Goldrock’s Matysek out to prove Argentina is a good bet

The hesitation is understandable:Argentina’s prospective geology gets lost amidst the country’s ever-shifting politics and economic challenges. This is, after all, the country that defaulted on US$132 billion worth of international debts just 12 years ago, where rampant inflation seems to shatter the economy every decade or two, and where history shows a pattern of populist leaders nationalizing private sector holdings.

However,Argentinais also the twelfth largest gold-producing country in the world. The nation has seen ten mines enter production in the last ten years. Half a million Argentineans work in the mining sector and the population is generally supportive of mining projects, including indigenous groups. The government also supports mining and fast tracks permitting processes once key boxes have been checked.

“All these people are pouring money into Argentinean oil and gas right now,” says Matysek, Goldrock’s president and CEO. “One of the best performing stocks on the Venture exchange this year is Madalena Energy (TSXV: MVN), a Canadian junior looking for unconventional oil and gas inArgentina. Yet people are too nervous to invest in mining inArgentina, even though the same regulations apply to both? It just doesn’t make sense.

“Every time we meet with potential investors, we spend the first 20 minutes explaining that things have changed, thatArgentinawants mining,” Matysek continued. “And it really does want mining.Saltaprovince is in love with Lindero.”

Matysek is used to telling stories others are not used to hearing. A proven mining entrepreneur, he joined Goldrock in 2012 when the company transitioned away from exploring Lindero and towards the next step, whether that ends up being developing the project into a mine or selling it to a major. And Matysek is a perfect fit to that challenge.

Prior to Goldrock Matysek was president and CEO of Lithium One, which in mid-2012 merged with Australia’s Galaxy Resources (ASX: GXY) in a $112-million deal. The merger was a success for shareholders and gave Matysek experience inArgentina, as Lithium One’s flagship asset was in the country’s north.

Before that Matysek was president and CEO of Potash One, where he was the architect of a $434-million takeover by Germany’s K+S Ag. And before that the dealmaker founded and led Energy Metals, a uranium company that grew rapidly for three years before a Chinese uranium major acquired a controlling stake.

“I get into things early: uranium, potash, lithium, and nowArgentina,” says Matysek. “I get in because I believe in the commodity and the project. And I invest personally in my companies and never sell my shares.”

So what is this project Matysek believes in so? Lindero is a gold project in northwestArgentina’sSaltaprovince. It is permitted for development into an open pit, heap leach mine that initially processed 15,000 tonnes per day (tpd), expanding to 18,750 tpd during the first year.

It’s a straightforward mine plan: open pit mining, three-stage ore crushing, conventional heap leaching, and a carbon adsorption-desorption-recovery plant. Life-of-mine gold recovery is projected at 68.3%.

During its first nine years of operation the planned Lindero mine would produce 109,000 oz. gold annually. It would cost US$703 to produce each of those ounces, as an all-in sustaining cost, which means the Lindero mine should generate a 33.4% after-tax internal rate of return based on a gold price of US$1,400 per oz. and a 5% discount rate.

According to the April 2013 feasibility study, it would cost US$155.4 million to build Lindero into this mine. The project’s high rate of return means the investment would be recouped in two years.

The idea is to start small — Lindero could support a bigger operation, but Goldrock wanted a low capital cost, small footprint mine initially. Once the modest heap leach operation is up and running, Goldrock would consider expansion.

The dioritic porphyry at Lindero hosts 128.7 million measured and indicated tonnes grading 0.52 gram gold per tonne and 0.1% copper, plus 59.7 million inferred tonnes averaging 0.37 gram gold and 0.09% copper. The reserve considered in the mine plan is considerably smaller: 65.5 million proven and probable tonnes grading 0.72 gram gold, for 1.5 million contained oz.

As such the defined 3.5-million oz. resource offers good potential for reserve expansion. In addition, Goldrock has outlined an initial resource at the adjacent Arizaro porphyry totaling 31 million indicated tonnes grading 0.34 gram gold plus 27 million inferred tonnes averaging 0.26 gram gold. Lindero is the northwest end of the Arizaro intrusive complex; the Arizaro porphyry system is at the southeast end of the complex, a few kilometres away, and in terms of surface expression is twice the size of Lindero.

Goldrock is now out searching for the US$155 million it needs to build Lindero. Matysek says they are considering all options, though the company’s stated goal is to secure US$100 million in debt, pull in US$30 million in equity, negotiate a US$35-million equipment leasing contract, and sign a US$15-million royalty.

The equity component is small for a reason: Matysek orients all he does towards increasing shareholder value.

“I don’t believe in increasing market capitalization — that as a goal doesn’t make sense to me,” Matysek says. “All these companies in the last few years — they issue stock and raise money and say, ‘Hey look we’re worth more now because our market capitalization is up!’ But in fact their share prices are lower; they just have more stock out. And that does nothing for the investor.”

The hunt continues, but just because Matysek and his team have not secured full funding does not mean Lindero’s development is at a halt. In December, with roughly $9 million in the bank, Goldrock ordered the high pressure grinding roller (HPGR) that will be the cornerstone of the Lindero mill. The HPGR is the longest lead time item for the project, so the fact that it is scheduled to arrive on site in early 2015 with $5 million, or 70%, down against its price tag derisks the project financially and in terms of a timeline to production.

Another step in the de-risking process for Lindero came in early March, when Goldrock entered into a gas pipeline access contract with the owner of the regional gas pipeline. The contract is for the transport of 38,000 cubic metres of natural gas per day, enough to power the planned Lindero mine.

The idea is not to actually connect Lindero to the gas pipeline, but to set up a virtual gas pipeline consisting of a station at the source in Pocitos, a receiving station at the mine site, and four trailer trucks to transport the gas. TheSaltaprovincial government built the pipeline that carries the gas to Pocitos specifically to encourage mining and other development in the Puna region.

The authorities inSaltahave also issued every permit needed to develop Lindero, often in record time. And so Goldrock and theSaltagovernment continue to push Lindero towards production, despite constant pushback from the mining investment community, which does not forget recent events so quickly.

One event overshadows all others when it comes to Argentina’s recent resource past: the government’s unilateral nationalization of oil and gas major YPF in the spring of 2012. Spanish oil and gas giant Repsol had owned 57% of YPF and the surprise, uncompensated nationalization of that asset sent shockwaves across the global resource sector. Overnight, the political risk rating attributed to Argentinean projects skyrocketed.

But in April of this yearArgentina’s congress approved a $5-billion repayment to Repsol. The Spanish oil giant had originally asked for $10 billion, but a sizeable settlement is still significant for a country that is trying to attract foreign investment to develop its shale oil and gas reserves.

Most of those reserves are in the Vaca Muerta, a shale formation in southernPatagoniathat hosts huge amounts of oil and gas. The contained hydrocarbons positionArgentinasecond in the world for shale gas reserves and fourth for potential shale oil reserves.

Argentinaneeds international help to develop significant production from these in-ground resources. Matysek thinks the Repsol repayment shows the Argentine government has learned its lesson: a country cannot nationalize resource assets and attract global investment at the same time. With that lesson learned investors can expect better from the government of president Cristina Kirchner going forward.

“The YPF case should not be [considered] a precedent for further expropriations,” says Matysek. “Our sources widely believe that the YPF expropriation, while unacceptable from a reputational and rule-of-law standpoint, was partly justifiable. Our sources further believe that the recent settlement with Repsol stemmed from the government’s recognition of its urgent need to regain credibility at the international level.”

The nationalization of YPF was the highest-profile hammer to hitArgentina’s resource sector in recent years, but it was not the only blow. In 2011, before taking control of YPF but facing a serious decline inArgentina’s once-bountiful trade surplus, Kircher enacted import controls to try to curb the flight of capital. The government also arbitrarily increased the range of products liable for import taxes.

Those moves hurt individuals trying to protect their nest eggs and a wide range of businesses reliant on imports, but for resource companies it was Kirchner’s next move that really set the stage for resource risk: in late 2011 the government forced companies in the extractive sector to repatriate their export revenues. In other words, mining companies were suddenly required to convert all the revenues they wanted to take out ofArgentinainto pesos first.

To the government, the reasoning was straightforward: it was watching capital pour out ofArgentinaand saw this move on mining revenues as a way to create some capital inflow. To resource companies, the requirement to convert revenues into a devaluing currency was not so palatable.

With the repatriation requirement leaving a bad taste in everyone’s mouths, the subsequent nationalization of YPF was too much. Investors fled, from oil and gas majors to individual shareholders in Argentine-oriented explorers. Goldrock’s share price, for example, fell from $3 in early 2011 to just 40¢ by mid-2012.

Matysek says investors constantly ask about these limitations. Can mine developers import the equipment they need? And can miners get their profits out ofArgentina? The answer to both questions is: yes.

“It took all of four days for Goldrock to obtain a license to import the high pressure grinding roller,” said Matysek. “It was not arduous at all. And just to prove it was possible we applied to transfer funds out ofArgentina— it only took one day for the central bank to authorize the transfer. They are not trying to stop these things from happening. They just want companies to buy domestically if possible, which was not for the HPGR, and they want to know how much money is moving out of the country.”

Even disproving those limitations is unfortunately not enough to convince many in the resource sector to believe inArgentina, because its list of economic challenges continues. Inflation is near the top of that list. Rampant inflation broughtArgentinato its knees in the early 1990s; in 2001 a similar crisis forced another government out of office and led to the largest foreign debt default ever. Now inflation is again on the rise.

According to the Foundation for Latin American Economic Research, inflation inArgentinatotaled 26.4% in 2013. Other analysts peg it at well over 30%. The government figure is 10.5% but there has long been widespread distrust ofArgentina’s official inflation reports. Even the International Monetary Fund has weighed in, censuringArgentinain February 2013 for failing to divulge accurate inflation data to the public.

However, Goldrock does not see inflation as a major hurdle.

“Inflation is not an issue for companies that have revenues in US dollars,” says GoldRock CFO Bassam Moubarak. “Historically the depreciation in the currency has been consistent with the rate of inflation, thus insulating the company from inflationary pressures. The inflation inArgentinais also beneficial to companies in the mining sector as this lowers their costs over time, as increases in prices and wages tend to be a little less than actual inflation.”

Another factor weighing onArgentina’s financial reliability is a major drop in the central bank’s reserves, which fell almost 30% in 2013. This is not because of inflation or currency devaluation. This is because of spending: in 2012 the government approved a bill allowing it unfettered access to central bank reserves to pay public debts.

The measure also expanded the central bank’s capacity to lend to the treasury. Taken together, these moves effectively eliminated the standard requirement for the central bank to hold reserves equivalent to the monetary base. The central bank now has less than US$28 billion in reserve, compared to US$47 billion in March 2012 when Kirchner’s government started spending reserve dollars.

Argentina’s challenges don’t end there. Rate freezes mean power companies are not investing in infrastructure, which has led to rolling blackouts throughout the country, including multi-day outages inBuenos Airesin the mid-summer heat.

Governments of all levels inArgentinaare being pressured to increase public sector wages. In December police in the city ofCordobawalked off the job to protest low salaries; rioting and looting started almost immediately, forcing the province to grant a 30% wage hike. Police in 20 other provinces followed suit. Teachers, transit workers, trades unions, and municipal workers have all also taken to the streets.

Then there are the allegations of corruption against Kirchner and her top officials, a general and alarming growth in crime, and the lack of strong leadership since Kirchner underwent surgery last October to remove a blood clot in her brain.

Matysek takes it all in stride. He believes inArgentina, just as he believed — correctly — in uranium, potash, and lithium. And he believes Lindero is a very good gold project.

Now Matysek just has to convince everyone else. Thankfully for him, his track record should give people reason to listen.