Mining speculation is a people business, as evidenced by the fact that there are a few groups that have managed to generate one big winner after another.
One of these is the Discovery Group, and I decided to ask them to explain the secret sauce behind their big successes.
By Brien Lundin
Dear Fellow Investor,
Winners win. Sometimes it’s as simple as that.
If you ask anyone with any track record of success speculating in the junior mining business what the most important factor to consider in a company, they’ll invariably say “the people.”
Of course, the odds are stacked against anyone in the prospecting business. Not one in a thousand “discoveries” becomes a mine. But a great management team can slash those odds in a number of ways.
To define some of these key strategies, we queried three executives from the Discovery Group of Companies www.discoverygroup.ca to learn more about the companies they lead, and to learn some of the ingredients for their major successes of late.
If you don’t know the Discovery Group, you might recognize some of the companies that were spawned from this group, including Kaminak Gold Corporation and Northern Empire Resources Corp, to just name two recent wins.
As it turns out, three of the companies in this group are exhibiting at our upcoming New Orleans Investment Conference in a few weeks, so I decided to query the CEOs of these companies about their secrets for success:
Brandon Macdonald, President, CEO, and director of Fireweed Zinc Ltd. (TSX-V: FWZ) NOIC booth #122 www.fireweedzinc.com
Darren Klinck, President, CEO, and director of Bluestone Resources Inc. (TSX-V: BSR) NOIC booth #222 www.bluestoneresources.ca
Chris Taylor, President, CEO and director of Great Bear Resources Ltd. (TSX-V: GBR) NOIC booth #225 www.greatbearresources.ca
I hope you enjoy the interview transcripts and take the time to visit each of these impressive CEOs at their booths during New Orleans 2018.
1) Buying “Right”
Your team was able to make a highly discounted acquisition of a project currently exhibiting significant value with a lot more upside. In short, “you got a great deal.” Tell us a little about how you recognized and then took advantage of the opportunity.
Brandon Macdonald, CEO, Fireweed Zinc Ltd. (“Macdonald”) Thanks, Brien. It’s a real pleasure. The most important step in getting great value for us was timing. When we started looking for properties it was a full year before the zinc bull market started. That allowed us to pick the property we really wanted and get it at a good price rather than overpaying for something worse which is frequently what happens when companies scramble to ride the wave of a hot metal.
Darren Klinck, CEO, Bluestone Resources Inc. (“Klinck”) Thanks Brien. Yes, Bluestone was fortunate to be able to get into a position to acquire the permitted Cerro Blanco Gold and Mita Geothermal projects from Goldcorp last year. These projects combined have had more than US$230 million invested in them previously by Goldcorp and Glamis. But with the Marlin mine moving into closure last year, Cerro Blanco and Mita weren’t significant enough as a stand alone for Goldcorp and thus they made a decision to divest them.
Timing is sometimes everything as you know, and we picked these up for US$18 million along with Goldcorp retaining a 1% NSR and 4.9% of Bluestone. Once into production, we will have to make a final payment of US$15 million six months after commercial production.
The Cerro Blanco project is already starting to surprise us to the upside just over 12 months from taking the keys. We launched a feasibility study on this advanced project late last year and as part of this undertook an 11,000-meter infill drill program early in 2018. As a result we updated the resources in September and were successful on boosting the high-grade resources by more than 20%, comprising 1.2 million ounces of gold in Measured and Indicated and about 350,000 ounces of gold in Inferred resources, at about 10 g/t gold.
This will be the focus of the feasibility study, which we expect to complete in the next few months, outlining a high-grade, small-tonnage underground operation which is already permitted with an exploitation license. Beyond this, we were also successful increasing the broader bulk-tonnage resource by approximately 40% with about 3.0 million ounces of gold in Measured and Indicated resources and another 550,000 oz of gold in Inferred resources. This bulk-tonnage scenario could present interesting opportunities for Bluestone going forward.
Ultimately there is always “opportunity cost” considerations for larger companies on where they are able to spend their management time, and this is a classic example where the decision was made by Goldcorp to focus elsewhere despite the significant investment over more than a decade. Opportunities like this are rare and this is a tremendous opportunity for Bluestone and our many stakeholder groups to fast track what is typically a 15 year discovery-to-operations timeline in something closer to 15 months!
Chris Taylor, CEO, Great Bear Resources Ltd. (“Taylor”): Thank you, Brien! In December 2015, at the bottom of the gold bear market, GBR VP Exploration Bob Singh and I were evaluating projects becoming available. Our due diligence brought us to the Dixie Project, located 24 km south of Goldcorp’s Red Lake, an area where Bob himself had worked for 17 years and already overseen tens of thousands of meters of drilling.
The asset was previously held by Teck, then two other junior resource companies. More than 160 holes had been previously drilled, with an encouraging database of high-grade intercepts. The historic data showed comparable drill-indicated widths and gold mineralization grades to other Red Lake gold projects such as Pure Gold’s Madsen mine, Premier Gold’s Rahil-Bonanza project and Goldcorp’s Red Lake mine. For example, historic drilling had returned 7.54 g/t over 12.34 metres, 163.75 g/t over 0.47 metres and 32.65 g/t over 2.0 metres.
With multiple past operators, the data was not the most organized and there was a lot of data that we viewed as insufficiently evaluated, which presented an opportunity to unlock the true value. It was also believed, (incorrectly, in our opinion) that the Dixie project was hosted in different rocks to those which play host to most of the Red Lake mining camp deposits. Adding to the mystery was that the mineralization didn’t outcrop to surface. If it had, it would probably have been part of the original Red Lake camp discoveries and mines.
Fortunately, Teck did geophysical surveys in the 1980s and drilled some of the conductive units and they started hitting gold, including high grade gold. The GBR exploration team poured through the historic data and looked at the core on-site. We believed that the results were being downplayed by misinterpreted data, as for instance in some cases the drill hole collars were incorrectly located, drill core was not assayed, or assays were capped at far lower values than actually seen in the assay certificates.
In the Red Lake area, any project that has 160 historic drill holes, most of which contained gold, was definitely intriguing given the 30 million ounces of local gold production, and we decided to see what we could do to unravel the project’s real potential.
2) Backed By Strong Shareholders
You have some/an incredibly well-known resource sector investor(s) on your share register. What do you think attracted them to your story and why are they a good fit to finance your company/advance the project?
Macdonald — FWZ: One of our biggest investors is Resource Capital Funds out of Colorado, one of the largest and most prestigious mining private equity funds. They saw not just a project with incredible upside, but deep value in the way the market was pricing us. That they are well known for their rigorous due-diligence has given a lot of other investors confidence. Their technical expertise and market connections continue to benefit us.
Klinck — BSR: Yes you are correct. Bluestone is fortunate to have the support of some of the most successful and well-known investors in the space. John Robins, our Chairman, is a significant shareholder and he has a long history of success in the industry — most recently as a founder of Kaminak, which was sold to Goldcorp, as well as on the board of Northern Empire, which was taken over by Coeur this year. The Lundin family are our largest shareholder with 36%, and have been very supportive since the initial capital raising in 2017 to acquire the projects from Goldcorp.
Additionally, CD Capital in London holds 17% and with Goldcorp’s 5%, along with management, that adds up to close to 65% of the company. No doubt, having a high-grade, permitted project with more than a $230 million head start is a bit unusual. And I think you would find that the Lundin family, CD Capital and the rest of our well-known institutional investors all saw the same thing as management — that being, this a potentially great platform with a high-quality advanced asset that had a lot of the de-risking already completed and at an acquisition price one couldn’t ignore.
Taylor — GBR: The largest shareholder of GBR is Rob McEwen, founder of Goldcorp, with 11%. He had been following the asset since we met with him in 2017. However, when the company returned exceptionally high grades of 16.35 meters of 26.91 g/t gold and 7.00 meters of 44.47 g/t gold (revised to 7 meters of 68.76 g/t gold) in August, it prompted McEwen to invest $4.5 million personally and $1.1 million through McEwen Mining as part of a $10 million GBR financing at $1.45.
His friend and sometimes business partner, Rob Cudney of Northfield Capital, also holds 1% of the company. The rest is held by management and insiders, including the founding members of the Discovery Group of Companies led by John Robins, about 12%. The two “Robs” have been involved in some of the biggest monetizing events in the Red Lake camp and we are delighted to not only have them as investors but to have received the validation of the significance of the August discovery holes.
3) The Benefits of Structure
We have seen how share structure can dramatically affect upside for shareholders. The structure of your company is relatively very good – can you tell us about that?
Macdonald — FWZ: Absolutely, Brien. Early on we elected to do an IPO so we could really build the company exactly how we wanted. Every shareholder who has shares in Fireweed bought those shares and, combined with the fact we’ve never issued warrants on a financing, that structure makes a big difference to avoiding headwinds when you’re trying to make progress.
Klinck – BSR: I agree totally. Today there are limited pools of capital available for resource companies. So Bluestone’s big advantage was that much of the early de-risking investment was already completed, and we are now focused on the feasibility study and then moving into a development mode. That means that years and years of exploration expenditure were effectively already completed by Goldcorp and Glamis, and thus we still have a very tightly held share structure.
That provides part of the leverage as we advance towards the next stage —development — and we will have a number of different financing options available for us, including debt, as we move forward into the development stage. So this helps tremendously to keep the equity issued low and tightly held.
Taylor — GBR: Immediately after acquiring the Dixie Project, Great Bear consolidated its share structure to approximately 12 million shares, mostly held by the management team and Discovery Group individuals. Working with patience and loyal shareholders, many we have to this day, the Company embarked on early exploration to prove Bob Singh’s theory.
We had strong and early success in a modest exploration program completed in 2017, with our fifth drill hole of an eight-hole program hitting the best gold intercept on the property to date at that time. Subsequently, raising and spending money both equally cautiously during the harsh reality of a poor mining market, a more significant drill program totaling 10,000 meters was planned and executed and culminated in the new discovery holes.
Drilling in Red Lake is relatively inexpensive, approximately $175 per meter including work and assays. By paying attention to spending we were able to maintain a very low share count and, as a result the news of our discovery holes, propelled the stock and company valuation to a level where we were able to complete a $10 million funding at very minimal dilution, protecting both existing shareholders and new ones alike.
4) The Magic of Discovery:
As a part of a group of companies, i.e. Discovery Group, with a track record of exploration and mineral discovery successes, your company has added a lot of value through drilling high-grade mineralization over the past year. Can you share some of the exploration and discovery highlights from your project in the past 12 months?
Macdonald — FWZ: When we bought this project the two main deposits, Tom and Jason, were thought to be about 60% of the size we’ve delineated now. Growing incrementally is fantastic, and we’ve demonstrated some really incredible mineralization potential in step-outs recently, but what really presents the most blue sky is the exploration potential in the district-scale land package we’ve assembled.
Recent reconnaissance geophysics and geochemistry has shown some real promise for additional discoveries on our land package.
Klinck – BSR: Yes, in some ways it is a treasure hunt at the end of the day and that can be the real value driver in our business. As I mentioned earlier, we have already enjoyed some positive surprises with the increases in our resource base in this short period of time. We started with some very important structural geological work that commenced last year immediately after closing the purchase, and this was a key to laying out the targets for the drill program.
The results from the infill drill program we announced over the first six months of 2018 I think were arguably some of the best drill results across the gold space during that period and are reflective of the high-quality, high-grade deposit we have at Cerro Blanco. The geologic system at Cerro Blanco is a classic low-sulphidation epithermal system. These tend to be highly prospective, but do require attention and drilling. I believe we put the first geologists on the property in over four years last year following a care and maintenance period at the project, so the early results in just over 12 months I think are a good sign of things to come.
Taylor — GBR: It is pretty amazing how it all came together, Brien. The market initially took notice when GBR hit 16.84 g/t gold over 10.40 meters in the Dixie Limb Zone (DLZ), it later showed near-surface potential in the DLZ with 40.30 metres of 1.73 g/t, and proved the mineralization extends to a strike of 2.3 kilometers along a 10-kilometer trend.
We then followed up with high-grade intercepts in the Hinge Zone: 16.35 meters of 26.91 g/t gold and 7.00 meters of 68.76 g/t gold, and later found a new high-grade zone, the South Limb Zone, which returned 1.75 meters of 101.05 g/t gold, including 346.79 g/t gold over 0.5 meters, within a vein zone of 10.35 meters of 18.23 g/t gold.
In the past two years, Great Bear has drilled 50 holes in addition to the 160 historic ones and has extended the known mineralization from 500 meters to 2.3 kilometers on a 10-kilometer trend. GBR drilling averages a vertical depth of just 100 meters in a region known for high grades to improve to depths of 2.5 kilometers. So, still lots of upside remaining.
5) Future Catalysts:
What can we expect from your company in the short term and over the next one or two years?
Macdonald — FWZ: We’ll continue to see Summer 2018’s drill results trickle in from slow labs over autumn and also release more detailed results of our regional exploration program. Those two combined will paint a compelling picture of where we could be headed in terms of resource growth.
Over the longer term, we expect to be working in parallel towards resource growth through expansion of known zones and new discoveries in the region, while also working on additional engineering and permitting activities as we progress through feasibility studies and on to production.
Klinck — BSR: The key near-term catalyst is to watch for the completion of the feasibility study on Cerro Blanco towards the end of this year. That will be a key step that will allow us to ramp up the project financing discussions, and hopefully by the middle of 2019 we will be in a position to finalize the financing and commence development activities at Cerro Blanco.
As I mentioned earlier, we have in some ways short-circuited the usual 10-15 year timeline of discovery to production and realistically Bluestone could be a gold producer by late 2020 or early 2021 — a big step from what is today, one of the highest-grade, undeveloped gold deposits in the world. No doubt with the geologic potential we have already started to demonstrate, we will have plenty of targets to focus our exploration on to upgrade and expand the current resource base as well — and the great thing about Cerro Blanco is that every ounce we find definitely pays the bills with an average grade of 10 g/t gold so far!
Taylor — GBR: GBR is fully funded with approximately $12 million to drill on a 10-kilometer trend that folds upon itself for a potential 20 kilometers of mineralized length. It has already proven 2.3 kilometers of strike.
The Company has recently begun an additional 30,000-meter, 150-hole program to be completed towards the end of 2019. The drilling results and news will be consistent throughout the year with each batch of results expected every two-three weeks. With 50 drill holes having produced three back-to-back-to-back discoveries during the first year of active exploration, we are optimistic that triple that number of holes could generate more results that will be of very strong interest to the market, and be of tangible benefit to our shareholders, over our second year of work.
In short, the impressive scale and strength of the gold system at Dixie will be much better understood by this time next year.
Don’t forget to visit all three of these Discovery Group companies at the New Orleans Investment Conference, being held from November 1 - 4.
To learn more and to register, CLICK HERE.
