The Art of A Mining Deal


 

Hey there, Speculators. Glad to have you back.

The Canadian issue was a hit! Over 1000 new subscribers since publishing Sunday!

Look at you Canada, spreading the love. Amazing.

That’s rocketed the Maple Leafs into a dead heat with the Americans for first place in total subscribers, 38% to 39.1%, respectively. The race is on. Forward away!

I’m on the road again. From Panama, I headed south to Colombia.

After spending a decade in first-world Europe, it was shocking to me how much I liked this place when I visited for the first time, just a year ago.

Usually I stay in Cali (Santiago De Cali, not California). This city reminds me of the south.

Hot. A little sticky. Slow pace of life.

The people too. They give southern hospitality a run for our money, and despite a low standard of living, it’s the happiest group of humans I’ve ever seen.

And it’s CHEAP.

I do some consulting work for a marketing company down here, and a few trips ago I threw a little party for all the employees—these guys work their tails off—and most had never been bowling. So I took everyone and their families out one Friday for bowling and beers. A few hundred beers. 61 people in all, and the tab?

$700 bucks. Try that in New York. 

The weather in Colombia is peculiar, no seasons this close to the equator. Rather, the year-round climate is determined by your city’s altitude.

Today’s trip illustrates that point. I take off from Cali and it’s 80 degrees. This morning, I was poolside.

Flight time to Bogota is a mere sixty-one minutes, but the temperature drops to 55. Really, from the pilot’s perspective, they’re not flying across, but up. Bogota sits high in the sky, 8,600 feet. To put that into perspective, if you’ve ever been skiing in BC, Whistler mountain tops out at just above 7,100 feet.

And if you’re not skiing BC, what the hell is wrong with you?!

But in Bogota, you can trade that Canadian powder for rain. Lots of rain. And it’s cold. Think Milan or London in the winter. Or Nashville for that matter. Gross.

But it is the capital, and I’m here to meet a couple junior mining CEOs.

Jerry’s a friend, and the CEO of one of my largest positions. Dennis leads the other, a company I’ve had my eye on for some time now.

Just haven’t been quite ready to pull the trigger, maybe tonight is the night.

A word to the wise, if you wanna play on the world’s most volatile stock exchange, get to know your management. This is a business like any other, and who’s running it couldn’t be more important.

Never, never underestimate an idiot’s ability to screw up a good thing, regardless of how good the project looks on paper. They can tear down a company in far less time than it took to build in the first place.

Even worse are the intelligent ones that just weren’t raised right.

Mining, like too many sectors these days, is littered with seedy characters the world would just be better off without. They’re sharp, charismatic, and believe me they can tell you a story, but don’t kid yourself. They’re way more concerned about their next Porsche payment than they are their responsibilities as a fiduciary.

Also, if management doesn’t have their own money at risk alongside yours, run.

Get them on the phone and ask them point blank yourself. If they blink, or if they’re too busy to give you the time of day, next deal. Simple.

The best managers have their own money on the table, pick up when you call, and have a track record of winning for their shareholders.

Jerry is all of those things, and one of the very best out there, full stop.

I got in with him at .06 cents, today he’s trading at .35. Exactly the kind of guy you want running your companies.

As my friend Orrin Woodward likes to say “Everything rises and falls on leadership.”

Including penny stocks.

I check into the Estelar La Fontana. It’s Valentine’s day, and they’re celebrating.

 

 

Bought me roses. Clever.

I head across the street to a bar, aptly named just “BEER.”

Jerry waves me over.

“Christoph, meet Dennis, CEO of the company we’ve been speaking about. As you know, I joined their board a few months back.”

I’m curious, that’s for sure. When Jerry called me 72 hours ago, all he would say is:

“I’m closing down a deal for these guys on Wednesday. You’re gonna want to see this Christoph. Game Changer.”

I ask for the largest stout on the menu. She returns with a gallon of what looks to be Guinness. My kind of bar right here.

We settle in. “How’s your son Jerry? How’s the band going?”

Jerry beams. His son is in a band I follow, Calpurnia. Lead singer is the famous Finn Wolfhard, lead actor on Netflix’s Stranger Things, pretty cool story.

“He’s great. Just recorded their first album. Man, they grow up fast.”

One proud father right there. I love watching this guy talk about his kid. Can’t wait.

Giancarlo joins the table. Country manager for the project. He’s young, Colombian, and has a smile that’d make Tom Cruise blush. Guy looks more like an Abercrombie model than a mining manager.

And he’s built like a brick shithouse. Former special forces. I like this company more already.

Another round of stouts for the table, and Jerry starts in on an overview of the existing projects, drawing them one by one on the stout-stained white paper placemats.

Four projects in Colombia, another in Nicaguara. Of particular interest is a 22 kilometer strip they have in the south of the country, adjacent to a property just scooped up by a Major for 190 million.

“No Christoph,” Jerry corrects me, “They paid 190 million for just 20% of that project.”

“Jesus. How’d you swing that,” I ask.

They both look at Giancarlo. He smiles, his teeth blinding us like a flash grenade.

“We anticipated. It was federal land, but we knew the courts would declare the situation unconstitutional. And when they did, we were the first to stake.”

In my mind, I can’t help but see a Camo Giancarlo descending from helicopter into the bush.

Now in full sprint, AR-15 in one hand, wooden stakes in the other, rushing the property as the judge’s gavel smashes mahogany.

A much older, much whiter Dennis screaming all the while from the chopper, “Stake it to the horizon Giancarlo! Stake it to the damn horiz––”

“It’s actually all done by computer these days Christoph,” interrupts the soldier, abruptly burying my daydream.

“Of course,” I reply.

Out of my head Giancarlo!  

But I want this guy on my team. And certainly not the reverse.

“Sounds good so far gentlemen, but tell me what’s next on the… horizon.”  I’m having entirely too much fun with this.

Dennis takes the lead, “Twelve months ago my geologist approaches me with this story. Essentially, there’s this multi-generational family-owned coal company, and in the midst of drilling for coal, they start hitting patches of gold. This was in 2005, and with the gold price on the rise, they decide it’s worth looking into.”

“But they’re not a gold company, and didn’t understand the importance of having an in-house geology team. So for years they kept drilling, outsourcing their geology to Peru.”

 “Why is this such a problem?” I ask.

Dennis explains, “Because they kept drilling like they were searching for coal, not gold. Meaning instead of drilling holes close to each other, and at an angle through the earth, they were drilling holes straight down, nominal spacing, 200 meters apart, 200 meters deep.”

Jerry illustrates the situation:

 

Dennis continues, “So they kept hitting gold, but just a meter here, a foot there, they didn’t understand what they had.”

What kind of grades are we talking about here?” I ask.

Dennis grins like Santa Clause prepping the reindeer. He’s been waiting for that question.

“12 grams per ton, 40 grams per ton…” He holds his breath, “even a meter at 1200 grams per ton.”

Now we’re in the stratosphere, grade wise. Wasn’t anticipating numbers like this.

“Those are difficult stats to believe.” I say.

“I’ll email you the full results, but here’s a pic of that hit:”

 

 

“Well, that’s impressive. For sure. But even that grade, at just one meter, it isn’t exactly the next major discovery Denny.”

 Jerry chimes in, “What we’re talking about here is an epithermal overprint Christoph, they couldn’t see it drilling straight down.”

He borrows a pen from the waitress, purple ink,

“They estimate they’re sitting on 700k oz, but they couldn’t see it because of how they were drilling. And their geologists were working for a fee, flying in flying out, no vested interest, complete disconnect.”

“Here’s what Denny thinks––here’s what I think––we’re sitting on. The gold is here, in purple:”

 

 

“OK” I say, “So maybe they don’t know what they have. Even still, why should they give it to you?”

Jerry explains, “It’s just like the oil and gas companies back in the earlies 80’s, they were making money hand over fist in good times. God was raining down cash, and they got into an industry they didn’t fully understand. But once their core product took a dive in price, they just wanted out.”

“OK, let’s backup,” I respond, “12 months ago this comes across your desk. What did you do then Denny?”

“I called, I emailed. Back and forth for months. Four face-to-face meetings. First with the business development manager. Then two with the son. Then he goes and talks to the Father––“

“Daddy I found some idiot that wants to buy our land finally!” Jerry blurts.

Denny’s face covers with scorn. He didn’t appreciate that. But Jerry’s pissing himself.

They have their moment. I down the rest of my stout, and seize the opportunity to order another round for the table. This is turning into quite the night.

“Anyways,” Dennis continues,

At that point, I hit a snag. Negotiations stalled. They wanted everything, total control of the project, total control of when to sell, and I’m sitting here thinking ‘what if I don’t want to sell?’ I mean, I think I’m sitting on 2 million oz. minimum here, maybe 5 or 6.”

“So what did you do from there?” I ask.

“Well, to be honest…I asked Jerry to get involved at that point.” Dennis responds.

Smart man.

Now I know I’m dealing with competent management.

When you need help, you need help. Ego scuttles so many good deals. But I’ll be damned if it’s gonna scuttle my capital…

Before I can inquire more, Jerry settles the score:

“We closed it down today Christoph, here’s the deal:

We raise 5m to drill this resource the right way. Figure out what we really have.

We take 70% of whatever we find, and once we find it, they gotta pony up their share of the exploration costs. Or, they have to dilute, and either is fine by me.”

“Because you can get the capital, need be.” I interject.

On a project like this, in my sleep,” he responds.

I ask a question I’ve wanted to ask for a long, long time,

“You’re a capital-raising machine Jerry. What’s your secret?”

“I have no idea.”

His face is convincing, but I’m not letting him off that easy.

“Come on. Really. Raising money might as well be your superpower, what’s your secret?”

“Honestly Christoph, It’s not that complex. I only get in on deals I believe in, and I tell the truth. And I mean the truth. It is what it is. I’m not in the habit of screwing over my friends.”

“And I imagine your group of friends––”

Yeah. They’re successful people. I got married. You know who was in my wedding? My boys…”

He lists off a who’s who of mining. Five names deep, I get it.

“Ok Jerry, makes sense. Can’t say I don’t deploy capital the same way. It’s a game of trust. So back to the deal, 70/30 split, that easy?”

“Mostly,” Jerry replies, “1.5% royalty after the first million oz. of production, and they have a nice kicker, $5/oz after we release the 43-101, capped at––”

“Well it was capped at 1.5 million bucks, then 3…,” Dennis interrupts, “But Jerry was feeling generous when they came back at 4.5 million.”

Jerry stares him down, friendly, and says,

“Hey, let’s not get too stingy here. At that point, everyone is writing home to their mother, you and me included…did I sign the deal, or didn’t I?”

“You did. And in a single day.”  Dennis admits. And raising a glass, “Here’s to Jerry, Here’s to a new flagship.”

Amen.

“With or without you Christoph, this is a homerun by any definition.” Jerry’s proud, he knows this is a winner. And the salesman in me can’t help but appreciate the fear of loss.

“Allright then,” I say, “What’s the pitch then, am I buying in on the open market or you guys have a private placement for me?”

“Private placement,” Dennis responds.

“How much per share?”  I ask.

“We’re trading at .12, PP is at .11”

“More importantly,” I say, “Tell me about the warrant.”

“Full warrant at .24 cents, and it’s for four years.

That’s a strong warrant right there.:

I can hear Doug Casey in my head, scolding me like a Catholic school nun with a ruler:

“You absolutely cannot understate the importance of a long-term warrant Christoph!”

And Rick Rule too, for that matter.

I remember when the occupy wall street movement was in full force­­––“We! Are! The 99 Percent!”––Rick took it upon himself to print T-Shirts for the entire office, based on net worth.

A few read succinctly, and appropriately, “The 1%.”

The rest, a simple verb: “Aspire.”

This is me Aspiring Rick!

“And what’s your market cap?” I ask. I know the answer, but I want to hear it from him.“Well, sadly we’re only sitting at 6 million.”

I look him dead in the eyes, “Dennis, 6 million market cap might be disappointing to you as the CEO, but as an investor, that’s music baby. Six million means room to grow. Or did you think I wanted to get in after my upside got cut in half?”

He gets it. Glasses up, “Here’s to a ten bagger,” he proposes.

“To hell with that,” Jerry chimes, “Here’s to 40X.”

And I will drink to that, all day long.

Dennis and Rambo tap out.

Jerry and I catch up.

Before I know it, we shut the place down.

Not sure if it’s closing time, or they just ran out of beer, but it’s time for bed.

We make our way back to the hotel, rats in a maze.

The seeming simple floorplan has turned into a labyrinth.

My door finally appears, and as we say our goodbyes, it strikes me just how different junior mining is to typical investing.  

Where else can you make ten, thirty, a hundred times your money?

Where else can you buy a stock for less than it’s trading?

Where else can you get a warrant with each share and still make money four years later, even if you’ve sold your position?

And where else is this much fun? The highlight of investing for most people is opening an envelope once a month, hoping for a return higher than five percent.

Here you get to be a part of the story, take a gamble on what’s below the earth, and watch the discovery unfold.

It’s the thrill of being an entrepreneur, the thrill of the hunt, a geologist’s theory played out on the back of a napkin.

It’s the thrill…of what it truly means to be a speculator.

The next deal can’t come soon enough.

 

 

-Christoph Grizzard, The Fat Cat Investor

 

k.459 © 2018 FatCat Consulting Limited. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher. This report is copyrighted and registered.

 

 

 

 

 

 


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