By Peter @Newton Bell, 3 December 2016
I had the pleasure to spend an afternoon with Suzette McFaul talking about Clean Gold, an exciting new business that is worth learning more about. As she said, “We're not a toll miller. We're private and the artisanal miners are going to do business with us because we have the relationships we need.” Based on her experience with SEF Canada doing community enterprise development, she knows what she is talking about.
Provided below is a transcript of a conversation with Suzette McFaul, SM, Sean Janzer, SJ, and myself, PB. We discussed the following question:
“It is exciting to develop new business model that provide opportunity to do well by doing good, but the Clean Gold model has some concerns; in particular, it is illiquid; the preferential returns structure limits upside for investors; Ecuador can be difficult; and there is a history of failure in public markets with toll-milling. What can you say to interest our community of ‘wild-ass speculators’ to be interested in your business?”
SJ: First, with regards to the actual investment -- it is illiquid because this is a private company. The fact that it's illiquid -- you can't get around that. This is a private company. The investment is composed of preferred shares and a debenture. Could someone buy them if you needed to get out? Absolutely. Can a company promise that? Never. We wanted to take the risk off the table as much as we could, that's the reason we would have a debenture and a preferred share. The debenture will be projected to repay all of capital and a balloon interest payment of 60% in the first 18 months. The illiquidity is, hopefully, not that much of a concern because it is an incredibly short timeline.
SJ: In terms of the preferential returns, the preferred shares are participating as if they are common shares. They are paid 15% of net profits. We cannot issue a dividend to common shares preferentially. We're talking about running this processing plan until the reserves are gone, so there is not any residual value where they would miss out and the common shareholders would win.
PB: Great. The 15% of profit goes to investors, any comments on the remaining 85%?
SJ: That is largely going to some original investors and the parent company, Clean Gold, which is actually operating the project. Everybody, including the joint venture and the preferred shareholders are getting paid first. The people who set it up and are running it are getting paid last.
SJ: The 15% can be misconstrued -- it's not a 15% coupon, like it could be with some preferred shares. This is a 15% participation. We're not looking at a 15% return on the original capital. You've got your original capital back and a 60% return with the debenture and then, based on our projections, you're getting a 20-25% annual rate of return on the original capital, which you already have back in your pocket. I don't want to get down the rabbit hole of running an IRR on it, but you can see that the returns can be pretty high over 5-6 years.
P: Those margins sound significant. Any comment on how long that operation might be in existence?
SJ: We wanted to run it for a five-year projection, even though we have looked at a ten year horizon. We don't want to be foolish and anticipate this is going to go on forever, but five years is a reasonable amount of time. It is likely to go beyond that.
PB: Does the preferred have an redemption date at all?
SJ: Nope, they wont' be retracted. There is no expiry date.
P: Great, thanks. For what it’s worth, I have found that illiquidity can be a helpful thing to have in some of your investments – not having to worry about Mr. Market as a business partner. And the potential returns sound significant, thanks for clarifying about that. Now, if can ask us to move on talk about Ecuador now.
SM: We recognize that it has been difficult historically for mining companies. Ecuador wanted to take a 70% windfall tax on mining companies, but I think they finally woke up and realized that was over the top. They weren't going to get any mining companies there and were losing out on opportunities to make a lot of money. The reputation of Ecuador being difficult is all about the Government stance. That's changed. With Lundin having taken over Kinross' gold project, there are other projects in there. Some of the big players are looking at going back into Ecuador. It is virtually untouched.
SM: The opportunity in Ecuador is huge. It is one-third the size of Peru. We haven't even started to explore it for mining. The government is now waking up and realizing that they should be mining-friendly. The Canadian Government now has a great relationship with Ecuador. Ecuador got into trouble with Peru, so they're looking to Canadians to come back down there. They're really opening the door.
SM: The roads may not be great, but you can get to most projects simply through dirt roads. Water -- there is abundant water. How many Latin American countries do we go to, where mining companies have problems with water? Mining companies should be looking to Ecuador rather than saying it is difficult.
SM: A lot of people say that Ecuador is scary, but there is no political unrest. Maybe there were a couple rocks thrown back in 1980. The World Bank has a measure for the difficulty of doing business and Ecuador does well there. EDC says it is a low-risk country. It's rated one of the best places to retire for Canadians and Americans -- why is that? It's not a difficult place to do business and we know that. We've worked with them in the past and we actually have experience working with the Ecuadorian Government. We're happy to go in there, we don’t find it difficult, and I don’t think people should be scared of it.
PB: Great, thanks. Let’s move on to talk about past problems with toll milling now.
SM: We are not a toll milling operation. Our model is completely different from any toll milling operation out there. Toll miners looked at it and realized there is a great financial model in taking ore from artisanal miners and processing it on their behalf. The toll millers also realized that the miners will get a better life out of it, but it didn’t work. Twenty five years of experience has taught us that you can't go into a community and tell people what to do. You create conflict when you do that. Not a good basis for a relationship.
SM: It doesn’t matter how much money you have -- the philosophy is that you just give someone some money, but what has that created for mining companies in the past? What is the biggest problem with mining right now? Social.
SM: You have a junior mining company that is public entity, saying "I'm going to help you, little miner. Just give me your ore and I will give you some money." Even if they were given more money than they had ever seen before, they still looked at the junior as a shark. They had no relationship. Sometimes human behaviour makes us take less money than we would get from working with a big company. The artisanal miners asked some of the millers: “why aren't you doing more for me? As a mining company, you may have a reputation in my country where you are going to take gold out of the ground that I was going to get myself! Are you kidding me? Am I going to have a relationship with you? No, thank you!”
SM: These juniors in the public markets had this great idea and the best intentions, but the failure was that they didn’t have the relationships. They didn’t have the security of getting ore. Our model provides us the security of getting ore. We're not a toll miller. We're going to be private and the artisanal miners are going to do business with us because we have the relationships we need. We have the expertise to continue those relationships.
PB: Yes, the experience of SEF Canada on the ground down there in Ecuador really goes a long way to help make the business model work. Thanks again. Any final comments about what people like me can find interesting and exciting in your business?
SM: Why would you be interested in our business? It's a great, quick, return on investment. We're working in gold -- it's a great commodity. We have the experience, the history -- we have the best team out there. We have the three pieces that you need to make a true business. We have the community operation -- 25 years of community experience. We have one of the best technical teams in the world. And we have the business team. I don’t think the current toll miners can say that -- they're miners! They're out there mining, that's what their expertise is. Our expertise isn't mining, it is gold processing, running a business, and taking care of the community. We're looking at it like a win-win situation all the way through. We're going to solve some environmental problems, we're going to make the community happier and healthier, and the phone's going to start ringing.
PB: Suzette McFaul! Thanks very much for introducing us to Clean Gold.
SM: My pleasure, Peter. Thank you.
