Category: Precious Metals

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Understanding Risk: Investing in Junior Mining Companies

Glen McKay

There are many lessons to be learned from investing in the mining sector. First, it’s inherently risky and many companies will disappear before mining a single ounce of base or precious metals. But it’s also an attractive sector for those willing to take chances and put in the work. Here are a few things I have learned over the years.

 

Do Your Research

 

Don’t go on a blind faith tip or even a rising stock price. Research the exploration project or mine you are interested in thoroughly and find out what others aren’t seeing before you put in a penny. There’s always something new to discover in a deep dive.

 

Find The Right Price

 

One of my last acts before leaving the position of president and CEO of Cornerstone Capital Resources in 2011 was to acquire the Cascabel project in Ecuador at a very early stage. At the time, it was believed to be a future source of gold and copper, but there was no proof. So the price was right. I got a bit lucky with Cascabel, as exploration has since revealed it as one of the largest gold-copper undeveloped mineral deposits in the world. But that was because I had done my research before making an offer.

 

Know When to Exit

 

Cornerstone was a small company and we needed help to get the Cascabel project up and running. I knew it would take years and hundreds of millions of dollars. So, making sure I left the company in solid financial shape, I turned it over to Brooke Macdonald, who remains CEO to this day.

 

The Truth About Cascabel

 

The Cascabel mine has gained the attention of BHP Billiton and Newcrest Mining, two of the largest mining companies in the world. They both have bought shares of SolGold, Cornerstone’s partner in the project. SolGold has the right to earn 85% of Cascabel by funding all exploration costs through to the completion of a bankable feasibility study. Cornerstone has the other 15% interest plus it owns about 10% of SolGold, effectively owning 23% of Cascabel. That’s one of the reasons I was happy to increase my already significant stake as a Cornerstone shareholder when the opportunity presented itself in 2016.

 

Although it was a risk to invest in a gold and copper early stage projects in Ecuador, the potential rewards were, and still are, tremendous. Even today, with all signs pointing to a positive outcome, Cascabel is still at the exploration stage. There’s a long way to go before the mine will see a profit. If you’re looking for quick and easy returns, the junior mining sector isn’t for you. But if you like doing research and have lots of patience, the risks can pay off in the long term.

 

Along the way, as a general rule, I sell enough shares to recover my original investment plus pay taxes on capital gains and then leave the balance of the investment until it hits my target price at which time I sell. Cornerstone has not yet hit my target price. However, I’m optimistic that it will within the next 12-24 months.

Colored Diamond Auctions in the Last Year Show Market Growth

Paragon International Wealth Management

Over the last fifteen years, fancy colored diamonds have become more popular as an investment vehicle and have exhibited higher profit margins over time than other hard assets. As noted in this recent Wall Street Journal article, a wealth report by Knight Frank, a property broker in London, stated that the prices of colored diamonds have risen by 122% over the last decade. And in just the last year, there have been a number of auctions of colored diamonds that provided clear indications of continued market growth.

At the beginning of April this year, the Pink Star, a 59.60-carat fancy vivid pink diamond mined by De Beers in South Africa in 1999, was purchased for $71.2 million at a Sotheby’s Hong Kong auction by Hong Kong-based jewelry retailer Chow Tai Fook. The chairman of Chow Tai Fook, Dr. Henry Cheng Kar-Shun, phoned in the bid for the stone, which was sold five minutes into bidding.

Later in the same month, a 5.26-carat fancy purplish pink diamond was up for auction at Christie’s New York. The colored diamond was set in a platinum ring and flanked by tapered-cut diamonds. The ring sold for $1.9 million.

In May, a pair of mismatched earrings, containing fancy colored diamonds–one blue and one pink–sold for more than $57.4 million. The 14.54-carat Artemis Blue, which is an internally flawless fancy vivid blue diamond and the largest one of its type ever to be offered at auction, sold for more than $42.08 million. The 16-carat Artemis Pink, a fancy intense pink diamond, sold for more than $15.3 million.

Meanwhile, an extremely rare 2.11-carat fancy red diamond, dubbed the Argyle Everglow, was shown by the mining company Rio Tinto in July. In an article on CNN, Tobias Kormind, the managing director of 77Diamonds.com, estimated that the stone would sell for more than $10 million. Rio Tinto does not report on the amount of winning bids, but bidding closed in mid-October 2017.

In London this September, at Bonhams Fine Jewellry sale, a fancy intense blue diamond that had been held privately for almost 30 years sold for $3.6 million. The pear-shaped diamond is 4.03 carats.

The Raj Pink, which is the world’s largest known fancy intense pink diamond at 37.30 carats, will be on sale in mid-November at the Magnificent Jewels and Noble Jewels sale in Geneva. The Raj Pink has a clarity grade of VS1 and is mounted on a platinum ring. The estimate for the sale of the Raj Pink is $19.7 million to $29.7 million.

Finally, later this fall, an enormous fancy vivid pink diamond, named the Pink Promise, will be auctioned at Christie’s in Hong Kong, with a price of $42 million. The Pink Promise weighs 14.93 carats and is set in a diamond-studded ring.

With various mining companies, like Rio Tinto, set to close some of their mines in the near future, the scarcity of fancy colored diamonds could increase, in addition to their value.

Attracting the Best and Brightest to Mining

Ian Telfer

The need for the mining industry to attract a strong workforce in the decades ahead remains a critical topic and I think it’s something that bears emphasizing.  The growth potential is such that in Canada alone the industry will need over 145,000 workers by 2023, according to the Mining Industry Human Resources Council (MiHR). 

A report released last November looked at the ability of the industry to access workers with the necessary skills when an economic upswing takes place.  The shortage in skilled tradespeople is exacerbated by a lack of recruitment over the past five years. That only increases pressure on an already thin labour supply.  It also hampers the resurgence of the industry to previous production and employment levels. 

That’s why this is such an important issue to raise.

The Mining Industry Human Resources Council also estimates that the pool of available talent will not be enough to meet the industry’s needs by 2023 — that’s only six years away.

The challenge of attracting skilled workers to our industry presents both a challenge and an opportunity.  For those looking for a growth industry, it’s a great opportunity to enter a field where your skills will be valued and well compensated. Given the need for workers, mining will offer security that is lacking in other fields. The jobs run the gamut from engineers to geologists, to health and safety professionals and many other trades. 

Admittedly, mining was not my first choice when I completed my studies. After earning my MBA, I joined Hudson Bay Mining as a financial analyst. I didn’t have long-term plans as far as working in the mining industry is concerned until I realized what a tremendous entrepreneurial opportunity this industry could be.

It’s also worthwhile to note that there are ongoing innovations in mining which hold great promise and are tremendously exciting, advances such as sensor-driven autonomous mining machines and developments in the microbiology of minerals.  The technological advancements and possible applications in the area of robotics are also very exciting.

There are excellent training courses available for those wanting to get into mining available through the Canadian Mining Certification Program (CMCP).  The CMCP is a national program that certifies the skills and competencies of mine workers. Those positions include miners and drillers. There are also certified courses and programs offered by EduMine.

The field offers plenty of opportunities for personal growth. This industry is not for everyone, but I can say from experience that it offers many enriching opportunities for growth. My goal here once again is to remind everyone of some of those exciting opportunities.

Tomorrow’s future starts with today’s investments

Ian Telfer

Education has been accurately called ‘the great equalizer’ because it evens the playing field and opens the doors to success. I have seen and experienced the affects a good education can have on one’s life. When I was young man, it was my acceptance into a Master’s program at the University of Ottawa that helped set me down the path to my career accomplishments.

While institutes for education like elementary schools, high schools, colleges and universities are the first line of educational training, there are also a number of other organizations and groups that aim to enrich and enhance the knowledge, skill set and experience level of today’s younger generation.

One that is especially dear to my heart is the Junior Achievement organization of British Columbia (JABC), a chapter of the larger JA Worldwide, an international organization committed to empowering and educating young people to overcome their circumstance despite their social and economic challenge and transform their futures.

JABC has been an education partner to the province of British Columbia since 1955, inspiring and preparing youth to succeed in the constantly evolving business and digital world. Over the last six decades, JABC has helped 35,000 students each year through their unique programming that is facilitated through the tutelage of local business and community leaders.

With a specific focus on business education, programs at JABC include work readiness, financial literacy and entrepreneurship. Students also begin to form strong business networks that will serve them throughout their school and work careers.

Last month, I was among two other BC business people honoured by the JABC with an induction into the Business Laureates of BC Hall Fame.

As Jan Bell-Irving, President and CEO of JABC, spoke about the contribution my fellow inductees and myself have made, I couldn’t help but think about how impactful JABC is on the lives of the youngest residents of our province. JA Canada, the national chapter, has worked with more than 4 million Canadian students over the last 60 years, with plans to help another 4 million in the 60 years to come.

In my gratitude address (Ian Telfer: 2016 Business Laureate Induction),  I thanked the JABC, not only for the honour, but also for the fantastic work they do preparing and enabling the success of Canadian youth. I also urged the more than 700 business executives and entrepreneurs in the room to continue to support the efforts of the JABC through donations, volunteer work and sponsorship.

In the final words of Jan’s speech, she said, “They have left behind a powerful legacy that continues to inspire future generations of business leaders and entrepreneurs,” and although she was talking about this year’s inductees, she could have easily been talking about the JABC.

Three tips for effective leaders

Ian Telfer

There are few things greater than the feeling you get building and leading a successful business. Throughout my career, I have had the pleasure of establishing and growing a variety of mining firms into successful companies and I have also lead some not so successful ones.

While this feeling of accomplishment is grand, it is only dwarfed by the amount of gratitude that leaders must feel and show the dedicated team of professionals they work with. This includes the executive team, managerial staff and employees; in short, the people who are able to take your corporate vision and make it reality. 

Over the last 30 years, I have learned some valuable lessons when it comes to being an effective and efficient leader. I have also witnessed leaders in other sectors exhibit truly admirable leadership skills.

Ian Telfer’s 3 leadership tips

Building a team

Building the right team is as important as building a successful business.

No man is an island, as the old adage goes.  Which is why in order for a business to achieve full potential it needs a robust team of executives who are able to bring unique skill sets and perspectives to the boardroom.

Don’t be afraid to delegate

The ability to wisely and effectively delegate is a quality less talked about than others and yet it’s crucial to a leader’s success. Too many business leaders want to micromanage and oversee every detail of the company, which can delay important deadlines and leave the executive team feeling undervalued.

A leader should be in charge of the overall direction of the business.  They are looking ahead, steering the course, and making needed corrections to avoid getting off track. A leader who is too caught up in every minutia of the company is apt to lose sight of the big picture and may even fail to see that their company has veered off course until it is too late.

It’s also been proven that leaders who give important responsibilities to their team and employees, along with the freedom to complete the task their way, foster a positive and healthy workplace. Additionally, this builds team innovation and idea levels, morale, and overall satisfaction.

Assigning responsibilities and delegating work establishes levels of trust that are crucial when working in any business environment.

Foster open communication

It’s important to let business teams feel free to share results and findings with you. Communication is also key to ensuring your team is able to fulfill their assignments and responsibilities. Being able to clearly and succinctly describe what you want done is very important. If you can’t relate your vision to your team, you won’t all be working toward the same goal.

From my experience, if you want an organization to succeed, you and your team have to master the art of clear inter-communication. In my opinion, implementing well-organized paths that facilitate easy group communication and collaboration improves the likelihood that a given business will enjoy success.

Finding equilibrium between shareholders and business realities

Ian Telfer

The relationship between a public company and its shareholders can be a tenuous one at times. While both interests want the company to achieve success, each have a unique view as to how success should be gained and within what timeframe.

This difference of opinion is often magnified in the mining sector, where more often than not it takes years to see a return on investment for any given mining project.  This can create tension between mining executives and shareholders, one further complicated when shareholders are pension funds and money management firms.

To put it fairly simply, shareholders are looking for consistent growth in terms of capital and production because it translates into favourable fiscal projections. However, when it takes five to ten years for a mine to start producing ore, there’s a timeframe difference that can sometimes produce tension.

I briefly touched on this issue when I addressed Laurentian University in early 2015 (see Ian Telfer: Top 10 Mining Mistakes). As I explained, in my experience I have found keeping shareholder interest in mind is important.  However, it is equally important to find a balance between their more short-term goals and a mining company’s sustainable future. Increased pressure to focus on shareholder needs can skew perspectives and lead to hasty business decisions, poor strategic planning, and acquisitions or divestitures that backfire later.

More importantly, shareholders are compensated based on short-term price performance rather than long-term business feasibility, which can misalign the interests of both management and current shareholders with the true welfare of the company.

In the mining sector, there is often a tug-of-war between management and shareholders over the company’s capital. Investors often view extra cash on a company’s balance sheet as a possible return to shareholders in the form of cash dividends, which in turn is looked favorable by markets.

However, the company’s management teams can be hesitant to do this, and rightly so. This is because management teams are committed to sustained growth and may want to use additional capital to invest in new mining projects. Re-investing capitals in new mining initiatives is sometimes not at the top of shareholders priority list.

By no means am I saying that shareholders aren’t valued, but as my history in the mining sector has shown me, they are only one component of a much larger picture that includes the management team, the employees, the shareholders and the community. Finding the right balance between appeasing shareholder demands and promoting and protecting the future of a company is paramount in order to achieve long lasting sustainability no matter what sector or industry.

What I wish I knew when I first started my career

Ian Telfer

Throughout my more than thirty years in the Canadian mining sector, I have been taught many lessons, some I wish I learned earlier than others. While each lesson has helped me grow, there are a few choice ones I wish I would have learned when I first set out in this fascinating industry.

I am often asked to speak to students regarding their future aspirations. During a more controversial address of mine, I mentioned to attendees not to overly-listen to what shareholders say.  To be clear, I don’t mean disregarding shareholders all together.  However, many shareholders are temporary investors, while mining initiatives, if anything, are long-term projects that last years.  It’s an interesting juxtaposition, and one that I think is particularly evident in the mining industry.  But, what it means is that focusing entirely on shareholder input and opinions can sometimes be detrimental to the long-term advance of a mining company.  That’s something I’ve certainly learned during my time in the mining field, and it’s a lesson to keep in mind.

I’ve also mentioned this before, but it’s worth reiterating: the power of embracing opportunity when it presents itself.  I think this goes hand-in-hand with my belief that there is no reward without risk.  For business leaders and entrepreneurs, these two concepts unfortunately battle against each other constantly.  On the one hand, we can’t succeed without embracing opportunity.  On the other hand, rarely is there opportunity that does not carry with it some sort of risk.

The fact is that the most successful entrepreneurs in any industry are the ones who listen closely for opportunity as it knocks ever-so gently.  And when they pinpoint this opportunity, they sense its timing and have a gut feeling that it’s worth pursuing.  Then, without any further hesitation, they embrace this opportunity with 100% commitment. 

Many people hesitate at the sign of opportunity.  But, realizing that it’s oftentimes fleeting and only knocks once, successful business leaders are quick to evaluate an opening and put their full weight into it, if the timing is right.  That’s key.   

One other point that I wish I knew when I was starting out and a point I also reiterate to  students and the younger generation of professionals is to be the business partner you wish you had.  Putting yourself in another person’s shoes is never the easiest thing to do, but it’s incredibly worthwhile when building business relationships or building a business with a partner. 

Commit to being a partner who brings unique tools and skill sets to the table.  By the same token, choose partners who have skills that compliment, not compete, with your own. And look for associates who can challenge your way of thinking and offer fresh perspective and insight.

I think being a business leader means learning from one’s mistakes.  And that’s okay.  We have to be free to fail.  In business, and, yes, in life too.  But, hopefully, these words of guidance can provide a little measure of help along the way.

Mining growth through private investment

Richard Warke

In the fall of 2015, following 12 months of weak performance, the TSX metals and mining index was down more than 40 percent. The slump was attributed to falling commodity prices and a slowdown in global GDP growth, which had a negative impact and dragged down mining equities.

However, after a rough 2015 that left many mining companies battered, the sector is recovering and perhaps on track to end this year on a high note.

Some analysts credit the rise in the price of silver and gold to weak performance in the energy sector, which is creating an environment where investors are looking to mining companies to offset the losses their portfolio took in oil and gas.

This of course was further proven earlier this year when oil hit a 12 year low. In a review of the natural resources industry released in January, Moody’s blamed China’s economic slowdown for its gloomy outlook and pointed to a “substantial risk” that oil prices will recover only slowly from decade lows of less than $30 a barrel.

“Even under a scenario with a modest recovery from current prices, producing companies will experience much lower cash flows,” read the Moody’s report.

Despite banks being reluctant to invest, mining companies in North America are gaining large investments due to the private debt fundraising market.

A recent study of private capital in the resources sector commissioned by industry tracker Preqin found significant growth since 2008 in the debt fundraising market, with 54 funds closed for more than 5 years and raising more than $29 billion.

According to the data Preqin collected, there are currently 32 unlisted natural resources funds in the market that will invest in debt and together these funds are targeting an aggregate of $23.2 billion.

The majority of this investment will be earmarked for North America because as the study’s author notes, the region has a longer tradition of private ownership of natural resources assets than many other areas.

It’s estimated that $700 million of the total capital raised is destined for debt financing in mining.  Currently, there are two unlisted metals and mining funds in market planning to invest in debt, both targeting approximately $400m in institutional investor capital.

“Among fund managers with the requisite expertise, the particular financing needs of mining companies may create attractive opportunities,” notes the Preqin report.

But, what does this have to do with Canada’s mining sector?

The short answer is substantive and long term growth. The continued progression of interest in debt fund investment throughout the North American mining sector will help fill the void left by the banks’ inability to meet the financing needs of the sector.

These private debt funds will hopefully encourage mining industry growth and expansion through the funding of ongoing and future projects, which in turn results in favourable effects for the Canadian economy.

Reflections on a career mined in the resource sector

Ian Telfer

What defines an outstanding career?

I was thinking about this question several weeks ago when I was honoured with an induction into the Business Laureates of British Columbia Hall of Fame. While the distinction is humbling, as I sat at the gala dinner, I naturally began to reflect on my career.

Those who know me, know I credit a large part of my success to luck, perseverance (or stubbornness) and the ability to take risks. These skills by definition are not different than a vast majority of people, which I guess is where luck comes in.

After spending a handful of my post-undergraduate years working a series of non-descript jobs, I decided that I was in need of a reboot and applied to a number of Masters of Business programs in Canada. Contrary to the good fortune I would later experience in life, I was turned down at all of the universities to which I had applied. Just before registration I received a call from the University of Ottawa telling me that a spot had opened up and that I had been accepted into their program.

Many years later, in the late 1990s, I was running a gold mining company that was experiencing pressure from a declining price in gold.  I was left with the very real prospect of not being able to repay our company’s loans.  Following the guidance of a friend, when gold rebounded momentarily and gained more than $50 dollars in one day, I sold all our company shares, paid off our loans and learned an even more valuable lesson: the value of timing.

This moment served as a catalyst and a lesson for the rest of my career.   But, it didn’t dull my belief that in order to succeed, you have to take risks.  Ideally, you have a gut feeling that the timing of a given ambition is right, and with that gut feeling, you boldly move forward.

In the 1990s, while gold prices remained low, I had a brief foray in the technology sector.  Although my time in the technology sector did not end particularly well, it also served as a learning experience. My time in the industry reinforced my belief that technology was going to be a game changer, and it was also going to eventually heavily influence the mining sector.

While many resource companies have been slow to embrace the potential technology offers, I’m proud that Goldcorp has been ahead of the curve as far as embracing the possibility in technological innovation.

In 2000, for example, Goldcorp became one of the first precious metal firms to engage in crowdsourcing. The Goldcorp Challenge is a unique initiative in which Goldcorp releases data from its Red Lake mine in Ontario to the public in a competition to maximize the site’s potential.

Today, the Internet of Things, cloud computing and digital sensors I think are really helping to revitalize and push forward mining. As a note, crowdsourcing has also become a viable investment tool for those who are interested in investing in mining projects. 

As I sat reviewing my career in the room filled with some of British Columbia’s best and brightest, I was honoured to be selected among the other inductees, but I was also humbled by how my career has been forged by partnerships, advice, warning, generosity and of course luck.

My philanthropy is often noted in the press, which to me seems strange because giving back is so intrinsic to the Canadian identity. However, I am honoured and blessed to be able to share my good fortune with others.

It was around this time in my reflection that I heard the announcement, “This year’s inductee Ian Telfer…”

And again I was reminded of how truly lucky I have been.

Crowdfunding Coming to the Mining Sector

Richard Warke

Once reserved for charities, individual causes and fundraising, crowdfunding and crowdsourcing has become a viable way to bring startups to fruition and raise investment capital. Crowdfunding has also been fairly successful in creating a buzz, spreading word of mouth and increasing interest in philanthropic projects, new technologies and entertainment and media sector.

As the popularity of crowdsourcing grows, it’s interesting to note that other industries are beginning to look to crowdsourcing, one of those is the mining and resource industry.

Traditionally, mining investments are facilitated through various alternative financing tools, such as streams, off-take agreements and royalties. While these have proven to be tried and true strategies, the allure of technology is always tempting, especially when it promises to bring new financing tools. Mining companies that have turned to a crowdfunding platform to finance their ventures are certainly evidencing this trend.

Crowdfunding is different from traditional financial tools that mining companies are used to, in part because it uses a web-based platform to raise funds through small contributions from a large pool of registered users. Under this new financing method, investors can purchase shares from both private and public companies and derive profits from those shares, should the companies perform well financially.

Over the last year, we have begun to see the emergence of equity-based crowdfunding platforms specifically targeting the mining sector. In Canada, Toronto-based Klondike Strike Inc. was the first to offer a mining-centric equity crowdfunding interface. Its proprietary platform, Red Cloud, operates through the offering memorandum exemption pursuant to section 2.9 of the National Instrument 45-106 Prospectus Exemptions (NI 45-106). 

“I believe we are the first to create this type of website and that is a bit daunting but I believe this is going to be the future of financing, not just in the mining sector but in all sectors,” said Chad Williams, Klondike Strike’s president and chief executive officer.

Late last year, Australia began looking seriously at using crowdfunding to alleviate the pressure junior mining companies were feeling from a decrease in capital. The potential capital that can be raised through large groups of investors is also appealing to the country’s larger resource and mining industry which have been suffering from capital issues.

But, what is the catch, Richard Warke, is something I’m asked when crowdsourcing and mining are combined in the same sentence.

The catch is that crowdfunding in the mining industry is new and unknown. Is there potential risk when we get investors who are naïve or unaware of the operations and protocols of a given sector?  Yes.  Should crowdsourcing investor do their due diligence?  Absolutely.  Should they be made absolutely well-aware of the risks associated with investing in the mining industry?  Again, absolutely.  These are all questions to contend with.

It’s still too early to tell how crowdsourcing will affect the mining industry.  However, it does promise to be an alternative investment method to those that are popular now.

“This is a revolutionary event and opens the door for almost any Canadian to directly invest in a mining project,” said Mark Ayranto, chairman of the board of directors for Banyan, an international gold producer. “I don’t know if this will completely replace traditional financing but it enhances what is already in place.”