Never Mistake Intelligence for a Bull Market: George
Ireland
Source: Brian Sylvester of
The Gold Report
(4/9/12)
http://www.theaureport.com/pub/na/13048
George Ireland, portfolio manager with Boston-based Geologic
Resource Partners, believes in seeing what he invests in and his
passport bears witness: 80 countries visited in five years. From
Africa to Argentina, from gold to lithium and graphite, he and
his team seek out companies with experienced management,
promising geology, good infrastructure and strong cash flow.
Ireland shares his views on issues facing the mining industry in
all corners of the world in this exclusive
Gold Report
interview.
The Gold Report:
Your grandfather was a mining engineer. Your father founded a
coal company. You are a geologist, worked with Cliffs and ASARCO
and are on the boards of several mining companies. How much of
your success at Geologic Resource Partners do you attribute to
your business acumen and how much to your relationships in the
industry?
George Ireland:
Having grown up in a mining-oriented family, the dinner table
conversations from an early age steeped me in the lore and
intrigue of business. Based on that early interest, I have built
up quite a book of relationships and a broad knowledge over the
years, but I attribute a lot of the opportunities that have come
my way to hard work and perseverance in an industry that was, for
quite a long time, out of favor.
TGR:
What wisdom did you pick up at the dinner table that you use
today?
GI:
One of the first things I learned was to see for yourself what
you are investing in and who you are investing with. The
second-and I give this advice to companies that we invest in and
to other fund managers-is to talk to your investors, to the
people who are giving you their faith and money.
TGR:
Does that mean you make regular site visits to projects?
GI:
My team and I have visited about 80 countries over the last five
years.
TGR:
What are your "must-sees" on a site visit?
GI:
Typically, we are looking at the lay of the land: how the project
sits in the political jurisdiction, the social environment, the
environmental issues. We look at management, from the senior
level down into the junior ranks. We want to know if they are
capable of performing the work they are being asked to do. We
look at the assets themselves, reviewing public information found
in various documents such as NI 43-101s. We look extensively at
the drill cores, site and plan maps and other data to assess the
quality of work being performed with regards to our own
assessment of value of the company.
TGR:
Do you expect your clients to meet a certain annual performance
threshold?
GI:
We do not have a specific threshold. Our orientation is toward
compensation and performance over the long term.
TGR:
Would it be fair to say that you look for at least double-digit
growth?
GI:
Very definitely. Given the expected risks in the mining industry,
our investors look to us for rates of return comparable to other
venture capital or private equity businesses. We believe it is
important to note that the mineral exploration business, much
like the pharmaceutical or tech business, can create substantial
growth of value through exploration and discovery. Our general
focus is to capture those areas of growth, rather than the
commodity trends.
TGR:
What is your time horizon?
GI:
Our investment horizons typically stretch from two to five years.
We focus on a firm's capabilities and ability to grow, not its
latest drill or production results.
TGR:
Are you concerned that equities have trailed the underlying
commodity, especially in the precious metal side, for close to 18
months?
GI:
The market trends are changing. We are now seeing the precious
metal mining companies being valued using similar metrics to
other mining companies, whereas historically they traded at a
substantial premium. We believe this is both a natural evolution
of the market and a direct result of the widespread acceptance of
the metal exchange-traded funds (ETFs) like SPDR Gold Shares
(GLD:NYSE.A). On a smaller scale, we see a lot of opportunity in
exploration and development companies. Fortunately for us and
unfortunately for them, these companies are having trouble
getting financed, which means we can pick and choose among the
assets that interest us.
TGR:
Are you paying more attention now to things like
infrastructure?
GI:
Infrastructure has always been a critical component of mining
investment. Our approach always includes taking into account all
the necessary factors for a mining situation to be developed. The
infrastructure demands of a mining project and how they will be
financed are always crucial factors in deciding to invest in any
remote mining situation.
TGR:
Are most of your positions private placements or do you buy
positions in the market?
GI:
We do both.
TGR:
In terms of your private placements, how important is a
warrant?
GI:
Not critical, although we like warrants. We particularly like
financings that are elegantly structured, meaning the warrants
are tied to the company's financing needs rather than an
unrelated timeframe.
For example, if a company is raising money for a drill program
it expects to complete in 15 months, we like to see that the
warrants are tied to the completion of that program so they can
be used to fund the next stage of exploration and
development.
A big problem for many junior companies is the potential
dilution caused by a large number of warrants outstanding with no
implicit or explicit linkage to the cash requirements of the
company.
TGR:
Can you give us an example of a recent private placement you did
versus the market price for the company involved, without naming
a specific company?
GI:
Typically, private placement terms are on the higher end of the
historic band for discounts, namely 10-15% off a recent
weighted-average price, as opposed to 5-10%.
TGR:
Are you looking for companies offering a dividend?
GI:
Absolutely. As a long-term investment fund, our focus is on total
return to our investors. That comes through both capital
appreciation and dividends.
TGR:
Does that mean you are looking beyond companies in the
exploration and development stage and into mid-tier and top-tier
producers?
GI:
Yes, we invest in companies in all phases of the mining sector.
We utilize our judgment to decide which companies are the most
appealing based on projected risk-weighted rate of return. In
practice, that means you would not expect the same returns in
lower risk senior producers compared to higher risk explorers
once you remove the issue of the movement of the underlying
commodity price. As for capital reinvestment and dividends, it is
logical to expect that smaller, more rapidly growing companies
would be less likely to pay a dividend than their more senior
competitors.
TGR:
Has your asset base moved from companies with market caps less
than $200 million to larger companies, given that more of them
are offering dividends than they used to?
GI:
For us, dividends by themselves are not a driver; they are part
of the total return on a particular investment. What causes us to
change the portfolio in one direction or another is where we see
the best prospect for total return relative to the level of risk
inherent to an investment. It all depends on our view of the
potential return on an individual company, not a particular
segment of the business.
TGR:
Would you be willing to name some of the dividend-issuing
companies you hold?
GI:
We hold names such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and
Goldcorp Inc. (G:TSX; GG:NYSE)
, to name two of the larger ones in the gold sector. Outside of
the gold business, we hold Cliffs Natural Resources Inc.
(CLF:NYSE) and Cameco Corp. (CCO:TSX; CCJ:NYSE), for example.
TGR:
What are your strategies for playing ETFs?
GI:
Our strategy for metal and metal stock ETFs is to look at
relative return in the metal versus the equities.
For example, we hold platinum and palladium ETFs because we
like the outlook for the metal, but we do not like the outlook
for most of the companies, particularly those operating in
Southern Africa and Russia.
TGR:
Without naming companies, what have you seen on site visits that
made you decide not to invest?
GI:
Our site review process has uncovered everything from operational
issues related to the geology or the quality of the drilling to
engineering challenges associated with site layout or metallurgy.
There may be infrastructure issues related to access to the
project or, more importantly, shipping routes away from the
project. Political and economic issues in the region or country
can also come up. And finally, site visits allow us a better
chance to see the quality of management in their "home" as
opposed to being in a nice office or boardroom.
TGR:
Brent Cook has suggested that there are too few people properly
trained in preliminary economic assessments (PEA) and
prefeasibility studies (
PFS
), leaving untrained people to plug numbers into models that
cannot be relied on to predict whether a project can be mined. If
you agree, what are some common errors retail investors should
look for that might raise a red flag?
GI:
We are deeply committed to doing onsite due diligence as we want
to be able to make our own assessments of the numbers being used
in the PEAs or PFSs being prepared. That said, it is important
for retail (and institutional) investors to read and understand
these documents for what they are: namely, preliminary estimates.
If I had to characterize the most common area for error at this
stage, it would be the assessment of the geology of the deposit
and how it relates to the calculation of resourses and
reserves.
Concurrently, the investor needs to understand how the
economic numbers were calculated, particularly such things as
metallurgical recoveries and costs such as the cost of
electricity, fuel, labor and metals prices.
Investors need to understand the upside case, and more
importantly, the downside case.
TGR:
What are some of the common problems you see on site visits?
GI:
One general theme is the lack of trained staff and labor, ranging
from engineers and geologists to skilled operators and trades
people. This continues to be a big problem worldwide.
The second would be the uncertainty associated with legal
title and the project investment climate. This includes the tax
rates or ownership structures being imposed by host
countries.
The third is the temptation to use advanced technology where
it is not completely understood or is being misapplied. Too
often, this leads to failure or poor performance.
TGR:
Once financed and in production a lot of mines fail to meet
production targets. A management change soon follows. Is this a
result of some of those factors?
GI:
Very much so. It is the combination of, first, the expectations
of the original group not being met and, second, not having the
depth of experience to understand and correct for all the
variables. It is no surprise to see issues come forward that were
not anticipated in the feasibility studies. An axiom that one of
my analyst partners loves to use is "there has never been a
failed mine without a positive feasibility study."
TGR:
I like that. Can you tell us about some of your recent site
visits?
GI:
My team and I have recently been to the Democratic Republic of
the Congo (
DRC
) to visit
Banro Corporation (BAA:TSX; BAA:NYSE)
and
Loncor Resources Inc. (LON:NYSE.A; LN:TSX.V)
. I recently visited
Continental Gold Ltd. (CNL:TSX)
and other companies in Colombia. I also visited a number of
non-precious metal names, including
Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX)
in Argentina. In the rare earth space, I visited
Great Western Minerals Group Ltd. (GWG:TSX.V;
GWMGF:OTCQX)
in South Africa, where I just joined the board.
TGR:
In South Africa, calls to nationalize more of the mining industry
are growing. Why?
GI:
South Africa is not alone. It seems that 80-90% of the countries
around the world want more of the patrimony to be shared with the
government and the citizens.
The history and economic ramifications of apartheid influenced
the move for local ownership in South Africa. There also are
labor/management conflicts over wages and profit sharing. We
believe the South African political outlook has declined
substantially over the last five years.
However, South Africa is not alone. In 2010, the Australian
government sought a very large tax increase on the mining sector.
The U.S. Environmental Protection Agency has taken actions
relative to the coal industry.
TGR:
Let's go into more detail on your African visits. Banro recently
chose a debt financing over equity financing. What are your
thoughts on that?
GI:
It was entirely appropriate, given the cash generation capability
of its Twangiza project and the relatively accelerated
development at Namoya, its number-two project. Banro looked at
the cost of capital of equity, convertible debt and straight debt
and decided the debt issue was the best alternative.
TGR:
You have seen Namoya firsthand. What do you think?
GI:
When I visited approximately 18 months ago, I was very impressed.
Namoya has a relatively easy physical layout to build, a good
operating environment in terms of climate and, relative to
Africa, ease of access.
TGR:
Banro has a position in Loncor, is that right?
GI:
Yes. Many of Banro's early exploration team members were shifted
to Loncor to develop exploration projects in North Kivu. As North
and South Kivu became safer to explore, we noted their success
with the Banro projects and wanted to invest with them.
TGR:
Loncor has an agreement with Newmont Mining Corp. (NEM:NYSE) on
its Makapela project, a high-grade gold deposit in North Kivu.
Geologically speaking, can it be a mine?
GI:
We believe so. The drilling is very early stage. There are two
development options. One would be a larger, lower-grade, open-pit
development. We are interested in the second option, a higher
grade underground mine. It would have lower capital costs and be
easier and faster to bring into production.
TGR:
What are your thoughts on Peter Cowley and the management
team?
GI:
My teammates and I have known Peter for a number of years and
have a lot of respect for the job he and his team have done. On
our site visits, we have been pleased with the work being carried
out under their direction. As a non-technical factor, we have
been very pleased with the training programs that Loncor is
offering its Congolese employees and the care being taken to
build social relationships locally through their charitable
foundation.
TGR:
Many people consider the DRC to be the riskiest district in
Africa. But the geology is irresistible. How do you balance those
two considerations?
GI:
High risk/high potential return is the mantra. While we believe
that a number of assets in DRC that offer potentially returns to
investors, the risk associated with each one must be closely
scrutinized. For us, one of the key risks comes back to the
question of whom we are investing with. In the case of Banro and
Loncor, we believe the team, from the board down to the men with
feet on the ground, has experience and relationships in the DRC
to develop profitable mines with social and environmental
sensitivity.
TGR:
You visited Continental Gold's Buriticá Project in Colombia. What
can you tell us about that?
GI:
We began investing in Colombia a number of years ago, principally
in the private company that evolved into Continental Gold. We
initially saw Colombia as a regional play, just opening up for
exploration and systematically underexplored by modern
standards.
Developing Buriticá as the company's chief asset with the
Berlin asset in second place struck us as a very good strategy.
We like the high-grade ore reserves at Buriticá and the very high
probability that it will be an underground mine using bulk
tonnage mining methods. This approach should cause the project to
have a relatively small footprint on the surface environment,
which eases permitting and causes less social disruption.
TGR:
Ari Sussman is Continental Gold's CEO, as well as CEO of
Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX)
. Is this a management team you follow?
GI:
We also invest in Colossus, and, yes, Ari has attracted strong
people. We are particularly impressed with Sussman's ability to
build up management teams with people as they are needed at each
stage: exploration, development, construction, production.
In our evaluations, we ask how well management is prepared to
transition itself in terms of its skill set as the company grows
in value and as it develops its assets. That is one of the major
risks in any kind of venture capital or private equity
business.
TGR:
What are your investment themes for non-precious metals
equities?
GI:
One of our major themes is in what we call "green metals," metals
that will benefit from the environmental issues associated with
global warming and climate change. An example is the
lithium/graphite complex.
Lithium Americas is one of the most advanced brines project in
South America, producing lithium using brine technology and solar
evaporation-a very low-cost production method. We expect it to be
among the first to market, in relatively due course.
And because lithium batteries utilize graphite in their
anodes, we started to look at graphite producers. One of the most
intriguing projects is
Northern Graphite Corp.'s (NGC:TSX;
NGPHF:OTCQX)
Bissett Creek in Northern Ontario. The management team has the
right combination of geologic, mining and marketing smarts. We
became a cornerstone investor.
TGR:
You have done well; since August Northern Graphite's share price
probably rose about 300%.
GI:
There is an old adage, "never mistake intelligence for a bull
market."
TGR:
So, is it a bit too frothy right now?
GI:
It depends on your view for graphite. We fundamentally believe in
the green metal theme and have decided that the lithium/graphite
complex will be a winning technology.
If you believe market penetration for electric vehicles will
be in the 3-4% range over the next 5-10 years, graphite prices
will have a lot of upside. If you believe in market penetration
rates of 10-15%, graphite prices will have to be that much higher
in order to bring out the amount of material needed.
TGR:
As an institutional investor, can you offer any wisdom to retail
investors wondering if they should stay in the mining equity
space?
GI:
The generic advice to any investor in any business is to know
what you are investing in. Know whom you are investing with. Do
your homework.
Structure your investments appropriately relative to your risk
profile. That is essential for institutional or individual
investors in this high-risk, potentially high-return sector.
TGR:
George, thank you for your time and your insights.
George Ireland
founded Geologic Resource Partners LLC in 2004 and serves as
its chief investment officer and managing member. He serves as
portfolio manager of the associated Geologic Resource Funds and
has been president of GRI Holdings LLC since June 2000. Ireland
has 30 years of experience in all aspects of the resource
sector, ranging from field geology to banking and venture
capital.
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The Gold Report
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sponsors of
The Gold Report:
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Gold Ltd., Lithium Americas Corp., Northern Graphite Corp. and
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