The Mining Report: Over
the last 30 years you've been involved in a number of natural resource mining
companies as an executive officer, board member and/or investor in your
position as managing director at Clarion Finanz, including some controversial
projects that made headlines both when they did well and when they failed.
Has the structure around junior mining investing changed during that time?
Carlo Civelli: Yes, it certainly has. We
have invested in about 900 companies in the last 35 years with commitments
ranging from $100,000 to $60 million ($60M). Of course some of them failed,
but the majority did well.
We have
been involved in every single aspect of financing juniors, including the use
of shell companies and mezzanine financing. I was one of the first Europeans
to invest in Canadian mining companies and oil and gas companies in the
1980s. At the time there was absolutely no appetite for them. We created the
appetite in Europe through our success as an investment company based in
London and Zurich. Later a lot of other brokerages moved in the same
direction, including Yorkton Securities, where I was a director along with
now billionaire investor Frank Giustra, who was named chairman and CEO in
1995.
Today,
I don't see anybody in Europe interested in junior mining or oil companies.
The little guys have vanished. The market has become totally illiquid and I
think the same can be said about the Canadian markets. When I talk to my friends
in the brokerage industry in Vancouver or Toronto or Calgary, they all say
that there's no appetite. Only stocks with production and reserves are doing
well in this market. The market doesn't want to hear about a company until it
has found the resource. Certainly, the last couple of years have been the
worst market that I have seen in my 35 years in the industry.
CC: I think that there are opportunities
out there, but it can be difficult to spot them. Too many companies are doing
exactly what they did in 2000; they are just sitting on cash and paying the
management nice salaries, but they're not putting any money in the ground.
That is one thing that an investor should look at before making an
investment. How much money is the management taking out of the company? What
are the general and administrative costs and how much money is actually going
into the ground?
TMR: Have regulations made investing
safer and more transparent or have they made it more difficult for companies
to raise money and placed a burden on small companies for reporting costs?
CC: They have made it more difficult to
raise money, but at the same time the public is more protected. The NI
43-101s that companies have to produce today at least give insight into what
drilling could reveal. My mentor, Mike Muzylowski, chairman of Callinex Mines
Inc. (CNX:TSX.V; CLLXF:OTCQX), says you have to put the truth machine on,
meaning the drilling rig, because despite evidence from 3-D seismic and
surface anomalies and the like, you don't know what's really there until you
pull it out of the ground.
In the
past, stocks would move when the company announced it was putting a drill rig
on the property. Unfortunately that is no longer the case, but it certainly
means that companies today have to do a lot more intelligent work to attract
investing money. The money has become much more sophisticated.
TMR: If there were to be a huge
discovery, could that attract investors back to the market in the U.S.,
Canada and Europe?
CC: Yes, but it may not work the way it
did in the past. In 2000, gold hit $250 per ounce ($250/oz) and all the
stocks were down; we did do some very good investing at that time. Then there
were a couple of discoveries and that lifted the entire market. Today I don't
think one discovery would do it because commodity prices are down and there's
no change in sight. I don't see the gold market going up anytime soon. I
think gold has lost its luster.
You can
see it also in the compression of the price-earnings ratios of the gold
companies. They used to be at 40 to 50. Today they trade just like a copper
stock. They have just become commodity plays. Gold is no longer an inflation
play and no longer gets special attention. Now it trades purely based on
fundamentals, i.e., the cost of production and the outlook for the underlying
commodity. So it comes down to bringing down the price to produce an ounce as
much as possible. At $800–1,000/oz there just isn't much profit in $1,200/oz gold.
A big discovery that could produce for $500/oz could attract attention, but
at these prices a lot of gold with the same low margin won't make a big
splash.
Some
low-cost producers are already attracting attention and the Osisko Mining
Corp. takeover is an example. There are going to be more takeovers because
it's much cheaper today to take over an existing mine with a nice resource
then to go out and drill it yourself. The same is happening in the oil sector
as well.
TMR: Will favorable exchange rates and
lower energy costs help the bottom lines of Canadian companies to reduce
those production costs?
CC: Yes, but when the underlying
commodity price is coming down faster than the costs are coming down, it
doesn't do much for the overwhelming negative sentiment.
TMR: You seem to have found some
Canadian-listed companies that you like. What have you invested in there?
CC: We were lucky—and it really was luck
rather than smarts—to sell near the top. In the past couple of months we have
started going back in to a few select companies we think can do well. One
example is HudBay
Minerals Inc. (HBM:TSX; HBM:NYSE). When it dropped down to $8/share, that
was a huge buying opportunity.
Another
one we have bought into is Kirkland Lake Gold Inc. (KGI:TSX), which has fallen from
$20/share to as low as $4. It has become a show-me stock, but I think the
company will be able to show it. We are long-term investors.
Another
one I like is in the diamond sector, Mountain
Province Diamonds Inc. (MPV:TSX). Last week we got a bad surprise with a
rights issue that turned out to be bigger than we had anticipated, but it's a
long-term buy so it has time to work itself out.
A very
small company we have invested in is CB Gold Inc.
(CBJ:TSX.V) in Colombia. That could be on the way to becoming a bigger
company. It has very good management and a nice discovery.
The
Canadian company I am really involved in is Callinex Mines, which spun off
from Callinan Royalties Corp. (CAA:TSX.V), a company founded by Mike Muzylowski.
He is in the Canadian Hall of Fame because he discovered 10 mines in the Flin
Flon area. Mike found the Trout Lake mine when he was working at HudBay some
40 years ago. HudBay has spent over $1.6 billion in that area and has been
mining there for the last 90 years and is running out of ore. It needs more
reserves for its strategic smelter. The Callinex claims include a major
portion of the Flin Flon district not explored by HudBay and are located
within three kilometers of this smelter.
Callinex
also has several shared targets with HudBay and several past-producing mines.
Mike Muzylowski believes strongly that resources like Trout Lake always
appear in clusters. The Pine Bay project is polymetallic volcanogenic massive
sulfide geology, which contains copper, zinc, gold and silver. This reduces
the commodity risk and plays into HudBay's strengths since it recently built
a new zinc processing facility.
I
believe that this is a company where the 3Ps come together: the price of the
stock is right, the property is right and the promoter or management is
right. Callinex has some very good managers and some very good geologists. I
am on the advisory board and my son, Nico, is VP of finance and a director.
The drilling program is fully funded and is about to commence. Test results
should be back in April or May. I believe that Callinex is onto something
that could be very interesting. This is why I have put a lot of money into
the company and we are willing to continue to fund it. A project like this
takes time. But eventually, I think HudBay will be interested as a
joint-venture partner or an acquirer.
TMR: Is that the ultimate goal, like your
previous project, to sell before it goes into production?
CC: Yes. I don't want to get involved in
putting a mine into production. We find it and then we sell it to the highest
bidder. I have invested in companies run by Mike Muzylowski for 30 years.
Four of them have been developed and then sold. We are doing exactly the same
again here.
TMR: What is your forecast for oil?
CC: I think oil will stay down for longer
than people expect. All the small U.S. shale companies seem to have hedged
their production, obviously at the request of their investment bankers, for
12 to 18 months. That means that they can go on drilling at least until the
end of this year. When the hedge runs out, they will really be in trouble and
may have to reduce production quite dramatically.
Let's
face it, 90 million barrels (90 MMbbl) are produced per day today in the
world. The overhang is only 1.5 MMbbl. It wouldn't take much for that
overhang to go away and the price to recover. Saudi Arabia could eliminate
the whole overhead by reducing output 10% and make just as much money. But it
is playing the game of getting market share and testing to see how much pain
the U.S. shale producers can take. You can see it already happening in the
reduction of the drill rates. High-cost offshore exploration has stopped,
which means that production that could have come on stream in the next couple
of years won't be there. OPEC then has more power.
I think
sometime next year we're going to go back to $70 per barrel ($70/bbl) and
we're probably going to stay there. But that is good enough. It's a shot in
the arm of the world economy. At $70/bbl you can produce very profitably.
TMR: What oil companies are you invested
in?
CC: In the oil sector, we have positions
in PetroAmerica
Oil Corp. (PTA:TSX). In the U.S., we have invested in Synergy
Resources Corp. (SYRG:NYSE.MKT), which has weathered the downturn very
well, meaning it is still trading at where it was four months ago, which is
unusual.
I am a
senior adviser and have a directing trust and a big interest in a little
Canadian company called Terra Nova Energy Ltd. (TGC:TSX.V; TNVMF:OTCQX), which we
started investing in three years ago and we keep buying it. The company owns
two large concessions in the Cooper Basin in Australia, which is heating up
quickly. In the last few years some of our neighbors, including Senex Energy
Ltd. (SXY:ASX), Beach Energy Ltd. (BPT:ASX) and Drillsearch Energy Ltd.
(DLS:ASX) have had impressive drill successes. Some of the wells are very
big. Magnum Hunter Resources Corp. (MHR:NYSE.MKT) and Seven Group Holdings
Ltd. (SVW:ASX) recently bought into some of our neighbors.
I'm
privy to some of the information from our technical staff and it looks
promising. We ran 3-D seismic tests on about 20,000 acres of PEL 444, which
has a total of 582,000 acres, and found that it compares favorably with one
of the best producing portions of neighboring Senex, an AU$400M company that
has reported 13.3 MMbbl of reserves on a fraction of the acreage Terra Nova
controls. As I said before, that doesn't mean anything until you put the
drilling rig in, but we are set to do that in the next three months. Through
one of my companies, Perseville Investing, I just invested $3M and now Terra
Nova has enough money to drill three wells at least, although we are talking
to partners who could pitch in enough to get to five or six wells.
TMR: In addition to your direct
investments, your son is the VP of finance and a director for this company.
Your recent investment included first right of refusal on investing in future
drills there. Why are you so committed to this company?
CC: I got involved a couple of years ago.
I brought in the same management that I had on my holding company, Pacific
LNG Operations Ltd., which was very active in Papua New Guinea and sold
nicely last year. Terra Nova is run by acting CEO Henry Aldorf, who was
president of Marathon Oil International and Unocal Thailand. Our technical
advisers are veterans from Pacific Rubiales Energy Corp. (PRE:TSX; PREC:BVC),
the Colombian company we helped fund back in 2007. We have a strong
shareholder base. We believe that we are on the right track and there should
be some very exciting news by the middle of the year. We should start
drilling in May and have news by August. We believe we are identifying a
unique new channel system. I think that this year could be very exciting.
We have
told Terra Nova management that we will continue to fund the company either
through private placements or by taking a direct interest in the underlying
concession, which is exactly what we did in Papua New Guinea years ago. In
addition to our large investment in the company, we also owned 20% of the
underlying acreage. When the company found a huge gas discovery, we sold our
20% interest to Oil Search Ltd. (OSH:ASX) last year for a very nice profit.
We are looking to do the same here. I want to have a separate drilling fund
where we fund these companies that we believe in, and we fund then either the
company or we invest directly in the asset.
My
company, Pacific LNG Operations in Singapore, is still involved in drilling
in Papua New Guinea as a partner with InterOil. We started a new company
called Pacific Hunt Energy with Henry Aldorf as chairman and CEO, and my son,
Nico, is on that board as well. We bought two concessions in Myanmar that
together are the size of Switzerland. We are raising $40–50M privately to do
the initial groundwork, seismic studies and reporting about drilling going
back to 1912. Eventually we will take this company public, too. I like to be
an early investor with all the risks attached to it, but I'm also a long-term
investor. I'm not afraid to put my money where my mouth is, take risks and
help the companies along through the ups and downs that are inevitable in
this market.
TMR: What is your parting advice for
investors looking to find the few companies that can be successful in this
environment?
CC: The most important aspect is
management because good management can turn even a bad company around,
whereas bad management can turn a good property into a disaster. Stick to
management; eventually it will lead you to a success.
TMR: Thank you for your time.
