Episode #246: Eric Sprott, Mark O’Dea, Oxygen, “I’m Trying To Look For Some Value That’s Not Appreciated By The Market”
Guest: Eric Sprott is a Canadian businessman and investor, and Mark O’Dea is Chairman and Founder of Oxygen Capital.
Date Recorded: 8/25/2020 | Run-Time: 49:44
Summary: In today’s episode, we’re talking gold, silver, mining and exploration. We talk about recent performance, and the popularity of gold among some high-profile institutional investors. We get into the lifecycle of mining and exploration companies, and allocating capital over the full lifecycle. We hear the story of the Gold Corp. Challenge, and how that became the launch point that took Mark O’Dea from contract geologist to running what would later become a multi-billion takeout by Newmont.
We discuss the M&A appetite in the sector, and cover some practical thoughts on how investors can put some of the things from this conversation together to potentially implement a few ideas for their own portfolio.
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Links from the Episode:
- 0:40 – Intro
- 1:47 – Welcome to our guests Eric Sprott and Mark O’Dea
- 2:04 – Eric’s Weekly Wrap Up
- 2:39 – Eric’s overview of the gold markets
- 2:51 – The Meb Faber Show Podcast – Episode #197: Rick Rule, “In Resources You Are Either A Contrarian Or You Are Going To Be A Victim”
- 2:54 – The Meb Faber Show Podcast – Episode #48: Van Simmons, “The Rare Coin Market Can Go Up Dramatically, Quickly”
- 4:42 – Thoughts on some of the larger investors getting involved
- 4:58 – What Happens When You Buy Assets Down 80%? (Faber)
- 5:03 – All Time Highs A Good Time to Invest? No. A Great Time. (Faber)
- 6:40 – Mark explains the life cycle of a mining company
- 8:13 – What Eric looks for when investing in mining companies
- 12:24 – Mark’s Red Lodge story
- 16:10 – How Oxygen is structured
- 18:41 – How PureGold deal developed
- 21:18 – How they think about allocating capital
- 25:08 – How Eric thinks about selling assets
- 26:55 – Timeline for PureGold
- 29:02 – Hedging prices
- 30:45 – Corporate finance and M&A mood for commodities
- 32:52 – Investing in mines around the world
- 36:38 – Advice for newer investors into the commodity space
- 43:37 – Invest With The House: Hacking The Top Hedge Funds (Faber)
- 43:48 – Most memorable investments for Eric and Mark
- 46:44 – How 2020 is impacting the commodity markets
- 48:17 – Best way to connect:
Transcript of Episode 246:
Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Hey, podcast listeners we have a truly amazing show for you today. With gold prices hitting all-time highs we decided to invite a couple of the most legendary and accomplished investors and operators in the natural resource and mining sector onto the show to chat about opportunities they’re seeing today. In today’s episode we’re talking gold, silver, mining and exploration. We talk about recent performance of the metals and the popularity of gold among some really high-profile institutional investors, including Uncle Warren Buffett and Charlie Munger.
We get into the lifestyle of mining and exploration companies. We even get to hear the story of the Goldcorp Challenge and how that became the launching point that took one of our guests from contract geologist to running what would later become a multi-billion exit by Newmont. We discuss the M&A appetite in the sector and cover some practical thoughts on how investors can put some of the insights from this conversation together to implement a few ideas for their own portfolio. Please enjoy this episode with the legendary Eric Sprott, and Oxygen’s Mark O’Dea. Eric and Mark, welcome to the show.
Mark: Thanks, Meb.
Meb: You guys…
Eric: Hi, Meb, glad to be here.
Meb: …look good in your cabins. Where in the world are each of you?
Mark: I’m in Sun Peaks in British Columbia.
Eric: And I’m at Lake of Bays north of Toronto at my cottage.
Meb: Eric, I heard on your podcast you’ve been doing some fishing. How’s the bite been in the last few weeks?
Eric: Well, it’s pretty good. I went to Lake of the Woods and the most stunning thing to me is you can take a jet flight there, take an hour and 40 minutes, another half hour you’re into the middle of nowhere catching muskie. So that was very, very exciting.
Meb: Muskie is on the to-do list for me. I’ve done a little pike fishing up in the Adirondacks mostly been a trout guy got a lot of family in Colorado. Caught the biggest trout of my life I think this past summer in a secret spot. I’ll tell the listeners at some point but outside of Shawnee, Colorado if you’re a local. Look, this is gonna be a lot of fun, this is pretty timely. We’ve done a handful of natural resources, precious metals, investing shows. Some names listeners are probably familiar with, go back Rick Rule, we did some collectibles with Van Simmons and others.
But it’s pretty timely right now. Markets in gold are hitting all-time highs. Not just in Canadian but also now U.S. dollars, which is pretty exciting. So Eric, figure we’ll start with you. Why don’t you give us a little bit of the macro backdrop or outlook, what are you seeing in gold markets today and how do things look to you?
Eric: Well, obviously they look great with the prices having done what they’ve done here recently. I personally have thought that gold and silver have been restrained for a long time due to the COMEX then banks abilities to sell paper gold and silver and keep the price kind of suppressed. You might have noticed that there was a bank in Nova Scotia recently agreed to pay $120 million fine for manipulating silver and gold. And JP Morgan traders, Deutsche Bank traders, USB traders, HSBC traders have all admitted to spoofing the metals and other such things.
And I’ve always looked at gold as an alternative to fiat currencies. When you look at what’s gone on recently with the printing of money both at the Treasury and central bank level, it’s obviously extreme. I think the back of the containment of gold and silver prices has been broken here. I’m a bit of a student of watching the open interest on the commodity exchanges. It’s not really going down and there’s all sorts of deliveries.
And as an example, today, I think we had 2.6 million ounces added to the silver ETF just yesterday. We only mined 2.5 million ounces. And there are some industrial users of silver by the way, but they’re not gonna be getting the silver if we keep adding that amount to the ETFs. And we’ve had lots of deliveries on the COMEX as well. So I actually see a shortage shaping up here and goodness knows where the price could go.
Meb: It’s interesting when you think about the macro backdrop. Listeners know I’m a quant and there’s some old, old studies we’ve done that are all sort of aligning right now. The first which was we looked at a lot of sectors and industries going back all the way to 1900 and found not surprisingly that things that are down 60%, 80%, 90% have a good setup for future returns. Then combining that we actually just published a new paper this year that surprises a lot of people but actually buying assets at all-time highs as a fun example, and 12-month highs more specifically for the trend followers, is actually a great idea.
And so you have a few of those lining up. One more comment and then we’ll hop over to Mark. Eric, what’s your takeaway from some of the big boys getting involved these days, Uncle Warren and Charlie, their company started to get involved in the gold miners for the first time. I know they were silver guys back in the day. Any general thoughts on the participation from the institutional world?
Eric: There is a lot of participation. In fact, I just saw the 13Fs that were filed for the June quarter, wherein there were about 10 major institutions that added silver to their list this quarter, first time. And then of course, Warren Buffett comes along and I sort of suspect it really wasn’t Warren, might have been his portfolio guys that bought Barrick. But I think the fact that their portfolio guys could look at the fundamentals for Barrick and say, it’s not a bad deal, get a dividend, get huge cash flows, lots of earnings, prices of gold is going up. This is gonna be an excellent investment for us. So I think he’s not exactly leading the way, but I think he’s sort of affirming that there’s fundamentals that allow you to buy precious metal stocks.
Meb: I was kind of smiling, given the amount of commentary Buffett’s made over the years about the shiny metal to see that holding everyone I think the Internet sort of lost their mind. It’s great to see. But like you mentioned a lot of other big guys part of that may be due to some of the momentum and trends and outperformance, but there’s certainly been a lot of interest. Mark, let’s hop over to you. You’ve been involved in exploration and building companies. And before we get to Oxygen, I would love to hear you talk a little bit about, for the sort of newbie listeners out there perhaps, kind of the full lifecycle of a mining exploration company.
The way that I have thought about it and you can correct me if this is accurate or not, it’s almost similar to like the pharmaceutical industry, where you have the early-stage biotechs, doing a lot of research and development, all the way up through the Pfizer’s of the world that are multi-hundred billion dollar pipelines of profitable companies paying dividends. Can you give us just kind of an overview of what that world looks like?
Mark: You summarised it pretty well there. There’s a lot of similarities between those two sectors. If you’re an investor, there’s two sweet spots in the whole mining continuum. It’s been named a lot of things probably most famously, it’s been called the Lassonde Curve after Pierre Lassonde. And really there’s a steep part at the beginning when companies are exploring and they make a discovery. And there’s the greatest value creation for the least amount of invested capital. That sweet spot there is when sort of stocks go from 10 cents to $2.
And then as the properties mature, and they get quantified, and they go through all the sort of the more boring parts of the lifecycle, like permitting, and financing, and construction, sort of the curve tapers off and then it ramps up again to another steep part or sweet part of the curve, which is cash flow and production. So that’s ultimately the anatomy of the mining space.
Meb: I feel like either of you guys can jump in on this one. But for the listeners, Eric, you’ve certainly invested in I assume dozens and hundreds of mining companies over the years. What are kind of the general things you look for? I feel like a lot of investors are a little nervous when it comes to this sector, not just because of the impact of gold and the periods of sort of fallow that followed the runs up, but a lot of the challenges of separating the good from the bad in the sector. What kind of general waypoints people should be thinking about?
Eric: The first thing is the prices of the underlying products. And I know this is gonna sound a little unusual, but the prices of products are more important than management. If the price of gold goes to $2,000…let’s say it goes to $10,000 everybody with a deposit is gonna look like a hero. I don’t care how bad of a manager they are. So price is a very, very important consideration. I’ve always been a believer in gold ever since 2000, just before the NASDAQ crash. How am I gonna protect my investors? I was running mutual funds at the time. And well, history has proven that precious metal stocks seem to outperform the market. So I made the big move pre the NASDAQ crash to get into gold stocks.
And lo and behold, from 2000 to 2011, the gold index went up by 1700%. I mean, these are massively outsized returns versus other things. And one of the things you realise with precious metals, if a guy makes a discovery, gets it into production I mean, the money that they can make. I mean to mention that somebody’s costs are $1,000 for gold and it’s selling at $2,000 you got a 50% margin there, that’s awfully impressive. And if you can go and find another ore body and do the same thing, the returns to shareholders can be staggering. So that’s kind of why I’m in the area.
What do I look for when I’m trying to seek out an opportunity? I’m trying to look for some value that’s not appreciated by the market. Quite often it might be grade, it might be prospectivity, it might be margins. There’s a number of things that you’re looking at that you’re saying, “Well, the market is not quite appreciating what could happen.” Let’s take Discovery Mines that Mark, obviously, his group organised that company. I mean, I looked at that. So I don’t know what my first purchase was, but I know it was very low, like well below $1. And I’ve just looked at the inventory of the asset they had, which had 600 million ounces, and maybe the market cap at the time was $50 million and holding. Now you had 600 million ounces of silver, and you’re got a market cap under your $50 million how’s that working out here?
And particularly with my view that the silver price could explode which it has started to explode. So that kind of thing you gotta be early, eyes wide open. Today if somebody ask me what am I looking for? I’m imagining that the price of silver trades at a ratio of 15 to 1 to gold, which it always historically has. But I honestly believe that the shenanigans going on in the COMEX, have not allowed that to happen. And if the shenanigans end gold goes back to 15 to 1. So 15 to 1, that’s just the price of…I mean, almost afraid to say it $150 silver. Well, what would the value of a company that had 600 million ounces of silver be worth at $150 silver? That’s $90 billion of gross metal value.
So that’s the sort of thing I’m looking at, I may as well because if we get to 15…by the way, we don’t have to get to 15 to 1, we can get the 30 to 1 and you could make a fortune. You’ could get to 40 to 1 and you could make a fortune. So it’s picking up on something that the market is not adjusting to and realising that if you make the plunge, you could get a very, very significant reward.
Meb: I think that’s a good advice for security analysis in general. So many people spend so much time analysing securities, fundamentals, whatever, and never stopped to ask the question, what does the market know? What do I know? I was trying to do the math. I was smiling because I had seen a comment you had made before Eric about when you were looking at investments, you say, “I’m not interested in 100% return, I’m looking for the 10 baggers,” which is a great way to think about it.
Mark, let’s kick it back over to you. You’ve been an operator, long time founder. I’d really love for you, by the way, as an intro to Oxygen and what you guys are doing, I’d love you to tell the contest story from how your early introduction to Red Lodge. Can we get a quick summary of that?
Mark: Okay, well, we’re going back 20 years here, Meb so…
Meb: Well, I’m a quant, and I’m a former engineer. That part like really stuck out for me.
Mark: This is apropos actually for kind of an introduction to Pure Gold, which is working in Red Lake, Ontario. And so life works in circles in many ways and we end up coming back full circle to where we originated. And I started my early part of my career anyway in Red Lake Ontario working for Rob McEwen at his…it was called the Dickinson Mine at the time. And it was producing 50,000 ounces a year, right next door to Placer Dome’s much more successful mine at the time, called Campbell.
And in the late 1990s, he and his team made a very disruptive discovery, and it was called the high-grade zone. And it alone transformed Goldcorp from a 50,000 ounce a year producer to a 500,000 ounces a year producer in a matter of years. And really made Goldcorp a household name and was a very successful event for Rob personally.
Anyway, he launched a contest, an Internet contest, I think it was the first tapping the minds of geologists around the world and he called it the Goldcorp Challenge. And he opened up his data room and sort of all of his drill hole data, all of his maps and sections and said, “Okay, here, sign up for this contest.” And there was a bunch of prize money, “We’ve assembled a team of judges, etc and tell us where to find the next 6 million ounces of gold in our mine.”
And I entered that contest. I was a struggling contract geologist eking out a living in India working for Phelps Dodge, thinking there’s gotta be a better way forward than this. And I ended up putting about three months of work into it and came second in the contest. And it launched my career. And so I got invited up on stage with Rob at the PDAC, which is a big mining convention in Toronto in the year 2000. Had my big rubber check for $100,000 sitting next to Rob. It was a magic moment that sort of launched my career.
And literally the next day got invited out to breakfast with two Toronto mining entrepreneurs. One, a guy named Hugh Snyder and another named Wayne Beach and said, “Hey, we have this shell called Frontier Development Group. There’s nothing in it there’s a million bucks in cash, no assets, no team, do you wanna run it?” Not knowing any better, I said, “Absolutely, I’d love to.” And it became the vehicle that ultimately morphed into a $2.3 billion take-out 10 years later by Newmont. So it was a crazy 10-year overnight success that really sort of solidified our group in the industry as a group that can find and discover advanced high-quality gold and copper projects and uranium projects all over the world.
Meb: I was smiling as you told that story. And I read about it because…I mean, fast forward, I don’t know how many 10 years later, Netflix kind of became famous for doing the Netflix prize. I think it was $10 million, or something or maybe it was a million. About optimising their algorithms and open source and the world’s kind of move that way certainly with the Internet. And there’s some even these big quant websites that do it and there’s…I’m blanking on the name, I’ll add it to the show notes. There’s another concept website that does a lot of these analyses.
But it also…like you mentioned, the serendipity of it, paving the way for kind of what you would be doing later in your career. It’s so great. Tell me a little bit about how Oxygen is structured, some of these portfolio companies. You guys have a number of different irons in the fire. Maybe just give me a quick walkthrough either timeline or history about what you guys are up to.
Mark: I’m a big fan of metaphors. Oxygen is a metaphor for life. And what we do is we breathe life into new mining ventures. So we structure them, we identify them, we build management teams around them, and we take them public and launch them. And we manage them in-house. So even though they’re all under one roof, they all have a separate management team, a dedicated C suite, an independent board of directors. So they can all stand on their own completely, but they’re incubated and created from sort of the collective group that we call Oxygen. Which is effectively the brain trust that have been responsible for all of our successes over the last 20 years.
We’ve sold five companies over the last 20 years for sort of big premiums to valuation and crystallised about $3 billion worth of real value. Those five have come and gone. And we have four today that are alive and well, all underpinned by tier-one assets and tier-one jurisdictions with top-notch management board around them. And one of them, Eric has mentioned already, Discovery Metals and that’s based in Mexico. And it’s got one of the largest undeveloped silver projects in the world. So great leverage and exposure to rise in silver prices.
Another one that’s a lot closer to production that’s near and dear to my heart here is Pure Gold. And Pure Gold has the Red Lake Mine in Ontario. So this is the full circle story. So I mean, I was working for other companies 20 years ago, working underground in their mines trying to figure out why the gold was there, where could we find more? How did it get there? All those kinds of questions. And here I am part of the team that are developing a brand new mine right next door to that. And it feels great. And so Pure Gold is the next North American mine to come on production to come on stream in 2020. We are literally the next producing gold mine with all kinds of organic growth.
And Eric is an investor in Pure Gold as well as Discovery. So he’s been really instrumental in getting us sort of fully funded to continue exploring and growing that asset. As well as getting it queued up and teed up ready for first cash flow into what is arguably the highest gold price environment the world has ever seen. So our timing is incredible.
Meb: Yeah, good timing. So I’d love to hear a little bit more dive in to Pure Gold. Because tying back and working back to what Eric talked about earlier on finding assets, or coming up with a hypothesis that’s different than the market. Presumably all these big mining companies all around the world are looking for the same thing. These big deposits that are either undervalued or they’re undiscovered. How did you guys end up finding something that’s kind of right in your own backyard that’s next to other properties that you were also looking at 20 years ago? And then how did that not cost like $10 billion to buy that land? So how did this sort of develop? I think it’s an interesting story.
Mark: No, it is. And I think it depends on your approach to the sector. Are you countercyclical and sort of a contrarian in terms of your business plan or are you the opposite? And if you look at the M&A space in general, then I’ll include assets as part of that, as opposed to just companies. We’ve come out of a seven-year bear market here. And what that means is that if you were a senior producer or an intermediate producer in general, you stopped exploring and you stopped acquiring. When you stop doing those things it means you also stop discovering, and your future growth basically starts to wither. And so your reserves tails off and you end up in a place so that when gold actually turns like it has, you need to feed that pipeline.
And so along comes Oxygen. And the business model that we’ve put together is you allocate capital during the bad times, and you buy assets when nobody wants them. And so that takes a certain mindset from investors like Eric and others who back companies who are building their businesses during the bear market. So we were able to acquire Pure Gold for $10 million at a bankruptcy at the end of 2014. And today, it’s a company worth $750 million. We’ve obviously put a lot of capital into it to run the vinyl verge of construction and we’re coming into production.
But that’s how you make money in this business, obviously, is you buy it at the right time. And whether it’s Pure Gold, or Discovery, or Liberty Gold, or Sun Metals, they’re all companies under the Oxygen umbrella. They’ve all follow the same trajectory, which is build your business, allocate capital to develop your asset as efficiently as you can when nobody cares, and get it ready for the world when the market turns.
Meb: Eric, I’d love to hear you chime in on that. This is something that we think a lot about where I’ve often said on this podcast, the biggest compliment you can give someone as an entrepreneur, also, as a money manager, is simply just surviving. You have these periods of boom and bust across every asset class, whether it be gold and gold stocks or U.S. equities, Japanese equities, rates, everything in between. And it’s hard and 2020 has certainly been a great reminder to a lot of businesses that only have a few months of cash and get into sort of these challenges.
Eric, you’ve been through some various cycles. How do you think about simply allocating capital over a full cycle. And also, as an addition to that, what was particularly attractive to kind of Mark’s properties that got you involved?
Eric: It’s very interesting, the most interesting part of this interview is you have a geologist and an accountant. I’m the accountant. You’re a numbers guy, too. And when Mark looks at something he’s looking at with geological eyes and saying “Gee, this could be bigger” or whatever. And it’s funny that he would have mentioned Goldcorp because I very much remember when back in probably 1999 or 2000, when Rob McEwen who owned Goldcorp at the time, came out on that same Red Lake deposit that Mark had just discussed. And in his annual report, he said, “The cut grade is 1.2 ounces a ton, but the uncut grade is 2.1.” And cutting means being conservative.
So I thought as an accountant, “What’s the big difference between 2.1 and 1.2? Because the whole 0.9 is profit? So this guy’s profit could be tripled,” with the analyst sort of thinking. So I went over to see Rob and his geostatistician. And it seemed obvious to me that it’s going to be the uncut grade. And sure enough, it was even above the uncut grade. And of course, Goldcorp, which was probably under $500 million at the time, this is back in probably 2000, or 2001, went on to become whatever, a $20 billion company. And that’s the mathematician looking at things.
So for example, when I looked at Pure Gold, I guess I’ve been in it for at least a year here. Well, first of all, I believed the gold price was going up. That’s very important. Probably it was at $1,300 at the time now it’s $2,000. Well, wasn’t that lucky that that transpired, which we thought it might. And then the other thing is that there’s always huge amounts of conservatism built into the mining sector. These 43-101s that these companies are forced to produce are always conservative because the guy signing off wants to make sure that the ore deposit is better than what he’s signing off on.
And if you can look at the data, the numbers now and say, “Well, this is gonna be a lot bigger than this report is suggesting,” you have a leg up on…let’s call it your competition. Your competition is an analyst who’s at a major institution who analyses by the rules, he’s got to use a 43-101. I’m an investor, I don’t have to use a 43-101. In fact, I think 43-101s are not helpful to the stocks, they tend to understate things. Plus, they stop at a point in time. Well, over time, things get better typically in the mining business.
I mean, think of Red Lake, it’s probably been mining for 100 years. Macassa’s been mining for 100 years. They’re finding more high-grade now than they’ve ever found there. So you can’t use something that stops in time and use that as your benchmark. You have to let your mind kind of go there and see that it might get big. And I think when I looked at both Pure Gold and Discovery, and you think “Wow, this could be awful big and the market has mispriced them and hey, let’s go.” And it’s worked out very, very well.
Meb: And then on the flip side, something works out how do you think about selling? Do you have any rules of thumb? Is it typically more macro price of gold-driven or is it company-specific valuation, story-driven, just wanna reinvest into other projects? What’s kind of the general approach?
Eric: Well, I’m not much of a seller, I’ve tended to own things and own them for a long time. And of course, going back to, let’s say, 2000 to 2011, as the stocks are going to 1700%, I mean, it probably didn’t pay to be selling much. The only thing you could do is say, well, this one’s gone up a lot and this one over here is better value. And therefore I might sell some of that, as I have done recently in Kirkland Lake Gold, which I bought at $5 and sold in the ’50s and ’60s here.
And I thought like, I think there’s other things that will be better because Kirkland makes now a $10 plus billion market cap company which I don’t normally invest in. And why don’t I go and buy some smaller cap companies where the street is a little behind the curve on it, where I might also emphasise silver today, things like that, that cause you to say, “Well, I think there’s better opportunity.” So it’s the other opportunity thing. I’m not likely to be a seller of gold because I think the price of gold is gonna crash. I think gold would have to go down an awful significant number from here for me to think that gold was overvalued.
Meb: We’ve had a couple of former guests on that have at least attempted to do some gold valuation work. And the fun part about that is they end up on like totally different universes. It’s like the joke about a discounted cash flow is like using a telescope, you move it a bit and you’re looking at a whole different galaxy. And so it’s always fun to see the academics try to do a little work on gold valuation. It’s tough though.
Mark, talk to me about where you guys are on the Pure Gold process timeline. You bought the property, you started to do the discovery. Are you guys actually pulling any gold out of the ground yet? How’s the timeline for some of that work? Does it take a year? Does it take a decade?
Mark: Yeah. So we’ve been in we’ll call it the construction phase for about a year and a half. And that involved financing and putting our project funding package together, which Eric was a part of. And thank you very much for that, Eric. So we are four months away from pouring our first gold. So our first million ounces of reserves start pouring by Christmas this year. So it’s an incredibly exciting time. The site is a hive of activity, we’re completing construction. All the components of the plant are sort of underway being installed, etc. We’re underground, we’re touching it and we should have a stockpile of about 25,000 tonnes of ore by the time we flip the switch and turn the mill on.
I would come back to the concept that we touched on earlier which is the price environment that we’re in right now is incredibly exciting. You go back two years which is not very long in the lifecycle of a mining project. Two years ago, companies were lucky to be making $200 of profit or margin an ounce. Gold was 1,200 bucks an ounce and if you were a successful sort of streamline producer, you were producing it for $1,000 and you’re making 200 bucks. And today, looking at the numbers, Pure Gold is positioned to…I mean our all-in costs are estimated to be about $790 an ounce. And we’re at…what are we today? $1,930 an ounce. So I mean, we’re looking at $1,140 of margin, an ounce.
That’s just on what we know today based on our phase one mine plan, which we know intrinsically, isn’t all that there is here, which is what Eric was talking about earlier in terms of conservatism. So that alone is $114 million a year of margin, U.S.
Meb: How do you guys think about both Mark as an operator and Eric as an investor, hedging prices at all? Is that something you guys ever get involved with? Do you want it? Do you not like to see it? What’s the general theory there?
Eric: Maybe I’ll go first…
Mark: All right you go first.
Eric: I’ll go first, Mark. As an investor, the word hedging makes me wanna puke. That is the worst thing you could possibly do. Imagine if you had hedged your gold at $1,500? And so in the example, that Mark made so fine, you can make $700 if your costs are $800, but you left $500 on the table. And that’s at $1,500. What if the guy hedged at $1,300 gold? I’m totally against it as an investor in a gold company. I want to take the risk of the gold price. That’s for me to decide. And nobody accomplished anything by hedging in my mind. Yes, you guarantee that your earnings are gonna be x, one year out or two years out, and then at the end two years, you got nothing. Because you’re also gonna…if it goes down, your next hedging will be at a lower price.
So I don’t get it. It’s not really about one or two years’ earnings it’s about the long-run game plan here. Do you wanna be in these things to make, in my mind, an outsized return? And I wanna make that outsized return so the last thing I wanna do is get it capped off.
Mark: And often what happens when you’re forced into a corner in financing one of these projects Meb, is that if you go to a sort of a traditional bank debt type structure, they force you into that. And so we were lucky at Pure Gold to avoid that trap and that pitfall by financing in a much more creative way without those kind of constraints. So there’s no hedging in place at Pure Gold.
Meb: What’s sort of the general corporate finance/M&A sentiment mood in 2020? I imagine it’s getting sped up and accelerating this year. But as you mentioned since 2012 it’s been some interesting, different changes, not just with ETFs, but banks and hedge funds, all changing sort of different roles, low-interest-rate environment. What’s been sort of the general lay of the land as far as the sort of corporate atmosphere recently, any general thoughts?
Mark: I mean, I see M&A appetite building in the sector. I mean, it has not been sort of explosive and frothy yet. And I think there’s still a little caution here that needs to be thrown to the wind for that to happen. But the reality is that these senior and intermediate producers are facing declining reserves because they haven’t invested in exploration and discovery for the past seven years. I mean, it’s the first thing that gets cut. When times get tough, those are discretionary dollars that get cut. And the focus goes on streamlining your business. And so that intrinsic growth pipeline that every company needs, suffers. So ultimately, the time will come where M&A will start to pick up and companies with good assets and good places are going to be a target.
Eric: Meb, I might add that at $2,000 gold and/or $27 price of silver, I mean the cash flows that these companies are generating, which was totally unexpected on their behalf. I bet you if you took any senior mining company, they would have had a projection of $1,300 gold this year, and now it’s at $2,000 earning twice what they thought they would make. And they didn’t have a plan for how they’re gonna invest this money in terms of M&A because they were kind of asleep at the wheel and just trying to survive in a very difficult environment with a very low gold price.
So they’re gonna come alive here, they’re either gonna have to pay it to their shareholders in dividends, which it looks like quite a few of the seniors have decided to do or go out and make some acquisition in order to generate some growth.
Meb: Talk to me a little bit about…This is an interesting area to me. I mean, I grew up reading the sort of Jim Rogers swashbuckling, investing around the world books. And you guys, Mark specifically have operated mines in other countries. I mean, I’d read ranging from Mexico to Turkey to Burkina Faso which…I have an old roommate from Burkina, shout out Simon if you’re listening. Those are not as easy as just driving around Canada. I mean, come on, I’ve skied the Powder Highway, that’s a little easier, I imagine, to operate a mine in Red Lake than it is in Mexico and Turkey. Talk to us a little bit about the challenges and maybe opportunities of going beyond your borders to operate mines and other domiciles?
Mark: Yeah, it’s funny from an exploration perspective, the world expands and contracts constantly based on geopolitical risk and the perception of risk and people’s appetite changes for investing in it. And I think there’s a contraction happening right now where North America and our first world jurisdictions are definitely the much-preferred investment jurisdiction. Back in 2016, from about 2014 to 2016, we built and operated a gold mine in Burkina Faso. It was an advanced exploration play called Karma. We took it through construction and financing and poured our first gold in 2016, and it got acquired by Endeavour Mining.
But it was a tough slog, and it fit into a different risk bucket than it would in North America. And you’re more dialled into, “When’s the next coup gonna happen?” as opposed to, “Are you gonna get your permit?” And so you gotta go into these jurisdictions with a much different tolerance for risk and a different type of risk. And frankly, I’m delighted to be focused entirely back into North America. And I won’t be going back to Africa anytime soon.
Meb: Eric, are you seeing any differences in opportunity in North America? Do you stick to just Canada and the U.S., or are you kind of a global investor too?
Eric: I basically try to stay to safe jurisdictions, Australia, Canada, the U.S. Mexico. But I’ve actually gone off the reservation a little this year, I actually put two mining investments into companies in Mongolia, of all places, fingers crossed. But I think the one thing to bear in mind is that when you’re looking at what are perceived as not the safest jurisdictions, the price is a lot less, you’re not paying the same price. So if it works, and hopefully your return is in the dividend, well, that’s gonna be a pretty good return then, relative to what you might have expected with a well-domiciled asset. So I don’t like doing it too much because of course, there’s a lot of risk, but I have done it every now and then.
Meb: We talk a lot about sort of valuations around the world and thinking about…My favourite opportunities are when the cheap stuff starts to catch a little momentum and trend. And we do a fun…well, fun for some people, maybe too painful for others. But I had done a post the last few years and this goes back to a book we had written over a decade ago. Again, this falls under category of fun studies, not something I’d put all my money into. But we had looked at the French pharma sector data going back to the 1920s, and looked at investing in industries and sectors when they were down like three, four or five, six years in a row, and also correlated to that, down 60% to 90%.
And within the U.S. it’s been almost dominated the last handful of years with a lot of natural resources. I mean, there’s coal stocks, uranium stocks. But those are all starting to see along with probably gold and silver being the leaders. Gold stocks, not at all-time highs yet, but maybe by the time this year ends, who knows. Let’s talk a little bit while we still got you guys about putting this all together. I think the challenge for a lot of people on analysing companies, whether it’s companies under the Oxygen umbrella, Pure Gold, etc, as well as really other natural resources.
I was smiling as you were talking about risk, Eric, because you’re saying the foreign ones are riskier, too much risk for you to handle. And I’m laughing already because watching the gold stocks, in general, tend to be pretty volatile. What sort of advice would you guys give investors that are either newer to the space or thinking about allocating more to putting a portfolio together? Should they just go buy some ETFs? Should they put together a portfolio of exploration all the way out to production companies? How do you guys think about it?
Eric: For the average guy, it’s hard for them to select gold stocks. Now, if you wanna take it seriously, you can do it on your own. I mean, that’s effectively what I do all day long. I’m looking for opportunities. And perhaps for me, it’s a lot easier because I kind of know what I’m looking for ahead of time. So I would say if you have the time to spend to do that, you should do it. And hopefully, in time, you’ll learn how to differentiate between what the upside is in company A versus company B.
Meb: And feel free if you have any names you would like to use as illustration or a case study, feel free. I know our listeners would love to hear anything.
Eric: Well, Meb, to me the key thing right now…and I know it’s gonna sound like it’s a tinfoil hat. But I’m 100% convinced and have been for a long time that the metal markets were manipulated. No one ever likes to accept that. But you can see evidence, including qualifying CP. I mean, imagine thinking that nothing’s been manipulated, we pretty well know that everything’s been manipulated, whether it’s foreign currency or bond, or who cares what. Anyway, so it’s not that much off the spectrum to think that things might have changed here.
So let’s take the case of silver. We produce about 800 million ounces a year, but so far this year, we’ve had almost 300 million ounces go into the ETFs. So maybe by the end of the year, it’ll be 500 million ounces go into the ETFs. Well, if we produce 800 and the industry needs 70% of it, how do you get 500 million going to the ETFs? Plus all the offtake and the COMEX? I mean, something’s missing here.
And let alone the coin sales all the data in silver is screaming at me that what we went through for these last decades has been wrong and that we’re going to correct itself. The same is true of gold. I think gold was always manipulated more starting off by central banks who wanted their fiat currencies to be considered the only place you could ever put your money and they used to sell a lot of gold. So for example they’d sell 600 tons of gold a year. Well, now they buy 600 tons of gold.
Well, why are we so surprised that the price of gold would be going up when the biggest seller becomes the biggest buyer? And let alone the fact that the gold ETFs are doing well, the off-take and the COMEX is doing well. So to me, the biggest thing is the prices are gonna go up here. How do I find something that will outperform? And typically it’s not gonna be a big stock, it’s going to be something in the mid to smaller range. What you can watch for are drill results, watch for changes in the 43-101s where the deposit is getting bigger. And try to get some metric that tells you that this is way cheaper than the average precious metal stock, which is essentially what I do all day long.
Meb: Was smiling as you were talking about the silver thesis because it sounds I mean, pretty similar to what Buffett was talking about in the late ’90s. He was talking about the supply-demand imbalance. But I also love the comment you made Eric earlier that I think is not that well appreciated for investors in general when it comes to securities across the board. And we talk a lot about this being trend followers, and also private investing, is so many investors, if they see a stock double, they’re absolutely elated. They’re the happiest they’ve ever been. “Oh my gosh, I can’t believe I doubled my money,” go take a vacation, whatever.
But not giving time for stocks to compound where they not only go from doubling but from a 5x, a 10x, even the elusive 50, 100 bagger. And so this old concept of coffee-can portfolio, I think it takes a lot longer than most investors realise. If you look at a lot of the biggest 100 baggers over history, I mean, it takes for many of these, 10 plus years. I mean so many investors are so willing to sell those before the timing has really had time to work out I think that’s a pretty important lesson too.
Eric: Meb, I think you’re making a great point there. People have to learn to be patient. And I’m gonna use Kirkland Lake as my example. I mean, Kirkland Lake, probably six years ago was losing money. Today, their profits probably put them in the top 30 companies on the Toronto Stock Exchange. That’s how dynamic things can be when all of a sudden you find a great new deposit, then you finally develop it, then you produce the gold, sell it, you make this outsized profit. To get there, it was a five or six-year process to finally get the profits recorded, that you imagined happening five years ago. It takes a while.
Meb: Mark, you had any thoughts over there?
Mark: I totally agree on the gestation period for these companies. Based on personal experience, it takes… My first success was a 10 year period, took 10 years, on average it’s 6 to 10 years from sort of full realisation of what this could be. I mean, a couple of sort of touchpoints here, category-wise, if you’re putting the work into being a stock picker, and don’t wanna allocate that task to a pool or money manager, but I mean, you wanna look for things that have a high degree of asset attractiveness. And those fall into certain categories, grade, doesn’t have a lot of growth, is there low execution risk? Is it well located? All those criteria. And then of course, your cost of entry.
And then the second point, which I think we haven’t really touched on a whole lot today, which is what kind of track record does the management team actually have? Because if the first asset fails, for whatever reason, you wanna have faith in your management team that they can reinvent this company and not lose all your money. Do they have a track record of creating success? Are they serial entrepreneurs or not? Because it is ultimately a risky business and you wanna back a group that has done it repeatedly.
Meb: That’s, I think really important, not just from the screening for the good ones, it’s also about avoiding the bad ones. You see so many serial capital incinerators out there, and they don’t even have to be necessarily fraudulent although those exist too, and then the scammers, but also just the really terrible operators. It’s like the positive and negative screen. And the great quote of “Success leaves traces.” We had done an entire book on 13F investing and the concepts there, and both positive and the negative. So trying to find people that have done it before, is I think important.
All right, we’re gonna start winding down. We’ve got a quick couple of questions for you guys. Here’s one that you guys gotta think about so I’m gonna just prep it. We always ask investors what’s been their most memorable investment. So you guys it could be good, it could be bad, it can be something you lost all your money on. It could be 100 bagger, it could be, I don’t know, some Superman comics your mom had in your basement. You guys have anything come to mind? Whoever has one first can have at it.
Mark: I guess my most memorable investment is…because I’m an investor in all of my deals, as opposed to other people’s deals is True Gold. And it was memorable because it was my first foray into West Africa. And I was wet behind the ears and didn’t really know what I was walking into. And we basically got our asses handed to us, almost. And we had the mine half built, fully-funded, and all hell broke loose in the country.
And we woke up one day and the president was kicked out and fled the country and the government had dissolved and it was out and out chaos. And we had to navigate our way through that. And with all kinds of creative advice from various people, re-established stability in and around our mine so we could get it finished and ultimately create this gold mine and not lose our shirt. I’ll never forget those two years and learned a lot.
Meb: My palms are sweating just thinking about the challenges of that. Okay, Eric, up to you.
Eric: I’ll talk about Kirkland Lake Gold. The reason I wanna talk about it is I’d invested in a company called Crocodile. And they were in Australia, and they owned a mine called the Fosterville Gold Mine, and it was like a 3 to 4-gram deposit. Then I noticed, well, gee, they had an intersection of 8 grams and 15 grams and 25 grams. And I had a geologist go down there and take a look at it because I wouldn’t know what to look for. But first of all, the first point to make is numbers took me there, numbers. You don’t have to be a geologist.
Anyway, the guy goes down there Quintin Hanning [SP], great geologist, he says, “Eric, you’re not gonna understand how big this is gonna get.” So I ended up with a very large position in Crocodile. It was taken over by…I’m forgetting the name. And ultimately, Kirkland Lake ended up buying that company and I was the chairman at the time. And that ore body went from being a 4-gram ore body to about a 40-gram ore body. And just imagine if you can make money at 4 what are you making at 40? It’s all profit.
So much so that their cost of producing an ounce I think in their last reported quarter was something like $135 an ounce. So today they’re making whatever, $1,800 per ounce of gold. And it was all based on numbers. So people who aren’t geologists and maybe don’t even have any history with the gold mining business can use their own number crunching to get them well down the line in terms of where the opportunities might be.
Meb: It’s good news for a quant like me. Mark, I forgot to ask, how’s 2020 impacted what’s going on in your world? On one hand, you have the prices appreciating but has coronavirus been impactful for the operation, are mines shutting down, are they all open? I’m not even aware of what the status is.
Mark: The impact of all of the travel restrictions and things that coronavirus has created really have impacted more remote locations. So we’ve been really fortunate because we can drive to the Pure Gold Mine site and our workforce is from that local region, we’ve been able to keep operating. The same with Liberty Gold who’s operating in southern Idaho, they’ve been able to drive to site, so no flying has been needed. So that operation’s been able to not skip a beat. Discovery is back, Mexico had a sort of a work ban, now it’s back. And so we’ve got four rigs operating at Discovery as well. And our fourth company Sun Metals is now operating in Northern BC with two drill rigs going. So we’ve been able to…obviously with a bunch of safety protocols in place, we’re continuing to run the business.
Meb: I think it’s a lot easier to social distance in places like Idaho than it is here local in Los Angeles. I was in southern Idaho last week we drove all the way from Salmon down to Sun Valley, and Stanley in Boise, beautiful country. I really wanna get back and fish the salmon, hopefully, 2021 if the world’s still around.
Gentlemen, we gotta start to wind down, this has been so much fun. We’re definitely gonna have to have you back as silver hits $50 and $100, and gold goes to $3,000 and $5,000. Tell me where do people find you more information, they wanna check out what you guys are up to, what’s the best places to go?
Mark: So for me, you can go to any of the following names. All these are trading on the Toronto Stock Exchange, the Venture Exchange TSX Venture Exchange, so Pure Gold Mining, Liberty Gold, Discovery Metals, or Sun Metals. Any of those websites will get you to where you need to go.
Eric: And if anybody wants to tag along with what I am investing in, I do a podcast on a company called Sprott Money. And I normally talk about precious metals and I certainly talk about specific stocks that I care a lot about, and think will do well. And I haven’t said this yet, but I should say it. My favourite stock right now is Discovery Mine because I think the silver price is going up, and they’ve got the goods. So that should be a lot of fun.
Meb: Mark. Eric, it’s been a lot of fun. Thank you for taking the time today. I really appreciate you guys joining us.
Mark: Thank you Meb, thanks for having us.
Eric: Meb, been a lot of fun. Thank you for the interview.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us email@example.com, we love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. My current favourite is Breaker. Thanks for listening friends and good investing.