CEO.CA Chairman's Briefing

By Peter @Newton Bell, October 6, 2016

Have you ever thought that the story behind a good junior would make for great television? Well, I have and it is my pleasure to share a short story that I wrote after starting to learn about gold mining in Egypt.

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It was a dark and cloudy night in the Eastern Desert of Egypt when something strange happened: it rained! Just a little, for a moment, on a small patch of sand and rock that was indistinguishable from the surrounding area. Almost as if the rain came from another time, when the area was green and fertile. An instant later, and a few hundred miles away, Ahmad Nazim was born on an unusually dry and hot night in Alexandria.

Twenty-odd years later, Ahmad was celebrating his graduation from University College London’s archaeology program. He was wearing his cap and gown, chatting with one of his friends about what was next.

“Urban archaeology in Eastern Germany,” said Ahmad’s friend William Buchan. “I leave tomorrow.” Buchan was a character, raised as an old-school Brit keen to see the world. It was 1991 and the two young men were ambitious, if not a little coddled. Ahmad said, “I am going to Australia to work as a geologist. The desert, the adventure… Beats graduate school!”. Ahmad felt less than his friend, like a sellout because he was joining a global commodities industry. Little did he know.

Ahmad spent eight years down under and learned how to run a small mining company. He loved it. Before he knew it, he was back in Egypt talking with his family about staking a claim in the Eastern Desert. They didn’t have much to offer him, but his mother still had family members who knew how to survive out there. With a small bribe to a government official, he had two mineral concessions in hand and was ready for an adventure.

At the start of the new millennium, Ahmad was out in the desert at his camp. His mother’s family had helped him get set up, but he was basically alone. His camel, Ibil, was his best companion. This camel seemed to know the best ways through the treacherous terrain and Ahmad trusted him.

On January 23rd, 2000, Ahmad found himself in a place he had never been before. It was a small valley with no easy way out, which was a problem because he wanted to escape the mid-day heat. He got up on the camel’s back to look around when he saw it. Something that made the archaeologist inside of him come right to the fore.

“What is that?!”, he exclaimed. The camel spat. It looked like the ruins of an old building, a few bricks sticking out of the sand near the side of the valley. He led Ibil forward, and started to see more. It looked like there was a ramp cut into the hill. He scampered up it, and then came face to face with a small, ragged hole in the earth. The air was cold and stale. Could it be an ancient mine site?

Ahmad knew the area was productive for mining in ancient and even early-modern times. That’s why he picked it. But, peering down the dark tunnel, he still wondered what this was. He knew, but he had learned to be careful in Australia.

He carefully moved into the tunnel and looked for some kind of markings that would reveal the holes in history. He was surprised to find the faint remains of English characters chiseled into the wall. Apparently he had found an old British gold mind that followed a high-grade vein in 1910. He left and went to erect one cairn in the valley and another on the hill top above the valley to mark his discovery.

What Ahmad found became known as the “Abayomi” project. A few chip samples from the historical adit had proved enough to get his friends from Australia interested. A small group flew out and brought enough money to fund some surface exploration and even start drilling on the project. They basically took control of the project away from Ahmad and encouraged him to visit his other claims in the South. “We know what we’re doing”, they said.

Six months later the Aussies were in trouble. They sent someone to visit Ahmad at the other claim who hold him that they didn’t find anything. “There’s something there but we haven’t found it. We can’t spend more time here because we’re lagging the others in this bull market. No-one cares about Egypt. Plus, the desert is tough. We thought we could handle it, but we’re leaving. Sorry.”

Ahmad was angry. He knew how failed exploration efforts could condemn an otherwise prospective project and didn’t want someone else to ruin his project.

The night after the Aussie left, Ahmad did the same thing he did everyday: he went out into the desert with his camel. This on was named Hijen and it seemed less ornery than Ibil. It was June and the mid-day heat was dangerous now. He went out at night to start exploring before retreating to camp in the morning to avoid the heat.

The next morning, Ahmed he came back a familiar route but things looked different after a recent wind storm. As the sun rose, it cast strange shadows and distorted the colours of the earth. He paused as something caught his eyes; it seemed like a small area of sand had a different colour from the rest. He stared at it for a minute as the light changed and the shadow moved. The discolouration in the sand remained.

“Ok,” Ahmad said Hijen. “Let’s stop here for a bit... I know…I know…”. He squatted down near the sand and noticed it was sparkling. Now the geologist inside of him was excited.

It turned out to be a high grade gold vein that was out cropping at surface. The wind storm had caused some intense erosion and the heavier metals were strewn over the surface as if the earth was bleeding. Seeing the sand sparkle like that made him understand why the ancients had called gold ‘the flesh of the Gods’.

Ahmad named this project “Fadil”, the generous. He didn’t know how he would advance it, but he carefully took samples and surveyed the nearby area. It was the richest gold showing he had ever seen. The surrounding area had very interesting geological structures with apparent faults and folds, as if it was out of a textbook.

After studying the Fadil project for three months, Ahmad went back to visit his family in Alexandria. He didn’t know how, but he would find someone to bite on this project. Things like this don’t come by every day, he told himself.

Upon arriving home, he worked through a stack of mail waiting for him. He was pleased to find a wedding invitation from his UCL friend, William Buchan. Apparently, there was a trip to London in his future. Business and pleasure.

Ahmad had good luck in London. He stayed there from November till February 2001. The weather was a welcome change. It turned out that Buchan worked in the City now and there was a lot of enthusiasm for gold juniors. Buchan’s partners agreed to fund a mining venture at Fadil, but first wanted to know more about the Egyptian tax policy.

“Well there really is no international mining in Egypt except for oil and gas,” Ahmad told Buchan and his partners. “We could try to make an agreement for taxes based on that precedent, or negotiate something else.” Despite his experience, Ahmad was naïve to the city.

The financiers sent Ahmad back to Egypt with a mandate to secure an agreement for mining taxes based on the oil and gas industry model. He had conditional funding for a substantial exploration program based on that agreement with the Egyptian Government. Ahmad found it relatively easy to secure government agreement and quickly started spinning-up the Fadil project.

Seven years later, in 2008, the Fadil mine went into production. It was turning into a massive project, with hundreds of millions of dollars in foreign capital pouring into the small Egyptian company that owned the project. The company earned almost half of all this money back in the first year of production and everyone in the city was happy.

The revolution in 2013 was a big scare for everyone involved, but the deep state seemed to reassert itself and things went back to normal quickly. The only drama seemed to happen in government buildings in Cairo and the stock exchange in London. Activities actually continued at the mine site during the supposed week-long “shut down” imposed by the transitional government during the revolution. The mine was far from any people who weren’t entirely committed to seeing it continue.

In 2015, a new problem started to appear. The company was earning large profits and paying steady dividends to foreign stockholders, but was paying no tax to the Egyptian government. The tax agreement was to pay fifty-percent of profits after the company recovered capital expenditures for exploration and development. That plan worked well in oil and gas because the oil fields were large and geologically simple – development costs were significant, but not ongoing. Gold mining was different.

The company operating the Fadil mine was spending more and more on development every year. This helped increase the supposed life of the mine and the company’s market capitalization, but it also helped the company avoid future taxes. The company had a large cache of historical development expenses and every new dollar spent on development pushed taxes further and further away. The company had seemed to have found a loophole and Ahmad wondered if this explained the City financiers’ enthusiasm for securing this particular tax deal in the first place.

Ahmad kept his mouth shut and enjoyed the ride. He was becoming rich, but felt conflicted because he saw a lose-lose situation developing for his home country. New investors stayed away from gold mining in Egypt because of the sticker shock on the marginal tax rate: “Fifty percent!? No, thank you!”. Yet the Egyptian government was receiving no tax revenue from the Fadil mining and likely would not for a long time. He saw the situation developing into a stalemate where he was one a few beneficiaries. He was uncomfortable.

In 2019, things went from bad to worse as the Fadil mine finally started to run out of room on its tax credits and it became clear they had over-developed the mine. The mine would have been able to sustain the company’s operations at zero taxes, but paying fifty percent of profits was going to be a huge problem. Ahmad continued to distance himself and position for what he thought was coming.

In January 2020, it happened. The company behind the Fadil mine started to collapse. The first thing they did was sell non-core assets and Ahmad was first in line to buy the package they referred to as “A7-B5”. To him it was still Abayomi, the bringer of joy.

Ahmad quickly closed the deal to buy Abayomi himself. By March 2020, he was on the ground again with a new camel named Ibil. He was ready to explore the land with modern techniques and brought some new partners from Vancouver to help him.

One morning in March he was making his way back to camp after a night of exploration when he saw his company’s helicopter speeding out over the vast land package. It was full of high-tech sensors and even had some small drones that he would operate from his cool room at camp during the heat of the day. “Now this is exploration!”, he said to Ibil as he trudged through the sand.

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I hope you enjoyed reading this short story as much as I enjoyed writing it. I was inspired to write this short story by the book “Speculator”, written by Doug Casey and John Hunt. My stories are fictional, but are meant to reflect some of the facts of reality today and convey some sense of what could happen in the future.