Month: June 2018

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Interview with Georgia Williams of the Investors News Network (INN)

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On June 14th I presented and was apart of a panel during the first day of the Mining Investment North America Conference. While at the show I had the chance to speak with Georgia Williams from the Investor News Network (INN). In the interview we discuss the upside potential and risks associated with investing in junior nickel companies and also a few points on how I think you can be more successful in the market. Enjoy!

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in FPX Nickel Corporation. Junior Stock Review and/or Brian Leni has NO business relationship with FPX Nickel Corp. or any other company mentioned within this interview.

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A Conversation with Whitney George, Chief Investment Officer at Sprott and Chairman of Sprott U.S. Holdings

In a recent interview with Whitney George, Chief Investment Officer at Sprott and Chairman of Sprott U.S. Holdings, we covered a number of different subjects including his background, gold’s role in a portfolio, the importance of remaining open minded, Sprott Focus Trust (FUND: Nasdaq) and, finally, the upcoming Sprott Natural Resource Symposium in July.

George is a generalist investor who seeks out quality companies that are selling at a discount to their underlying value. He has been very successful throughout his 30+ years in the investment business.  There are many valuable insights to be gleaned from his responses in this interview.

Enjoy!

 

Brian: What brought you to where you are today, or more specifically, how has your career led you to Sprott?

Whitney: Early on in my career, I figured out that I should listen to my mother who recommended that I pay attention to what Warren Buffett was doing. I started off as a retail stockbroker in resource stocks in the very early ’80s, after their big run in the ’70s. In 1991, I joined my best customer, an investment manager named Chuck Royce, who was somewhat legendary in investing in small- and micro-cap stocks, using a value discipline, which was very nicely aligned with what I was doing. I had a wonderful 23.5-year career at Royce & Associates, managing portfolios and mentoring portfolio managers and building what was, at that time, the premier thought leader in the investment management of small-cap value.

Starting around 2013-14, our discipline at Royce was not working as effectively. The QE programs, or zero interest rate programs, resulted in suspending capitalism for about five years because the discount mechanism behind markets started to malfunction as an unintended consequence of the Federal Reserve’s money printing. Our jobs became very difficult. I found myself making excuses for not keeping up with benchmarks in the mutual funds that I managed, to the point that I thought I could be having more fun going back to building businesses and investing in businesses.

I had a tremendous experience that I reflected on in the late ’90s when everybody wanted large-cap stocks, growth stocks and, ultimately, dot-com stocks. While at Royce, I took a contrarian approach and hired many small-cap value managers that were being dismissed because of the lack of interest in that segment of the market. Of course, when things turned around in 2000-2001 we had all the talent, were very well positioned, and benefited mightily in the next 11 or 12 years from a resurgence in small-cap value investing.

When I began looking around for other opportunities, I was familiar with Sprott. In 2014, Sprott was in the midst of a bear market in precious metals. I knew Eric Sprott quite well. Peter Grosskopf, the CEO, and I got to know Rick Rule very well. Sprott appeared to provide an exciting opportunity for me to repeat what I had done in the late ’90s at Royce, i.e., to lean against the tide, stayed committed to a sector that was very much out of favor, maintain and build a team and product offerings so that when the inevitable recovery in precious metals and mining shares occurs, Sprott could be the leading resource available for investors.

Although when I first joined Sprott in 2015 it was trying to diversify away from precious metals, last year, we decided to part ways with the general mutual fund managers, who are now known as Ninepoint. Sprott is now focused principally on precious metals, mining, and hard assets themes as an alternative investment manager. I think we reasserted our new focus by assuming the management contract of the Central Fund of Canada at the beginning of this year, which we relaunched as Sprott Physical Gold and Silver Trust (NYSE: CEF). We are very committed to our space and our sectors, and we are patiently awaiting the next inevitable recovery.

 

Brian: A qualitative narrative regarding the macro view of the world is constantly being broadcasted by the media. In North America, it was the impending doom related to war with North Korea or, recently, the talk of trade wars due to NAFTA negotiations. 

There are elements of these topics that have quantitative components, but in my opinion, most people concentrate on the qualitative framing that is presented.  I, myself, have struggled with how to properly deal with the qualitative narrative.

Does the qualitative narrative, in a macro sense, affect how you invest in the market? If so, how?

Whitney: I think there is one very long-term theme that became apparent to me back in the 1998-2000 period, which is the debasement of currencies. I am typically optimistic about things. I’m a business value investor. I look for companies that I can buy and theoretically hold forever because they’re well managed, they allocate capital well, and they have strong positions, strong balance sheets.

However, aside from the unprecedented day to day noise created by the current administration, one long-term macro theme that I have every conviction is that when countries get themselves into the kind of financial positions that they’re currently in, there’s only one viable option. Countries do not like to default on their obligations, and certainly austerity measures that try to reign in spending have a very limited and finite life before the population decides they’d like new leadership. I think we are seeing a lot of this around the world right now.

The ultimate solution to resolving too many claims on existing assets is to debase the currency. So printing Dollars, printing Euros, printing Yen has become the norm. I trace the beginnings of this kind of approach back to the Greenspan era, which first started with the Long-Term Capital Management hedge fund crisis and the Russian debt crisis that occurred in the fall of 1998. Certainly, it was repeated after 9/11, and then again after the most recent financial crisis in 2009. I just don’t see any other way out of the current situation other than debasement.

When a currency becomes infinite in quantity, investors should turn their attention to those things that are finite. Precious metals are finite in quantity, as are other hard assets categories like farmland and energy. And, so, an overlying theme to all the investing I’ve been doing for the past 20 years has been an awareness of those investments that will not be debased by what central banks around the world are trying to engineer.

Brian: What utility does gold bring to a portfolio?

Whitney: Gold is a currency that is nobody’s obligation. I view gold as a mandatory allocation in my own portfolio and recommend it to others in its physical form, or some derivative of that.  Gold is the original alternative asset, and it is not correlated to other markets. It provides a bit of insurance in times of high stress. Gold has, in the 18 years since the beginning of this millennium, posted superior returns to U.S. stocks as measured by the S&P 500 Index, including the reinvestment of dividends.

Of course, one can hand pick any time period to make their case. But I find that by having a 10% allocation to precious metals, I’m more comfortable being more aggressive with the other 90% of my portfolio because I have a bit of an insurance policy if things go poorly. Gold gives me another bite at the apple because it provides diversification.

 

Brian: We live in a society of paradigms or bias that lock us into thought patterns that make many of us blind to other alternatives that may be more efficient or beneficial.

Whether it be financial, political or social, in your opinion, how does one keep an open mind and see through paradigms and their own inherent bias?

Whitney: Keeping an open mind to changes is very important. As investors, we all have to learn about new technologies, to try and understand where the opportunities are and where the disruptions will occur. Being diversified and keeping a balanced investment portfolio is critical because we’re not always going to get it right. What happens in society as well as in investing is that after a prolonged period of something being successful, it becomes viewed as somewhat permanent, and people lose sight of the fact that things do change.

I would say that a good example of that now is investing in an S&P 500 Index nine years into a bull market. It has become almost a permanent default, a self-reinforcing phenomenon that is likely to one day not work out. Like any kind of momentum investing, one never knows when the momentum is gone until it is too late. Having a discipline, keeping an open mind, and then sticking to that discipline has worked very well for me, and for many other successful long-term investors. This gives you a strong foundation with which to filter out much of the political and social noise that we’re all being overly bombarded with every day.

 

Brian: While paradigms and bias give us the basis for how we view the world, emotion is the fuel that causes us to act without logic. The biggest lesson I have learned in my speculating career, thus far, is to act against the crowd and buy when everyone else is selling – and vice versa.

How do you control your emotions when speculating in the risky and volatile junior resource sector?

Whitney: My investment hero is Warren Buffett. He has said that as an investor it is wise to be “fearful when others are greedy and greedy when others are fearful.”  Human nature has not changed, and so having tools to deal with one’s own emotions is very important. That gets back to having a discipline and laying out a plan, and then executing on that plan when markets call for it, irrespective of how it feels.

In my case, I spend significant time researching companies and assessing what those companies are worth. What is the fair value of the business? What would another company pay to own all of that business? At what price does that business generate free cash and investor returns to me that are appropriate, and maintain that consistent return/demand throughout the market cycle?

I often think in terms of “cap rates”, which is a real estate term, and which is basically the earnings yield that I get on my investment. What I do is I set out target prices, both buys and sells, where I think a sell price would be a full valuation for a business, and a target price would be that which I would get the kind of return I would like, i.e., the double digits over time, if it should achieve the sell price.

Then, it is a matter of sitting back and waiting, and letting the market do whatever it is going to do on any given day. By having a plan in advance, one can execute on that plan in a fairly unemotional way by buying when the markets are selling off and your companies are approaching your buy targets, and conversely, by liquidating or selling as companies start to approach your sell valuations. For me, it’s a two-step process. First, do the research and understand the business. Second, execute based on what kind of opportunities the market is giving you or taking away.

Brian: Along with being Sprott’s Chief Investment Officer and Chairman of Sprott U.S. Holdings, you are also a Senior Portfolio Manager at Sprott Asset Management USA, where you manage the Sprott Focus Trust (FUND: Nasdaq), which is a closed-end equity investment fund.

Can you give my readers an overview of the Fund’s goal, and the process you employ to achieve that goal?

Whitney: One of my goals when I joined Sprott was to be more closely aligned with the people that I’m working for, i.e., the investors. I brought to Sprott two funds; a hedge fund and the closed-end fund, FUND, that you mentioned, where my extended family and I control about 30% of the shares, which means I am eating my own cooking. For me, the value proposition for FUND is absolute returns. Net of fees, net of taxes, net of inflation. You can’t eat relative performance.

I employ the same discipline I’ve been using since I was co-managing the Fund starting in 1996. I invest in high-quality companies with strong balance sheets, high returns on capital and good management; these are companies that are good at allocating capital. I try to buy them when they are out of favor, and at that attractive cap rate I mentioned earlier, and to hold them until they become fully valued. FUND represents a diversified portfolio of 40-50 stocks. No one stock is allowed to represent more than 5% of the portfolio. FUND is somewhat blind to market cap, although, generally, it has been invested in smaller and mid-cap companies where I have been able to find better valuations.

Since the financial crisis in ’09, FUND has been populated by some mega-cap stocks, including Apple, because its valuation metrics were as appealing as anything I could find by digging down into the micro-cap sector. My approach is a low turnover strategy, buying and holding positions with a 3- to 5-year investment horizon, buying companies when they are out of favor and that I know will survive because of the strength of their balance sheets and their core businesses. I like to hold these companies for as long as it takes the market to recognize its value. FUND is managed for a long-term capital gain objective with a mind to being tax efficient and generating absolute returns. I have maintained an allocation in resource stocks or mining companies in the neighborhood of 10-15%  for many years, somewhat as a hedge. Although I cannot invest in commodities directly, I have found some interesting companies to own in the mining sector. The Fund also owns about 15 percent in energy. My biggest areas of interest right now are in technology, particularly on the hardware side. That is where the market has been concerned about cyclicality recently, and in my mind, misplaced some very high-quality companies.

 

Brian: For me, I get a great deal of value from attending resource investment conferences. In particular, I’m looking forward to attending, what I think is a must attend, the Sprott Natural Resources Symposium in Vancouver next month.

In your opinion, what is the greatest benefit that the Sprott Natural Resources Symposium has to offer investors?

Whitney: I have always found it interesting and important to meet with company management. But being a contrarian, and somewhat of a skeptic, management is always going to tell you the best case story and what it wants you to hear. One of the interesting things that you can learn from conferences is what the peer group of various companies has to say about them, their prospects and their stories, so you get a much more balanced comparison than you might from a one-on-one management presentation.

The views and commentary of other participants at conferences, whether they are investors or competing companies, are often very insightful, if not colorful. Going to a conference and immersing oneself in a sector for four or five days allows you to do some deep thinking without the daily distractions of all that’s going on back at your office.

Brian: Whitney, thank you so much for answering my questions. I appreciate it.

Whitney: You’re welcome.

 

Consistently making money in the market isn’t done without proper due diligence and the personal discipline to see your investment thesis reach its potential.  It’s easy to get caught up in some of the qualitative narrative that surrounds both the market and the world in general. However, as George mentions in the interview, buying quality companies that are selling for less than their value and then holding them as long as you can, until you reach your target price, is an absolute KEY to success.

For those who don’t want to manage their entire portfolio, I highly suggest checking out Whitney George’s Sprott Focus Trust (FUND: Nasdaq), where your money can be managed by a man who has a very good track record for success and, as he says, where he “eats his own cooking,” by being a major shareholder of the fund.

Also, personally, I’m really looking forward to attending the Sprott Natural Resource Symposium in July, and think that it is a MUST-attend event for anyone who invests in the junior resource sector.  Being at the conference gives you the chance to see and listen to a fantastic group of speakers, which includes Rick Rule, Doug Casey, and James Grant, just to name a few. I hope to see you there!

 

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Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company(s) and sector that is best suited for your personal investment criteria. Junior Stock Review does not guarantee the accuracy of any of the analytics used in this report.

 

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Ecuador – A Renaissance in Mining Investment Attractiveness?

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Lately, I’ve spent a lot of time debating the criteria I use and the level of risk I’m willing to take with regards to jurisdiction. I find the topic of jurisdictional risk very interesting because, although, there’s a quantifiable aspect to jurisdiction, I believe many of the general opinions regarding jurisdictional risk are based on qualitative observations or anecdotal themes that are proliferated through the mainstream media.

A good example is Russia. Many jump to the conclusion that it’s a VERY risky country and, therefore, not a place to invest. I don’t necessarily disagree; most of the propaganda about Russia, today, is ‘negative.’

Let’s, however, take a look at one of the criteria listed by the Fraser Institute in its examination of jurisdictional risk; political stability. Relative to its peers, Russia scored low, which too many translate into ‘stay away.’ While political stability is a complex factor, I was taken aback when a friend, whose company does business in Russia, said he finds this scoring comical; “does anyone really think there’s going to be some serious political upheaval while Putin is in charge?” Given the complexity of evaluating political stability, his answer isn’t complete, but it still reveals the contrast in views – those who have experience in these ‘risky’ jurisdictions, and those who rely solely on narrative to form their opinions.

Last year, one of the mining industry’s best, Rick Rule, gave me some sage advice regarding jurisdictional risk;

“My own experience is that most investors equate political risk to their emotion rather than to reality, and you tend to react more strongly to political risk that you haven’t experienced or don’t understand. My own belief is that money that is stolen from me by white people in English, according to the rule of law, is just as gone as money that is extorted from me in some third world kleptocracy.

My experience, further, by doing business internationally, and this is going to sound like a generality, which it is, but it is also true, countries that can’t get any worse don’t, and countries that can’t get any better don’t, either.  This plays out over time, not immediately, but the truth is, the countries that have rewarded me the best are countries that have been coming off low bottoms. An example would be Chile, with a superb exploration endowment coming off, first, the idiocy of socialism under Allende, and then, the murderous regime of Pinochet. The response of the geology in Chile to stability and the sort of social sense that they had had enough of rightist and leftist autocracy was spectacularly good for me. I made money in hard places like Russia, Sudan, Congo. The truth is that most of the great, easy to find, tier one deposits that exist in countries that have been able to be explored efficiently in the last 40 years have been made. The big tier 1 discoveries that have yet to be made are going to be made in places where there have been problems with access or problems with cost of capital. Places like the Tethyan metalagentic belt, running through Turkey, Pakistan, Kazakhstan, Afghanistan, Uzbekistan, Kyrgyzstan, Mongolia, those types of places. The easy deposits in safe places have mostly been found.” ~ A Conversation with Rick Rule, CEO of Sprott US Holdings

With this in mind, and through my process of due diligence, I believe Ecuador is a country which is coming off a bottom in terms of mining investment attractiveness. I’m a buyer of what I believe are the highest quality junior mining companies exploring and developing projects in Ecuador, and believe that money invested now, near the bottom, gives the investor a great risk to reward opportunity.

 

 

Ecuador

  • Capital City – Quito
  • Population – 16.529 million
  • Currency – U.S. Dollar
  • 2017 GDP – $70.955 billion USD
  • 2017 Unemployment Rate – 4.34%
  • Main Industries – Petroleum (more than 40% of exports), food processing, textiles, wood products and chemicals
  • Main Export Partners – United States, Chile, Peru, Colombia, Japan and Russia

*All Figures taken from IMF website

 

Ecuador’s economy is the 8th largest in South America and is driven by the oil industry, where petroleum makes up almost half of the country’s exports. The agriculture sector is a distant second with a little more than 10% of exports.

NOTE: Ecuador is the largest banana producer and exporter in the world.

Ecuador’s oil production began in the early 1970s and is clearly the main driver of the economy. In the years before oil production, Ecuador was a country whose people identified with an agrarian social philosophy, meaning they valued rural society as superior to urban society. With the influx of cash into the country, this has slowly started to change and, in my opinion, is a key point in understanding the Ecuadorian culture.

 

Social Unrest – Taxes and the Environment

Looking into Ecuador’s past, it’s evident that its people are not afraid to protest, especially when it comes to the environment or a number of social issues. Ultimately, moving forward, the government will have to choose how they deal with future protests but, either way, social unrest surrounding a potential mine site could have a major impact on the success of the project.

 

Environment

If I were to pick the most likely point of contention regarding mining’s future in Ecuador, it would be related to the environment. Ecuador is near the top of the world list of biodiversity hotspots in terms of vertebrate species, endemic vertebrates and plants. Specifically, the Intag region, named for the river that runs through it, spans two of the world’s 34 most biologically important areas.

This biodiversity is highly coveted by many who live within Ecuador and many of the environmental NGOs around the world.  Doing a quick search of environmental organizations with propaganda referencing Ecuador reveals a long list of interested parties including, The Ecologist and Fund My Planet.

While there is the potential for turmoil regarding the environment, I think that the probability of there being issues can be reduced if handled correctly by the mining companies. By ‘handled correctly,’ I think it’s really important to educate and support the local communities in the region with which you’re developing or exploring. Educate on the benefits of mining and how the company intends to protect the environment in which it’s working.

Additionally, an X-Factor in this type of relationship are ties with Ecuadorian companies that have operated within the country for many years. I think the companies that leverage their relationships within Ecuador are miles ahead of those who try to navigate the culture and government from the ground floor.

There’s one such relationship which I think has a ton of potential to bring shareholders value through their expertise and recognition within the local communities.  Adventus Zinc Corporation and Salazar Resources (SRL:TSXV) have this type of agreement, and I had the opportunity to ask Sam Leung, Adventus’ VP Corporate Development, about it.

 

Adventus Zinc Corp

Adventus Zinc Corp. (ADZN:TSXV)

MCAP – $45.5 million (at the time of writing)

 

 

Brian: In your opinion, why was it important to have a partner, such as Salazar, in Ecuador?

Sam: Local know-how is often invaluable, particularly in the mining sector and developing jurisdictions such as Ecuador. Many foreign companies and corporate personnel often fail to recognize what they do not know about a project jurisdiction and its normal business and community practices, so a trusted local partner can add significant value with operational experience and local networks. For Adventus’ Curipamba Project and the Ecuador country-wide alliance, a strong partnership has been formed with Fredy Salazar and his local Salazar Resources team, who are pioneers in Ecuadorean mineral exploration with over 30 years in their home country. The Salazar team work closely with Adventus to help expedite and complete tasks in country with minimal complications, and share important business insights from domestic developments.

 

Brian: What do you see as the biggest risk for mining investment in Ecuador?

Sam: We perceive community relations and integration to be the biggest risk not just for mining investment in Ecuador but most other developing countries. Each project has different stakeholders and dynamics, so investors need to be aware of management teams’ capabilities and limits in addressing social needs in project development. For the Curipamba Project, the Salazar team are well-respected members of the project communities, while Adventus brings additional resources and international best-practices to address social needs.

 

 

 

Left-Leaning Socialism

The political philosophy which I’m most apprehensive about, especially from an economic standpoint, is left-leaning socialism. Throughout history, political structures rooted within these frameworks have been bad for business.

I believe, however, that given the obvious PUSH toward reducing taxes and attracting mining investment dollars, at least in the short-term, the risk associated with this form of political philosophy is reduced, but never too far away.

For me, when a political philosophy is so ingrained in the culture of a country, it’s only a matter of time before the cycle shifts and once again reflects the country’s history during Correa’s rein. I’m very optimistic that the next few years will remain positive for mining investment, but will remain open-minded about the subtleties that may be indicating a reversion back to the mean!

 

 

The Last 10 Years

A major turning point in Ecuador’s history, in terms of how it relates to mining, occurred in November 2006 with the election of Rafael Correa as President.  Interestingly, Correa’s 10 years as President was unusual given the fact that there had been 7 different Presidents in the previous decade.

Correa’s appeal to the Ecuadorian people appears to have been rooted within socialist or left-leaning political philosophy, which saw a major portion of tax dollars diverted into social causes, such as healthcare, education and agricultural subsidies. Additionally, and more to the point of this article, Correa focused his attention on extracting more cash from the mining business.

In April of 2008, Correa’s government adopted a new mining mandate which restricted companies to holding a maximum of three concessions and instilled a 180-day suspension of activities for almost all mining concessions in Ecuador while a new mining law was put together. This controversial move did not go over well with investors, and most of the mining companies which held property in Ecuador, as they saw their share prices fall in response to the news.

Months after, still under the guise of the new mining mandate, Aurelian Resources sold their multi-million gold ounce deposit, Fruta del Norte, to Kinross Gold Corporation for $1.2 billion.  I believe this deal single-handedly marked the height of ‘doom,’ so-to-speak, of the hard-rock mining industry within Ecuador.  Over the coming years, Kinross participated in negotiations with the government over terms to develop Fruta del Norte into a mine but, ultimately, couldn’t come to an agreement.

As cited in many articles relating to the negotiations, the Ecuadorian Government insisted on a 70% windfall profits tax, which, in essence, would limit the profitability of the mine in a rising gold price environment. Ultimately, this led to negotiations falling apart in 2013. Within a year, Kinross formally stepped away from Fruta del Norte with its sale to Lundin gold for $240 million – a whopping 80% loss!

As I stated, I believe this marked the low point for hard-rock mining in Ecuador; outside of nationalizing Fruta del Norte, selling it for a fraction of the purchase price because of negotiations with the government had a major effect on how the mining industry viewed investment within Ecuador’s borders.

The failure of these negotiations is clearly visible in the popular Fraser Institute Rankings, as Ecuador’s score for mining investment attractiveness fell to a low of 38.1, ranking it 80th out of the 122 countries that were covered by the 2013 report. In the years since, Ecuador has slowly improved its ranking with a score of 45.9 in 2014, 45.36 in 2015, 50.38 in 2016, and 52.09 in 2017. While this is a marginal improvement year over year, the score is headed in the right direction, and one which, I believe, will improve again in 2018.

 

2018

Why do I believe that Ecuador’s mining investment attractiveness score is going to continue to improve in 2018? Great question and one that needs to be explained in further detail, as Ecuador’s past needs to be kept in perspective when making prognostications.

 

Goal of Attracting $4.6 Billion Investment Dollars Over the Next 4 Years (2021)

In May 2017, Lenin Moreno replaced Correa as President of Ecuador.  While much of what I have read describes Moreno as having a socialist or leftist political philosophy that’s very similar to Correa’s, Moreno has publicly stated a desire to attract close to $5 billion for Ecuador’s mining sector. This is a lofty goal because, in my opinion, they will have to make great strides with regards to changing their image in the mining sector in order to accomplish this.

At this year’s PDAC, Ecuador may have made a crucial step in improving their image, as they were the headline country sponsor for the event and had a large booth at the show. While advertising is great and a step in the right direction, if they don’t take action to improve the country’s mining investment attractiveness, it may be all for not.

Even before this advertising PUSH, however, Ecuador has shown that it’s poised to change. The biggest change, in my mind, comes with hiring Wood Mackenzie as a consultant to assist in changing Ecuador’s mining tax regime, making it competitive with the rest of the world.

Here’s a list of some of the positive fiscal and financial reforms made over the last few years:

  • Value Added Tax (VAT) Recovery – Starting in 2018, VAT will be recoverable for mineral exports
  • Windfall Tax – A bill has been expedite to remove the windfall tax, and should be approved in the next 30 days.
  • Sovereign Adjustment
  • Currency Transaction Tax – exemption on tax relating to currency outflows
  • Accelerated Depreciation – Investors’ choice of 5-10 years (locked in fiscal stability contract)
  • Fiscal Burden – For example, the fiscal burden on a large scale copper project has dropped from 30% to 23% with the changes to the tax regime

NOTE: Review Wood Mackenzie “Ecuador Tax Regime”

 

Brian: Of the positive fiscal and financial reforms made by the Ecuadorian government to date, which do you feel will be the most effective in changing perception of the mining community?

Sam: We believe the significant reduction in the Windfall Tax terms over the past few years has been integral to changing the investment perception. Due to the negative connotations, we also believe the government of Ecuador could go further and remove the Windfall Tax outright, but that remains to be seen. Please refer to our corporate presentation on the Adventus website for more details on the Windfall Tax.

 

Brian: In your opinion, is there anything else that needs to occur to change the perception of the mining and investment communities?

Sam: With regards to exploration investment jurisdictions globally, Ecuador has been arguably the hottest over the past 12 months and this momentum continues. Longer term, we believe a significant milestone for Ecuador will be the completion and successful commercial operation of the first large mines which are currently in construction. Once these foreign companies demonstrate returns on their investments, many more deep-pocketed investors will be drawn into Ecuador.

 

 

Cash Flow Back Into Ecuador

As Ecuador’s actions align with the statements they’ve made about bringing mining investment dollars to the country, cash has begun to flow back into the country’s hard-rock mining sector. Arguably the best example of this comes from Lundin Gold and their push toward the development of Fruta del Norte.

Fruta del Norte

On January 14th, 2016, Lundin Gold announced that they had completed the negotiation of the definitive form of the Exploitation Agreement for the Fruta del Norte Project with the Government of Ecuador.  The completion of this Agreement is a huge milestone given the controversy associated with its history. For those interested in reviewing the details of the Agreement, please follow the link to the news release.

The completion of the Agreement was very important, but most important is Lundin’s ability to take the Agreement and put it into action via financing for the development of the Fruta del Norte Project. On March 26, 2018, Lundin Gold took a major step forward by announcing that they would be closing their $400 million USD equity private placement.  In my opinion, while the risk to reward ratio is very much in favour of Lundin Gold, considering the upfront capital cost versus upside potential related to expected gold production, the raising of this amount of cash for a gold project located in Ecuador speaks volumes about how the market is changing its view of the country, and Lundin’s level of influence within the industry.

 

Collaboration – Chile and Ecuador

On March 10th, 2018 Codelco, the world’s largest copper miner, announced that Chile’s Minister of Mining, Aurora Williams, and her counterpart in Ecuador, Rebecca Illescas, signed a joint declaration that strengthens the agreements of the Codelco-Enami EP alliance, and expedites the execution of the Llurimagua bi-national copper project, located in northeast Ecuador.

To date, there has been $34 million USD spent on the Llurimagua Project. It’s expected that the total will be upwards of $50 million USD by the end of the advanced exploration phase. The signing of the agreement and the money being spent by Codelco on the Llurimagua Project is another example of the changing tides in Ecuador.

 

Cascabel

One of the hottest stories in the junior mining sector in 2017 was about Sol Gold, which is developing Cascabel, its porphyry copper-gold deposit, located in the Imbabura province in the northwest region of Ecuador.

Cascabel is a great example of the mineral potential that exists within Ecuador. Clearly, investors are attracted to Sol Gold with their high-grade copper over wide intervals, such as that which was found in Cascabel Hole 12 and produced an interval of 1560 meters at 0.93% CuEq, or Hole 9, which produced an interval of 1197.4 meters at 1.16% CuEq.

Are mining investors avoiding Ecuador? Glancing at Sol Gold’s stock chart, I think the answer is no. With Ecuador’s push toward change in its hard-rock mining policy, and what looks to be world-class mineral potential, investors are clearly interested in the risk to reward potential.

 

 

 

Ecuador’s Potential

In my opinion, the top reason for investing in junior mining companies that are exploring or developing projects in Ecuador is the mineral potential that exists within its under explored borders.  Also, more with regards to the projects that are in development, Ecuador produces 90% of its internal energy requirements via hydro electric dams, giving Ecuador some of the cheapest electricity in the world.

Mineral Potential

Ecuador is located on the northwest coast of South America and is host to the northern portion of the Andes Mountain chain. The Andes are famous for their mineral endowment, as a couple of South America’s most prolific mining countries, Chile and Peru, have produced some of the richest deposits in the world.

In a presentation entitled, Geological and Mining Potential in Ecuador, John Efrain Bolanos cites,

“the spatial-time distribution of the Cu porphyries and related epithermal mineralizations of the Peru metallogenic belts are very similar to those ones in Ecuador.”

Source: John Efrain Bolanos Presentation – Geological and Mining Potential of Ecuador

 

From Bolanos’ presentation, Ecuador can be broken down into 6 geo-structural domains, which showcase Ecuador’s geological potential:

  1. The Fore Arc Basin of the Coast
  • Cretaceous to Cenozoic basin underlain by aloctonous basaltic ocean crust
  1. Western Cordilera
  • Formed by an accretionary prism mainly of ocean crust composition, continental crust and accreted Late Mesozoic to Cenozoic ocean terrains
  1. Interandean Graven
  • Formed by thick and large Oligocene to Miocene volcano-sedimentary sequences
  1. Real of Central Cordilera
  • Formed by several litho-tectonic divisions of Andean bearing and separated by regional faults. Guamote division, Alao division, Loja division, Salado division and Zamora division
  1. Eastern Subandean Zone
  • Formed by forearc belt of the basement covered by volcano-sedimentary sequences
  1. Back Arc Basin of Iquitos
  • Comprises of Oriente or Amazonian basin mainly formed by sedimentary and volcano-sedimentary sequences

 

Given Ecuador’s favourable geography, similarities to a couple of the world’s most prolific mining countries and lack of modern exploration activity, Ecuador may be one of the world’s last frontiers for potential world-class deposit discoveries.

 

Brian: Was Ecuador’s mineral potential a factor, first, in choosing  the Curipamba Project, and second, in expanding upon the exploration and development deal with Salazar?

Sam: In our global hunt for zinc-related projects in 2017, the quality of the Curipamba Project with respect to its high grade El Domo deposit and the additional exploration potential over its 22,000 hectare area stood out when compared with other known projects and operations globally. During our due diligence process, we also recognized the scale of potential discoveries within under-explored Ecuador and how a well-aligned partnership with Salazar would provide us with first-mover advantages during Ecuador’s adolescence as a mining jurisdiction. Ecuador’s mineral potential, located between Peru and Colombia, is at the heart of the investment thesis.

 

 

Concluding Remarks

It’s my contention that Ecuador is in the midst of a renaissance toward perceived mining investment attractiveness. While there’s a conscious effort being made by the Ecuadorian government to attract investment from the global mining industry, I believe investors and mining companies are rightly skeptical about placing their money in a place where so much destruction to capital has occurred in the past.

In my opinion, the risks that pose the largest threat to investment dollars still exist and will not cease to exist at any point in the future. I believe the Ecuadorian people have a culture which is rooted in left-leaning socialism. Currently, the pendulum, while still hanging under the socialist umbrella, has pushed further right and will remain there for the next few years, but will revert back to the mean at some point in the future – to that I think it’s inevitable.

Additionally, given the biodiversity of Ecuador and the global push toward environmental diligence, mining within Ecuador’s borders will always ‘walk the line’ between being accepted and being protested. Companies that do not make an effort to explain how they will protect the environment and the other benefits of mining to the communities will not be successful.

While the risk associated with investing in Ecuador is very real, I believe there’s tremendous opportunity in Ecuador right now. This is based on the following:

  • Current President, Lenin Moreno, has stated that it’s his goal to attract close to $5 billion in mining investment dollars over the course of his 4 years as President. Lundin Gold’s $400 million financing for the development of Fruta del Norte speaks to the market beginning to turn in favour of investment within Ecuador.
  • Adventus Zinc, Lundin Gold, Codelco, BHP and Sol Gold are all examples of companies that have started putting investment dollars to work within Ecuador. It’s my opinion that smart money begins to flow into the smart contrarian markets first.
  • Wood Mackenzie’s influence in Ecuador’s mining taxes is a major step toward becoming a world-class destination for mining exploration and development. Reductions in VAT and the company’s fiscal burden, along with the proposed elimination of the windfall tax, are all integral steps in attracting further investment dollars.
  • Immense mineral potential – Much of Ecuador has not been explored with modern exploration techniques. Given Ecuador’s geographical location, I believe it’s safe to say that Ecuador may be one of the world’s last remaining jurisdictions with tier 1 deposit type discovery upside potential.

 

I’m investing my money in Ecuador and believe it’s just a matter of time before the market recognizes the changes that have been made and will follow suit.

 

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Until next time,

 

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Adventus Zinc Corporation. Junior Stock Review and/or Brian Leni has NO business relationship with Adventus Zinc or any other company mentioned within this article.