Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
With approximately $5.5 million in the bank, a 3.5-million-ounce gold equivalent Measured and Indicated resource, zero debt and a robust, updated preliminary economic assessment, Almaden Minerals Ltd. CEO Morgan Poliquin says the company is in position to not only survive this tough market but to continue adding significant value at a deep discount. While other companies are trying to figure out how to keep the lights on, Almaden has been active. The company recently completed a spinout of a large portfolio of exploration projects and royalties—including a royalty on Ixtaca—into Almadex Minerals Inc. and purchased an option on a mint condition mill that reduced the initial capital cost estimate by some $70 million. In this interview with The Gold Report, the second-generation geologist points to the fact that 95% of the Tuligtic property, which hosts the Ixtaca Zone, remains unexplored and that the company can drill for about a third of what most operators pay. He says that the company’s market cap is less than the savings from the purchase of the mill, as an indication that a potential buyout is a plausible scenario.
Drill and Crew at Ixtaca. Photo courtesy of Almaden Minerals.
The Gold Report: Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) recently released an updated preliminary economic assessment (PEA) for the Ixtaca gold-silver deposit in Mexico. One of the highlights was the purchase of the used Rock Creek mill at a severe discount. Why is that investment—and the way the investment was structured—important to the future of Almaden?
Morgan Poliquin: We are in a challenging mining environment. That is obvious. What is less obvious is the opportunity. We know that the end of the down cycle is going to come eventually. Our strategy is not only to survive these markets, but profit from them. That is why our first instinct was to find ways to reduce capital costs of the potential mine at Ixtaca by looking for used equipment. Oftentimes, used equipment can be a pile of rusty junk. In this case, it was a brand new mill that operated for only six weeks before the company that owned it took it offline during the economic collapse of 2008. As shown in our updated PEA, the new mill is a big part of the reason that we could reduce our initial capital expenditure from US$244 million (US$244M) in our September 2014 PEA to US$100M in our recent one. Also, the mill acquisition is structured as an option to acquire, so there is also some flexibility for us.
TGR: What are the next steps for the Ixtaca project? When will investors see the next catalyst?
MP: The next engineering steps are a prefeasibility and a feasibility study, as well as permitting the mine plan. So the next steps are very straightforward—continue to derisk the project by completing the detailed engineering and getting the mine permits. We’ve already done most of the field work required. The mill feed in our new mine plan is already 97% Measured and Indicated. So a lot of the detailed engineering is behind us. For the civil engineering, on-site data collection is being completed. The next steps are to compile all of that into prefeasibility and feasibility studies and get our mine permits in place.
Morgan Poliquin and crew at Ixtaca. Photo courtesy of Almaden Minerals
We are also looking at doing some additional drilling within the mine plan area where we see some exciting exploration potential.
TGR: Earlier this year, you spun out Almadex Minerals Inc. (AMX:TSX.V) with a portfolio of early-stage exploration projects. What does that mean for Almaden shareholders?
MP: Since Ixtaca is now an advanced-stage project, moving it forward is increasingly a different business model from early-stage exploration. That is why it was prudent to separate the two companies. Almaden is now in the world of detailed engineering and eventually project financing, which is quite different from the business of funding early-stage exploration. We have a very high opinion of the mineral assets that went into Almadex, which include a 2% royalty on Ixtaca, and felt that they needed their own vehicle to properly value them.
To help understand part of the rationale for the spinout, you need to know a bit about our history. We have been around a long time. Our chairman—my father, Duane Poliquin—founded this company in 1981. In 1992, my dad began to piece together what is now a world-class database on Mexico, giving our team a 20+ year head start to survey, explore and stake the best looking prospects anywhere in eastern Mexico. I came to work for the company after graduating from the University of British Columbia engineering program in 1994 and we focused in on eastern Mexico, which we think is one of the most exciting districts in the world. So, Almadex brings proprietary knowledge in eastern Mexico and 20 years of exploration work, so it’s not starting from scratch. It’s starting on the basis of two discoveries—Caballo Blanco and Ixtaca—and the knowledge that went into those discoveries and a whole new belt of rocks that we pioneered. Our view is that it’s a very exciting proposition in terms of making new discoveries with all that work behind us and intelligence that will go into the next exploration drill programs.
TGR: Is the spinout of Almadex part of a positioning of Almaden for sale?
MP: If we were going to build the Ixtaca deposit ourselves, that would involve dilution of some sort to finance building a mine. Our job is to derisk the project as we are doing and position the company to take advantage of the full range of opportunities that might be there. That includes the possibility of building a production team and talking to potential partners or buyers. I think by separating the two business entities, we give our shareholders the best opportunities.
TGR: You and your father were early adopters of the prospect generator model. What are the specific skills that you and the rest of the team bring to both companies?
MP: First and foremost, I’m a geological engineer, as is my father, Duane Poliquin. We understand the spectrum of technical requirements from early-stage prospecting right through to where we’re at with Ixtaca. Our skill set is making new discoveries. Duane Poliquin and I are the prospectors. We’re the ones who go out in the helicopter, fly around and look for these things. We don’t typically option properties. We’ll do that if we think something very good comes our way. But our skill set is finding areas that have potential. That’s what we did with eastern Mexico. It was a completely unknown area, geologically speaking. Now, we have two discoveries. That’s how we work, recognizing early-stage opportunity.
At the same time, we’ve built a completely integrated exploration team that does the detailed work required before drilling holes. We know where to put pegs in the ground, and then geophysics, soil sampling and drilling come into play. We have our own geophysical equipment and team. We have our own soil sampling team. We also own five diamond drills, so we drill for a third of market rates. That’s one of the reasons we have managed to accomplish everything at Ixtaca for such a small amount of money and thus minimal dilution to shareholders. We do all these things ourselves.
In our office in Vancouver, our vice president of corporate development has a master’s degree in mineral economics and is competent in valuations and presenting that information to others. We have a full-time chief financial officer and a very qualified certified accountant. We have one geologist focused on quality assurance, ensuring quality control and that the data we gather are impeccable. We are a fully integrated exploration team. It’s very unusual. We don’t contract this out. It means that I’m the vice president of exploration and regional exploration manager, and the president and CEO in my spare time. But that’s what we are, a technical team.
TGR: We talked to Bob Moriarty about the importance of continuing to move projects ahead during a down market and he called your mill purchase “brilliant.” What are you doing to ensure that the company has the reserves to survive this low metals price market and be well positioned when it turns around?
MP: That is very kind of Bob, a great guy. We have had great support from existing shareholders, including a highly involved chairman who’s been in this business for 50 years. We recently raised a little over CA$3M to help with the mill option costs, which when combined with the CA$4.6M we had at the quarter ending September 2015, puts us in a good financial position. This is the expensive stage of a project’s life cycle, but we’re managing it very well. The key thing is not to spend money you don’t have. A lot of companies in our sector haven’t abided by that basic rule. Don’t make commitments that you can’t keep. The agreement on the mill is very important to us as you can see with this PEA, but it is an option agreement. We think it’s very valuable to make those option payments and acquire it, but we’re cautious, which is why we structured it that way.
TGR: Are new retail and institutional investors starting to get the message about your approach?
MP: I hope so. A core group of shareholders has been supportive for many years. We are very grateful for that, but you can’t rely on support in these tough markets. We have to keep moving the company forward and finding ways to be inventive. We hope we’re satisfying that for our shareholders.
Different pools of capital have different requirements. Private equity tends to be more technically oriented and have very specific requirements and very high return metrics. But they are there. Lydian International Ltd. (LYD:TSX) recently announced Orion Mine Finance helped it raise the money for its project in Armenia. So there is capital out there, but it’s in a little bit different form than what we’ve known in the past.
TGR: Why would traditional or new funding sources be interested in the Almaden story specifically?
MP: We have been around a long time. We bring a lot of experience to the table. We’re a technical group, and we look for opportunities. This is a tough environment, and it’s not a lot of fun for investors. But we believe in our project. We think it’s worth looking for the opportunities to improve it in this environment, and we’re finding them and in turn adding fundamental value to Ixtaca. It may not be reflected in our share price in this bleak environment, but we believe in precious metals moving forward. We know that it’s a cyclical market, and our market will return, whether that comes in the form of valuations for companies or metal price gains. Our job in the short term is to find the opportunities that are out there. That’s the hard-to-see silver lining when you’re in markets like this, but there are opportunities. We have the experience to look for them and to try to take advantage of them.
Morgan Poliquin, CEO and president of Almaden Minerals Ltd., graduated from the University of British Columbia Geological Engineering program in 1994. He earned his Master of Science degree in geology at the University of Auckland, studying geothermal systems and epithermal gold deposits and his Ph.D. in geology from the University of Exeter (Camborne School of Mines) studying the geology and mineral deposits of eastern Mexico. His Ph.D. research was combined with the prospecting program he led in eastern Mexico for the company. This exploration directly led to Almaden’s involvement in the Caballo Blanco and Ixtaca projects and the subsequent discoveries made on these projects.
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Source: JT Long of The Gold Report
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