
for copper mining.
TGR: Another investment you made?
RW: Another one that we put some real
equity into is a unique story, Highland
Copper Company Inc. (HI:TSX.V). It's a
Vancouver junior that has an interest in copper in the Upper Peninsula of
Michigan. Most people don't remember that the Upper Peninsula was one of the
greatest copper belts in the U.S. for some time. It produced over 5 Mt of
copper.
Highland Copper did a joint venture with a Houston group, BRP LLC,
which holds interest to about 13 million acres of mineral claims in the U.S.
It purchased the mineral claims in the Upper Peninsula in a bankruptcy in the
late 1990s and really didn't know what to do with them. To Highland's credit,
it did a joint venture with BRP to earn a 65% interest in the Upper Peninsula
mineral holdings by spending $11.5M and producing a feasibility study.
The problem came with the markets over the last 18 months and the
company's inability to finance itself and move forward on the earn-in
conditions of the joint venture. We became aware of it when a notable mining
entrepreneur, David Fennell, learned of this opportunity and discussed it with
us.
It was a restructuring exercise to take this Canadian company, which
last May had a market cap of about CA$2M. At that time, Fennell brought in
new investors including RMB Resources, new money ($16.5M), new management and
renegotiated the earn-in option appropriately to allow it to go forward. We
now own about 10% of the company.
The company has, since July, drilled 160 holes and over 24,000 meters.
It is focusing on the chalcocite part of the belt. Unlike the native copper,
chalcocite as a mineral is much more friendly from a metallurgical standpoint
and produces a very high-quality, clean copper concentrate. No one had really
focused on the chalcocite part of the belt in the old days.
We would expect that sometime in Q1/13, Highland Copper will come out
with its initial resource estimate, and it will probably be on the order of
6–7 Mt initially of 2.2–2.5% copper, most of it open pitable,
which is quite significant these days where the average grade of a copper
deposit is more like 0.5%.
There was a joint venture by Inco and Homestake Mining Co. in the
later 1970s and early 1980s, and they defined three deposits, conducted
preliminary evaluations and produced resource and reserve estimates. Highland
got an inventory of around 2 billion pounds of historic chalcocite and native
copper resource, which needs to be prioritized and confirmed.
Bottom line, Highland has a high-grade deposit near the surface in an
area that has a copper mining tradition. It is fully funded to meet its
obligations under the joint venture earn-in. It has also been producing
fantastic results, but people haven't really noticed. That said, it currently
has a market cap of about $24M, up from $2M, with about $14M in cash and a
lot of work going on to get an initial mine going and really explore and
evaluate the 13,000 acres of holdings that it has in the Keweenaw project in
the Upper Peninsula of Michigan.
TGR: What about permitting in a place like
Michigan, which hasn't seen a lot of mining over the last 30 years or so?
RW: Michigan seems to have quite
favorable attitudes toward mining and mining regulations. Most of the project
is on private land, so the federal part of the permitting equation is less of
an issue. The Keweenaw part of the Upper Peninsula is economically depressed.
There is still a history and heritage of mining there, so in general people
are very supportive. But time will tell. The permitting anywhere in the world
these days is every bit as important as any other part of the job. That work is currently being
initiated by Highland Copper.
TGR: Are there any other companies you
want to comment on?
RW: Trevali
Mining Corp. (TV:TSX; TREVF:OTCQX) is one of the
better stories in the marketplace and we are working on it right now. We've
been mandated to arrange $60M of finance for its mines and its development
opportunities in New Brunswick as well as in Peru.
It's a complicated task because Trevali has a lot going on
simultaneously, including three mines and two mills. For investors who like
zinc, it's definitely one to pay attention to. It also has quite an ability
to raise capital. But it is at that cusp where quite a bit of money is
needed, and we're one of the groups working on that. We have confidence it
will go forward.
TGR: Its biggest project is the Santander
base metals project in Peru. That has bounced around from company to company
for years. Why does that project make economic sense now?
RW: It makes economic sense for two
fundamental reasons. One is that there is already a tremendous amount of
capital invested there. There is already a mill at Santander. There is
housing at Santander and a complete mining camp. The other factor is that it
has good zinc and silver grades in a well-established mining resource.
But it's a big project. The challenge is getting all the final mine
plans in order and properly developing the underground deposit. Santander
should start producing metal in 2013. What makes these types of projects
successful is that some management groups bring a focus and a commitment to
it. That's what's happened at Santander. Glencore International Plc
(GLEN:LSE; 0805:SEHK) has a major interest there along with Trevali. But it's
Trevali, and the confidence that Glencore has in Trevali to put the mine into
production, that will bring it to fruition.
TGR: The junior mining space used to be
predominantly the domain of retail investors. Is there still room for retail
investors in the sector? Would they be well served to follow the investments
made by large companies, such as those made by RMB?
RW: There is always room for retail
investors. One of my attractions of getting into the junior sector when I
became an analyst many years ago at Robertson Stephens & Co. was the
realization of the mining industry in general, but the junior sector in
particular, that it's really a very small sector. There are lots and lots of
companies; in Canada, there are around 1,500 listed junior companies.
But if you take the total value of those companies, or even the entire
mining sector, it's not very significant. Apple is probably bigger than the
entire global mining sector. So when investor interest flows into the sector,
it doesn't take much for all the boats to rise, and do so rapidly. But when
the interest leaves the sector, the inverse is true. The tide goes out, and
all the boats fall quickly.
For people who think about fundamental investing, and not trading,
there is a lot of opportunity in the junior sector because of this complete
disconnect between the current valuations for companies and value of the
metal in the ground and even cash flow given the current and expected prices
for the commodities that these companies are producing.
I think for a lot of retail investors, it's very difficult to know
who's who in the zoo. Just because a company is a very good promoter doesn't
mean that it has very good assets. People with a view like ours, which is a
bit longer-term, fundamental resource-oriented view, would be well served by
looking at what some of the other successful major resource investors do in
trying to cull the number of opportunities and focus on those things that
provide the best risk-reward. Institutional investors, as a group, typically
do not seek market returns. We are looking at higher-risk, higher-reward
opportunities. Retail investors need to look behind the retail promotion and
see where serious money is getting invested.
When this market turns, it will come back with a vengeance. Everybody
will be very happy. The people who will be most happy will be the people who
were already invested.
TGR: That sounds like sage advice.
Rick Winters has been
president of RMB Resources, the resource merchant banking division of the
FirstRand Group, since August 2005. During the previous five years, he served
as vice-president of RMB Resources. Prior to his time at RMB, Winters also
had stints at Golden Star Resources Ltd., Robertson Stephens & Co.,
Phelps Dodge and the Colorado School of Mines, where he holds a master's
degree in mineral economics.
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DISCLOSURE:
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: Bullfrog Gold Corp and Sutter Gold Mining Inc. Streetwise
Reports does not accept stock in exchange for services. Interviews are edited
for clarity.
3) Rick Winters: I personally and/or my family own shares of the following
companies mentioned in this interview: Highland Copper Company Inc. I
personally and/or my family am paid by the following companies mentioned in
this interview: None. I was not paid by Streetwise Reports for participating
in this interview.
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