NOTE: Interview was originally published on May 14, 2020.
Whether it’s a black swan or a white rhino, the Covid-19 Pandemic will go down as one of the major events in world history.
In my mind, the question that remains is whether Covid-19 is remembered more for the deaths it has caused or the financial and social chaos which could follow?
Personally, if I had to choose, my guess would be that history will look back at the Covid-19 crisis as the precipice of something much bigger.
Clearly, the world financial system has been pushed to its limits, as the U.S. Federal Reserve’s pledge of QE Unlimited really makes you wonder where this is all headed.
On the social side of things, there have been many troubling developments, from the Canadian government’s attack on free speech to India’s Aarogya Setu tracking app, which allows the Indian government to track its users.
It’s a brave new world.
With that said, the case for higher gold prices has literally never been better than it is today.
Although higher gold prices spur thoughts of grandeur among many gold bugs, higher gold prices do come with the caveat of chaos.
The late Richard Russell said, and I’m paraphrasing,
“In the next crisis, it isn’t who makes the most, but who loses the least.”
Given the circumstances, he may very well be right – a sobering thought.
Today, I have for you an interview with one of the resource sector’s best, Mark O’Dea, who is the Founder and CEO of Oxygen Capital.
In the interview, we cover a number of topics, including the investment thesis for PureGold, which is in the midst of constructing its PureGold Red Lake mine in Northern Ontario.
Brian: The Covid-19 crisis has swept over the world the last few months, shutting down economies and forcing us into uncharted territory both economically and socially. Governments have pledged unprecedented amounts of money to repair the damage, but uncertainty about the future still remains.
In a 1959 speech, John F. Kennedy said,
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In crisis, be aware of danger – but recognize the opportunity.”
In your opinion, today, what danger should people be aware of and, secondly, where is the opportunity?
Mark: Well, thanks Brian. I think the danger is already baked into the reality that we’re all living right now. Stocks have been crushed, economies are struggling, danger levels remain high and people are on high alert. Whether stocks fall lower, testing the lows of a few weeks ago or not, remains to be seen. It kind of feels like that’s not the case, but who knows? I think throughout this, what’s emerged as an opportunity, a sort of counterpoint to all that risk and crises, is that gold is looking really constructive and is in a very good place right now. So, it’s done what it’s meant to have done in the sense that it’s behaved really well. If you look at its chart, it’s up 33% over the past year and it’s up 13% year to date in the face of this massive financial crisis, and it’s trading at or above US$1700 an ounce.
As governments continue to print trillions of dollars to stabilize the economy with interest rates near zero and debt levels through the roof, gold has reacted to that and has adjusted upwards very nicely. Printing all this new money inevitably leads to serious reduction in the future purchasing power of a dollar. Owning gold, which is rare and intrinsically valuable, as opposed to a paper dollar, is a way to preserve the purchasing power of your money. So, in my experience, having gold as an allocation in your portfolio is a sensible thing to do.
There are great opportunities that exist in the gold equities right now, and what’s compelling from an investment thesis is that we’re seeing operating margins increase dramatically with this rise in gold price. So, if a company, for example, was making $300 an ounce in margin a year ago, they’re now making $600 or $700 an ounce and that bump in profitability goes straight to their bottom line. That massive margin expansion isn’t yet priced into the equity valuation in my opinion. So, I think there’s a pretty interesting opportunity to capture there. It gets even more pronounced for Canadian gold mining companies like Pure Gold Mining (PGM:TSXV), for example. Because the Canadian dollar has weakened relative to the US dollar, gold is now trading at all time highs in Canadian dollar terms. Gold is hovering around $2,400 Canadian dollars per ounce. It really is incredible.
So, for a near term Canadian producer like Pure Gold, where your costs are in Canadian dollars but you’re selling a product in US dollars, it translates into huge margin expansions at the operation, so profitability goes way up.
Brian: Recently, Barrick Gold announced that the Government of Papua New Guinea would not be extending Barrick’s Special Mining Lease on their Porgera gold mine.
The nationalisation of assets is a risk which miners in the developing world always have to consider.
My question for you is do you believe there is more political risk in the developing world today, given the economic calamity we are facing globally? Please explain.
Mark: I think it’s inevitable that risks in developing countries have gone up. The economies of developing countries are at risk of being completely wiped out or at least pushed back 20 or 30 years because of this crisis. I firmly believe that this inevitably leads to increased chances of expropriation of mining projects. It becomes a matter of survival.
In contrast, in countries like Canada and the United States for example, things are quite a bit different. Big mining and development projects become a key part of the engine for re-stimulating the economy through all the direct and indirect benefits and the increased tax base created. Getting people back to work in high paying jobs goes a long way to helping a nation recover. So my prediction and hope is that we’re going to see big resource development projects multiply and come online quicker as a stimulant for recovery in developed countries.
Brian: A quick binary question for you, will gold be trading above US$2,000 per ounce by the end of 2020, yes or no?
Mark: I rarely make predictions around commodity price because I’m always wrong. But given the macro environment that we are in for gold, it feels like a perfect storm. So, I wouldn’t be at all surprised to see gold reach US$2,000 an ounce this year.
Brian: Without a doubt, the case for gold has never be stronger than it is today. Given this, I personally see tremendous upside potential in owning gold equities, especially the best of the best juniors. Oxygen Capital has a great stable of companies, all of which have varying degrees of exposure to precious metals.
To me, PureGold (PGM:TSXV) stands out from the rest given its stage of development, as it has commenced detailed engineering, procurement and construction of its PureGold Red Lake mine.
First, could you give us an overview of the Red Lake Gold Camp and why is having property within the Red Lake Gold Camp so valuable?
Mark: There are 30 million reasons to like Red Lake, and by that I mean there have been 30 million ounces of high grade gold produced in the camp over the past +80 years. It’s become world famous for some of the highest grade gold ever produced – anywhere. It’s a place where Tier one companies are born and bred. For example, it turned Goldcorp into what it became after the discovery of the famous High Grade Zone in the late 1990s. It was Placer Dome’s bread and butter and jewelry box for decades. Red Lake exists as a place because of mining, so as a location, you couldn’t ask for any better. Many of us at Pure Gold cut our teeth in Red Lake. And frankly I think that is a key attribute of our Company. If you are building Canada’s next gold mine in Red Lake, you want a team with significant Red Lake experience. For example, Darin Labrenz, our President and CEO worked in Red Lake for 10 years and was Chief Geologist at Placer Dome’s Campbell Mine. Phil Smerchanski, VP Exploration and Chris Lee, Chief Geoscientist, both worked extensively in the Red Lake camp for Goldcorp and other companies. I consulted for Goldcorp in Red Lake, early in my career and started my first Company called Fronteer Gold with an initial focus on Red Lake, backed by Placer Dome and Rob McEwen. Rob Pease, one of our directors, was General Manager Exploration for Placer Dome where he was responsible for Canadian exploration, including Red Lake. Finally, Maryse Belanger, also a Director, was a Senior VP Technical Services for Goldcorp, whose responsibilities included the Red Lake Mine Complex.
So, we have all spent years working at, and figuring out other people’s mines in Red Lake, and have more on the ground experience in the camp than any other group in the world. It feels so exciting to now be on the cusp of running our own mine and being the next chapter in the evolution of this incredible place. It feels like coming home.
What I have also learned is that not all geology is created equally in Red Lake. And we control (100%) of a continuous ten kilometre long stretch of some of the most fertile gold rich geology in the camp. We feel strongly that despite having already defined well over 2 million ounces of gold, and being the 5th highest grade gold mine in Canada, we have just barely scratched the surface.
Brian: Secondly, could you give us an overview of the current investment thesis for PureGold?
Mark: The first investment thesis really revolves around near-term production and cash flow into a rising gold market. The second, and equally important theme is grade, resource growth and the scalability of the mine itself. So let’s start with the first one, the near-term cash flow. We are coming out of what’s traditionally viewed as a fairly dull period in any company’s evolution. That is the construction phase of a mine. We are nearing completion of construction now and there is clear visibility to first gold production. We can see the finish line and we anticipate pouring gold before the end of this year. What typically happens during this period is a Company’s valuation begins to re-rate upwards from a developer to a producer. For example, when you look at what junior producers are trading at today, they are valued at roughly one times their Net Asset Value (1 x NAV). Currently, Pure Gold is trading at much lower than that. So, as we get our Phase 1 mine plan into production and in turn demonstrate that we can quickly scale up to even higher production rates, I really believe there is a valuation gap that is going to get filled. Layer onto that the strong operating margins that come from gold being at roughly $2,400 CAD per ounce, and you have a project that generates an additional $C680M of cash flow compared to our feasibility study just 12 months ago. This type of margin expansion isn’t factored into our equity valuation at all.
Brian: Finally, where is the upside potential – Is the deposit open at depth? Is there potential for discovery on other targets within the project’s land package?
Mark: What’s really unique about these types of deposits is that they pack a huge punch in a relatively small footprint and they’ve got very, very deep roots; they continue for kilometers at depth. The perfect example of this is the Red Lake Mine Complex up the road. It has produced 20 million ounces and has been mined down to 2.5 km depth. We have exactly the same geology and potential at Pure Gold, with the same opportunity for growth. Our orebody is about 7 km long currently and has only been drilled off in places to about 1km depth. It is literally open in all direction. And I feel we’ve barely scratched the surface. The real prize is still yet to be found. We have already defined two and a half million ounces of gold at ~9 g/t from 1.3 million meters of drilling. So it is exceptionally well understood geologically. We know mineralization continues at depth because we have intersected it in drill holes down to 2.1 km depth. We know It keeps going. So in my opinion, by extending the deposit down to the depths that they’re mining at the Red Lake complex up the road, you can see the potential for at least another five million ounces here. It is important to me that when investors look at Pure Gold they don’t just see the current reserves and resources. But rather, they see this as a multi-generational asset that is going to keep growing in size with ongoing drilling. Pure Gold is a big part of the future of Red Lake and we are on the cusp of starting a whole new chapter in this world class mining region.
Brian: Formal and informal mentors have made a tremendous impact on my life. I can honestly say that without their influence I wouldn’t be where I am today.
What is the best piece of advice a formal or informal mentor has given you?
Mark: One piece of advice would be to stick to your knitting and trust that value will come. It’s easy to get distracted in this business. But I do believe that sticking to your knitting and playing the long game is the way to go. Especially if you are lucky enough to be sitting on a project as special as the one we have at Pure Gold. And that’s advice that was given to me by some wise mentors, and it’s certainly served me well. There are no overnight successes in this business. It might look that way from the outside looking in, because values crystallize in an instant in a takeover or in an exciting discovery. But preceding that moment, there are usually 5 or 10 years of incredibly hard work. A second piece of advice would be that you can’t do it all yourself and you need a team you can trust. Surround yourself with people who are smarter than you. Let your talent run and trust them.
Brian: If you could offer a piece of advice to your 20-year-old self, what would it be?
Mark: I was 34 years old when I became CEO of my first company, Fronteer Gold. So I will give my 34 year old self some advice. And that is “comparison is the thief of joy”. I think it’s a useful piece of advice because there’s always a stock or a company that’s higher or lower than yours for reasons that don’t make any sense at all. And they may never make any sense. Don’t obsess about it. You can let it motivate you and learn from it, but you must keep your eyes focused on what you can actually control and focus on doing everything to the best of your ability to create fundamental value.
Next would be, raise more money than you think you’ll need because the companies that do the best in this business do not do it by raising half a million dollars at a time. That gets you nowhere. You want to raise enough money to get meaningful work done and take a project from one milestone to the next so you can unlock value. The companies that have the best valuations are the ones with a healthy treasury giving them enough working capital to make real progress.
Brian: Finally, at the end of our last interview, you left us with a very timely quote from Miles Davis.
“Time is not the main thing. It’s the only thing.”
Do you have any words of inspiration for today’s investors?
Mark: I would say do your homework. It’s easy to jump on the momentum train. Do your homework, look for transparency in companies. Look for companies that are going to take you along with them through the steps in their evolution, from resource to economic studies to permitting and so on, rather than companies who lack that transparency.
To take a quote from Abe Lincoln,
“If I had 6 hours to chop down a tree, I would spend 4 hours sharpening my axe.”
Spend 4 hours sharpening your axe and do your homework on the companies that you are going to invest in. Make sure they are backed by good people, with a solid track record, who have skin in the game and who have good projects in good places.
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Until next time,
Brian Leni P.Eng
Founder – Junior Stock Review Premium
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.