Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
When Ian Ball, CEO of Abitibi Royalties, (TSXV:RZZ) is asked why he decided to get into the royalty business rather than taking the more traditional route of building a prospect into a mine, he likes to reference Usain Bolt.
Most people can name Bolt, the world’s fastest sprinter and highest earner in terms of endorsements, but they have a hard time naming the second-fastest. Ball says it’s the same with mining companies – a lesson he learned from Rob McEwen, the renowned Goldcorp (NYSE:GG, TSX:G) founder with whom he worked for 12 years, most recently as president of McEwen Mining (NYSE, TSX:MUX).
“Rob would always say if you do the same as everybody else, don’t expect to be any more than average,” says Ball, who spun predecessor company Golden Valley Mines (TSX:GZZ) into Abitibi Royalties in 2011, after Golden Valley acquired key assets next to Canadian Malarctic, Canada’s largest producing gold mine.
“We’re really not here to be one of a thousand companies. The goal is to drive the best share price possible, because the rewards for yourself and the rewards for your shareholders can be remarkable. As Rob would say, the rewards for being the best aren’t just a little bit better than second, they’re a lot better.”
“The rewards for being the best aren’t just a little bit better than second, they’re a lot better.” Ian Ball, President and CEO of Abitibi Royalties.
Being first among a field of hundreds of junior mining companies is highly aspirational, especially in a market that has seen many “zombie” companies go out of business and the survivors drastically cut exploration budgets and overhead. Consider too that Abitibi’s competitors, who also play the royalty game, are many times larger, for example Royal Gold (NASDAQ:RGLD) at $5.2 billion market cap, and Franco Nevada (NYSE, TSX:FNV), which is valued at close to $17 billion CAD.
But Abitibi has had a remarkable year, as anyone who takes a look at their share price can see: the Val-d’Or, Quebec-based company has risen 157% year to date, and over 1,600 percent since the company started in 2011.
Ball says the main driver of the whopping increase in shareholder value has been the success of Canadian Malarctic, co-owned and operated by Yamana Gold (NYSE:AUY, TSX:YRI) and Agnico Eagle (NYSE, TSX:AEM). Abitibi has a 3 percent net smelter returns (NSR) royalty on the eastern portion of the mine which includes the Barnat Extension and Jeffrey gold deposits. The NSR also includes the new Odyssey North discovery announced in 2014, which Ball says is generating a lot of excitement among geologists and investors.
“We’re really not here to be one of a thousand companies. The goal is to drive the best share price possible, because the rewards for yourself and the rewards for your shareholders can be remarkable.”
“Agnico and Yamana continue to increase the amount of money they’re spending there, they’ve outlined a couple of scenarios where they’ve determined the length of the deposit is now a kilometre and a half long. That’s large by any stretch let alone a gold deposit,” he told MINING.com in a recent interview. The latest set of drill results released in February 2015 included 1.3 grams per tonne gold over 93.5 metres and 3.5 g/t over 13.5 metres. Yamana has discovered two “blowout” zones of mineralization estimated to be wider than any other part of the deposit.
Ball said all of the exploration success has come without any direct expense to the company – “the key is we put up none of the capital” – which is attractive to investors. That, and the fact that while most juniors have been selling shares to raise money in a difficult market, Abitibi management has been doing the opposite. “We’re buying back our shares, so you’re not diluting the stock at all.”
Ball is also excited about the prospect of getting more royalty deals from junior explorers who are sitting on excellent deposits, but may be encountering difficulties in keeping up the claims. The idea for a new approach to matching those companies with Abitibi came when Ball saw a junior in Nevada that had claims near Barrick Gold’s (NYSE, TSX:ABX) Cortez mine. Knowing there were some good holes drilled there in the 1970s, he did some investigation and found the company only had $3,000 on its balance sheet – not enough to renew the claims. Ball called the CEO and suggested they make a deal: Abitibi would pay the company’s claims and taxes, in exchange for a royalty on the property. The CEO had already dropped the claims, but that got Ball thinking: “there might be a demand for this.”
But rather than repeating the process and doing time-consuming research to find distressed juniors willing to cut a royalty deal, Ball figured it makes more sense for them to come to him. The result was an online platform launched in June called the “Abitibi Royalties Search”. Juniors are invited to submit data on their projects, and if Abitibi likes what it sees, it will reach out with a royalty offer. The portal asks companies to fill out a set a criteria and invites them to upload key documents including historical drill results, maps and assay results. Ball said Abitibi’s advantage over the big royalty companies is they strive to give the applicant an answer with 48 hours.
“If we get back to you we’ll cut you a cheque so you can pay your taxes, and we have a standard template for an NSR agreement which is a letter of intent, and then over the next couple of months we’ll work out a full royalty agreement, so it all gets done fairly quickly,” he said.
Asked what criteria they’re looking for, Ball said the first is proving legal title to the property, and the next is showing that the property lies close to an existing mine – going by the theory it’s usually much easier to find a new mine near an old mine. “We think if the infrastructure’s already in place, that’s going to increase our odds of getting cash flow. The hope is over time the junior that has the property will either sell to the company that operates the mine in the area, or they’ll come to some kind of agreement where they can get their ore processed,” he said.
Abitibi’s aim is to build a portfolio of properties 80 percent in gold, and 80 percent in North America. So far the company is adhering to that goal. A look at the website shows near-property royalties in Ontario, Quebec and Saskatchwan/Manitoba, plus one in Turkey. The projects are all in early stages of exploration, which gives Abitibi the opportunity to get in on a royalty at low cost.
MINING.com asked Ball whether he thinks Abitibi’s model works just as well in an up market as a down market- when more investment cash is flowing into juniors and they are less likely to need help keeping up their claims. Ball said the amount of deals could certainly slow when times are good, but higher metal prices will also enrich the company’s stable of properties, and its stock price.
“I look at it in terms of share price, that’s the only thing I’m focused on,” he said. “ I think if you can build a portfolio in a down market you’re going to benefit in an up market.”
