Read on for a transcript of an extended conversation with Mr. Kerry Knoll, Executive Chairman of GENERATION MINING (CSE: $GENM). Thanks to Jeb Handwerger for encouraging me to have look into this company!
Peter Bell: Hello, my name is Peter Bell and I'm here with Mr. Kerry Knoll, Executive Chairman and Director of Generation Mining. Hello Kerry!
Kerry Knoll: Hi Peter.
Peter Bell: Great to hear about the company here for the first time, myself, and to read your biography on the website. It mentions that you've co-founded several successful mining companies over 35 years, including Wheaton River, Thompson Creek, and Glencairn Gold. And you worked as an Editor of the Northern Miner Magazine. What a biography!
Kerry Knoll: I've had a lot of fun over the years.
Peter Bell: Amazing. I don't think I've ever talked to anybody who is a former editor of the Northern Miner.
Kerry Knoll: It was a lot of fun doing that for a while.
Peter Bell: The grounding in the mining industry that must have given you -- quite the perspective to really tap into the history and knowledge within the people at that magazine.
Kerry Knoll: The thing that fascinated me the most was interviewing the CEOs, like you're doing now, for a whole bunch of mining companies -- junior and major mining companies all over the spectrum. This allowed me to learn what makes a successful CEO and what makes a successful mining company. I was able to watch startups evolve over a period of many years and that was very useful in starting my own companies.
Peter Bell: Watching them as a journalist is different from investing in them. There's all kinds of complicated issues that come along with the conflicts of interest in the junior mining business, I think outsiders sometimes scratch their head and wonder if we're all crazy! I wonder about the capital allocation side of the business? Looking at Wheaton River, you've been involved with some pretty prescient groups that understand the need for financing and creative ways of doing deals in this business.
Kerry Knoll: The companies that I founded over the years have raised around $1.6 billion dollars. I've done my fair share of raising money, but the thing that excited me when I first got into the journalism side of this business was the junior mining companies. There were probably a thousand back then and there's probably two thousand of them now. What I define as a junior is a company that's not producing any metals at this point. What I found was that, first of all, there is a very low conversion rate from a junior mining company to a producing mining company. Very, very few companies ever make that transition. I was curious as to why that is the case.
Kerry Knoll: Not long after I crossed the road and got into the mining business itself, I got a question from Frank Mersch, who was one of the great fund managers back in the day at Altamira. He was new in the mining business then, too, and he asked me, "Why are mining companies so badly managed?" It was a really, really good question. Something I've been thinking about for the next 35 years!
Kerry Knoll: The conclusion I've come to, first of all, is that mining is really difficult. It's not an easy business. Every mine is different. Starting up a mine is a huge talent in itself. Financing a mine, building a team with people, timing the commodity cycles -- all of these things go into building a mine successfully. As I used to say to people, "If you're in the oil business and you discover oil, then your problems are over. But in the mining business, if you discover a mine then your problems are just beginning!" The average period of time between a discovery and the first production on a mine has been calculated at 11 years. That's a long time.
Peter Bell: And that's from discovery! The years and years of effort that go in before discovery itself and the long odds of discovery, right? Terrible!
Kerry Knoll: That's right. My niche in the business has not been to put luck into my business plan. It's hard enough without having to rely on luck.
Kerry Knoll: I don't rely on trying to discover a mine. My career has been focused around several things. First of all, figuring out what commodity is "the thing" to be in. I've been pretty good at that over the years. I got into molybdenum in 2004 and by 2006, it had quadrupled in price. That was Thompson Creek. I got into lithium in 2009 -- I was way ahead of people on that one. I got into zinc in 2016 and it had doubled in price a year later. Now, we got into palladium. And palladium has, as you know, also doubled in price. I've been good at picking the right commodities.
Kerry Knoll: That's the first thing you have to decide, what commodity are you going to be in? You look at the whole macro picture of the world and figure it out. You can do it -- it's not it's not rocket science.
Kerry Knoll: Then, what next? Hopefully you've picked a commodity that hasn't really taken off yet so that you can do the second thing well. You look around for a deposit that you can buy! And that's where you need to have some money. For example, we bought Pine Point off of a receiver for $6M six million in 2016. We bought the palladium property for $6M six million in 2019 -- we started negotiating before that, but it took quite a long time to close. You have to be able to come up with some money on your own and that's kind of hard for a startup.
Kerry Knoll: Then, the next step is to assemble a team, do the financing, do the feasibility study, and then build the mine! That's the order I do it in and I've done it five or six times.
Peter Bell: Wonderful. Thank you. Thank you. Seeing your title as "Executive Chairman", it's interesting to me that we have so many of those in the junior mining business. Real, hands-on people who are representing shareholders on the Board but still on the front lines of the business.
Kerry Knoll: I've tried to retire several times and I've not been successful at that.
Kerry Knoll: When I see a deal and it just looks perfect, I want to get involved! When I've got some relevant expertise so that I can bring something to the table -- that's why I'm back.
Kerry Knoll: I've only recently transitioned from a non-Executive Chairman role to Executive Chairman. That's really because I want to be more involved. I want to see this thing come to fruition.
Peter Bell: Good for you. That's a really bullish sign, as well. And the Marathon palladium project -- 200 square kilometers?
Kerry Knoll: Yes, I don't think I've ever had a property that big before. It's necessary to have the whole property because it's one complex of rock. Call it a geological intrusive such that everywhere in that 200 square kilometres is prospective.
Kerry Knoll: When you own claims in Canada, you can keep them based on spending money on them. We're going to be able to keep these claims for many decades based on the work we're doing, so we might as well own them.
Peter Bell: Amazing. When you talk about a single deposit that has a strike length of three kilometers -- the scale is a little mind-boggling.
Kerry Knoll: There's a few of those in the world, but not a lot of them.
Peter Bell: And palladium in Ontario -- not a metal-region combination that I typically think of but, obviously, one that is very significant here.
Kerry Knoll: No. There's only one other primary palladium producer in Canada: North American Palladium. Impala recently made a takeover bid for a billion dollars for that company, which is in the same general geological setting as we are located. It's not that far from us, approximately a couple hundred kilometers. It's all part of what's called the Midcontinent Rift, which is a geological formation that's been responsible for a lot of different mines but only one palladium mine -- that's North American. We're hoping to be the second one.
Peter Bell: Exceptional. And there's mention of an open-pit.
Kerry Knoll: We have seven million ounces of palladium-equivalent, which is worth well over US$10B ten billion dollars.
Peter Bell: New all-time-highs!
Kerry Knoll: All of those ounces are in an open pit. We've also got two other deposits, which will add a couple of million more ounces, we expect, once they're put into a resource.
Peter Bell: Wow. Where do you start, then with all of the things that you could do? And with palladium hitting new highs?
Kerry Knoll: I hope palladium isn't peaking early. I don't think it is. I look at the fundamentals of palladium and I don't see any solution. There's very little extra palladium capacity coming on in the world. The only ones I can identify that are virtually certain are an expansion at Stillwater in the US, an expansion at Norilsk in Russia that will be quite substantial but is taking seven years, and the startup of the Platreef mine by Ivanhoe in South Africa. Those are the only ones in the next four, five, or six years that I can see coming on to increase the palladium supply. Meanwhile, the demand goes up every year.
Kerry Knoll: Palladium is now almost 100% a hundred percent used in catalytic converters, which clean the exhaust from automobiles. That's been happening in North America for a long time, but the catalytic converters in China and Europe have been performing much more poorly. Over the last several years, China and Europe have been increasing the standards, which means the the amount of palladium going into each automobile has been increasing. That has gone now from an average of 3 grams per car to 5 grams per car of palladium. That doesn't sound like very much, but that's a 60% increase over the last several years and going into the next several years. The consumption in the world is going up, but the supply is flat. That's why you've got a high price. There's no new supply coming on and no sign that governments are going to start letting automobiles put toxic air out any time soon.
Peter Bell: Thank you. I had heard in the past that platinum was kind of primarily driven by a "diesel-engine-catalytic-convertor" story and palladium was more driven by battery usage "electric vehicles". I'd heard that distinction made at some point, but I never really saw any data to validate that.
Kerry Knoll: What you're saying about that is not correct. No.
Peter Bell: Thank you, Kerry.
Kerry Knoll: You're welcome. Palladium is about 87% used in catalytic converters for gasoline-powered cars. Platinum is different. About 30% of platinum goes into diesel catalytic converters -- that's everything from locomotives to semi trailers to diesel automobiles. They're both used, but platinum doesn't work as well as palladium in in gasoline-powered cars. That's why it's preferred. Even at these prices.
Peter Bell: Thank you. Such an important distinction. And palladium can set new all-time highs on a per-ounce-basis, but if you're using three or five grams per car then the incremental costs are still very small in context to the whole vehicle.
Kerry Knoll: Yes, and it's important that the supply is flat. It's not exactly true -- there has been increases in recycling. Most palladium gets recycled. The recoveries on recycling are low, but some of it gets recycled in the end. There's been double-digit increases 10, 12, or 14% in recycling each year. That's adding a few hundred thousand ounces increase every year. There is a slight increase in supply from that, but that is limited to the amount of availability of dead cars.
Peter Bell: Yes, and GENERATION MINING has the Marathon palladium project. Can you tell me how far back in time this deal started taking shape?
Kerry Knoll: We started looking at palladium in 2018. One of the challenges for us was a huge shortage of projects around. I was amazed at how few there were, worldwide, that were any good. One thing that I think I'm pretty good at is looking at a project and telling you whether it's got a chance of being a mine or not. Of course, most projects out there have no chance. We looked and looked and looked. Finally, we came across this Marathon palladium project. I knew about it going back to my days at the Northern Miner in the mid-1980s when I was covering the discovery of Hemlo.
Kerry Knoll: Now, Hemlo is and was a large gold mine in Northern Ontario. I think they've mined about 25 million ounces out of it. I was covering that story for the Northern Miner through the first four or five years that I was working there. It was a long-developing story and there was a massive staking rush at the time. That staking rush included a copper discovery by Anaconda from the 1960s, which has turned into Marathon palladium. I've been aware of this project ever since 1985!
Kerry Knoll: I was actually on the property in 1985.
Kerry Knoll: I have followed it over the years. It got taken over by Stillwater, a big American mining company, in 2010 for $118 million dollars and Stillwater started to develop a mine. Then, they realize it probably wasn't economic at $500 palladium. They put it on the shelf and it got taken over by Sibanye in 2016. They kept it on the shelf. We approached Sibanye in December last year and asked them if they would consider selling it. They said they would. It took a long time to negotiate a deal as they were negotiating their own takeover of Lonmin at the time. They were busy, but we managed to come to a deal. We think it's a fair deal -- a good deal for us as a junior company. We want to take this project to the next step.
Peter Bell: I see they own 12% of GENERATION MINING at present. Is there any anti-dilution right or anything like that?
Kerry Knoll: No, they do not have any anti-dilution rights. Let me explain the deal terms in more detail. We own, currently, 51% of the property. By spending $10M ten million dollars on the project over the next four years, approximately, we can earn an 80% interest. They're going to have a 20% interest. After that, they're gonna have to put up 20% of the money and we'll put up 80% of the money going forward.
Kerry Knoll: They also have the ability to buy-back part of their interest. They can buy themselves all the way back to 51% ownership, but they would have to pay the joint venture an amount equal to 31% of the capex to build the mine. That's gonna be a lot of money.
Peter Bell: 31% of the capex, I've never heard of that number as a back-in. What an interesting line in the sand. I've heard about paying back the exploration budget or a multiple of the exploration budget to that point, after some number of ounces is delineated but your deal structure is so much more clearly geared to production.
Kerry Knoll: Yes, and we anticipate the production cost to be somewhere between $400-600M four and six hundred million dollars. That wide variance is based on how big we want the mine to be from the start. If we want to do a smaller mine, then it'll be around $400 million. Either way, 31% of that is going to be a big cheque.
Peter Bell: I see a PEA study underway in Q3-Q4 2019. I wonder -- are Sibanye involved in that planning exercise?
Kerry Knoll: No. We're doing that on our own. We will involve Sibanye from time to time. For example, we will be producing a concentrate which has to go to a smelter. Sibanye is one of the largest platinum group metal producers in the world and they have a lot of experience dealing with smelters and we can we can look forward to using some expertise from them on that, for example, but right now we're doing this on our own. We've got our own team of engineers and geologists and financial people putting this together. We've hired an outside firm. We haven't haven't started the study yet. That should be starting any day now, once we sign the contract. We've let it be known that it's happening. It's not news that we're doing one.
Kerry Knoll: We expect the PEA will guide us towards the final feasibility study, which we want to do next year. Since a feasibility study was already done in 2010 on this project when palladium was only $321 dollars an ounce, we think that this is going to be very economic at foreseeable palladium prices.
Peter Bell: You have a lot of opportunity to cherry-pick the strongest part of the different pits, right? There's so much you can do with optimizing production schedules and things with the more you know about the ore. Glad to hear you mentioning sampling and testing material. I wonder where does that fall in your plan of attack?
Kerry Knoll: We're doing several approaches. We've done a lot of drilling and one of the things we're doing is the PEA. The second thing we're doing is something that the Sibanye required as part of our deal, which is to put $10M into the project over four years. That money is going towards a couple of things.
Kerry Knoll: One of the first thing we did was re-drill a bunch of holes into the original deposit to get some ore samples for metallurgical testing. Most of the metallurgical testing done on this property was done in 2007 and 2008. It was very well done at the time, but there have been advances in metallurgical testing since then. We're going to be able to use some of those new things and hopefully improve recoveries.
Kerry Knoll: The recoveries in the original feasibility study were around 77-78%. Some work done by Stillwater in 2011-12 brought that up to the low 80% range. We want to make sure we can prove that and keep that recovery. The low 80% range is actually a very good recovery rate for palladium.
Peter Bell: Certainly. Thank you.
Kerry Knoll: The other thing that we're doing is a 12,000 meter drilling program. People are saying, "Well, you've got 7 million ounces and you're going to 9 million ounces -- why do you need more?" Well, what we would love to do is find a higher grade place to start. That's what we're looking for. The grade we have is good. The grade we have is going to make a lot of money, but if you can have a higher grade for the first year, say, then you may be able to payback all of your construction spending in that first year. We're looking for that.
Kerry Knoll: One of the things that has happened over the last decade is that budgets for drilling have been very limited on the property because the companies that owned it were not particularly interested in it when the palladium price was low. Thankfully, the team on the property spent time during those years doing prospecting and groundwork. They discovered a bunch of new zones and now we're drilling those.
Kerry Knoll: If you saw the press release that came out just this morning, then you will see that it lists four zones that we are drilling that have never been drilled before. We're able to test those for the first time. We are pretty excited about them because we think that any one of them could be this high-grade deposit we're looking for.
Peter Bell: Exceptional! Yes, and October 8th, GENERATION MINING completes 21 drill holes. The intercept of +8 grams per tonne palladium over 8 meters -- wow. That's a pretty nice intercept. Geordie, Sally, Boyer -- all these different areas in addition to the Marathon deposit! These new targets right like Geordy East, Geordy North, the West Feeder Zone. Great.
Kerry Knoll: We've got a lot of targets. It's a big property. The interesting part is that there's huge swaths of that property that have never even been looked at because the topography is very rough. It's not that easy to get around. To go prospecting, you need to use a helicopter. And that's expensive. The work has just not been done because there's been so much property that is accessible that has been producing new ounces that they haven't really taken the time to look out there.
Kerry Knoll: The Boyer discovery that we're drilling right now, for example, was only discovered by putting a road through the property to one of the other zones in 2016. We've got seven or eight holes into it already. There are huge parts of this property that haven't been looked at and it's going to be expensive to do it, but we're gonna start.
Peter Bell: Certainly. And geophysics, as well. I'm glad to see the seismic gravity methods working for targeting at depth, potentially. Passive seismic is a fairly low-cost method.
Kerry Knoll: Yes. Passive seismic is a new thing in the minerals business. It has been used for years in oil and other things. It is very low-cost and very unobtrusive to the wildlife on a property. You don't have to have any big bangs or anything to get a reading, it's very quiet.
Kerry Knoll: The thing we like about the passive seismic is that most geophysics can't go much below about four or five hundred meters. Passive seismic can go quite deep, which is why they use it for oil. That's giving us some new insights into some of the zones on the property.
Kerry Knoll: On a property like this, where the deposits have been formed by, literally, magma coming up in a volcano -- being able to go down deeper into that source and possibly finding other deposits at depth is a huge possibility. That work has never been done at on this property. No-one has ever gone below 500 meters till we came along.
Peter Bell: Wonderful. New things in old places! Good for you. I'm very surprised, also, to hear mention of a "nugget effect". The variation in PGM content is largely attributable to the nugget effect, as in the news release today. To hear you speak about the search for high-grade, well that's it in a sentence!
Kerry Knoll: When you're dealing with rock that has got 1 gram of palladium per tonne, say, you're talking about not a lot of particles. That's one part per million. That one part is going to be your nugget.
Peter Bell: Not a disseminated gold situation here. It sounds like an extreme nugget effect.
Kerry Knoll: I wouldn't call it extreme. It depends on the deposit. The W Horizon, where we mentioned the nugget effect, does have the nugget effect to some degree. The Main Zone, which is part of the Marathon deposit, is disseminated. It's much more like the gold. And it's also got copper in it. The different zones are different.
Kerry Knoll: These deposits were formed about 1.1 billion years ago, but they were formed over quite a long period of time. There were different pulses -- different eruptions, if you will -- of the various volcanoes and those different eruptions produce different types of mineralization. Some of those are nuggety.
Peter Bell: And some of them have been eroded to be showing at surface, as well.
Kerry Knoll: Yes, all of the known deposits outcrop on surface. Yes, a lot of them have been eroded away.
Peter Bell: For you as a junior, the passive seismometer is a great way to target things at depth, but I wonder about doing more of this prospecting work at surface. Again, I'm glad to hear you mention that the team was busy over some of the quiet years doing good prospecting work.
Kerry Knoll: That's basic geology! To me, it's surprising that there would be a deposit left in Canada that outcrops at surface, but there it is on the Boyer zone. We've already found one! There's a lot of looking to do on this property, yet.
Peter Bell: Maybe it's something to do with the palladium industry being somewhat niche and and consolidated in a few prolific entities. Looking at the ownership of this project, I think that they may have focused on Stillwater, instead.
Kerry Knoll: There are very few high-grade palladium deposits in the world. You can look in the area where the Merensky Reef is located in South Africa, or the Norilsk which is very rich in palladium but that is mainly a by-product of nickel and copper, and then there's Stillwater, and North American Palladium. There's not a lot else in the whole world, which is why palladium is so rare.
Peter Bell: And thinking about Stillwater, the company, focusing on their recycling business. That was a big story for the USA and I wonder how much that took priority over the Marathon. Did Stillwater ever do much on Marathon or was it something they just had in inventory?
Kerry Knoll: We have two staff who worked for Stillwater and understand a bit of the history. I can't speak for their decisions, but what seems to have happened is they acquired it in 2010, as I mentioned, for $118M. Then, they started to develop it towards production and spent, apparently, $35M dollars on permitting studies, which are all still intact and still usable.
Peter Bell: Wow.
Kerry Knoll: In 2014, they re-did it. They did a new feasibility study that was never released to the public, but it showed that the costs were higher and the grade was lower -- it just wasn't as attractive as they originally thought. At the time in 2014, mining was in the doldrums and it was difficult to raise money. They were looking at $600-700M to build the mine. That was in Canadian dollars and the Canadian dollar was at par at the time! They decided they were putting this on hold.
Kerry Knoll: Since 2014, very little work has been done. Initially, a lot of work was done by Stillwater and that's all work that's money in the bank for us because we don't have to re-do that.
Peter Bell: Certainly. And new to the markets, really.
Kerry Knoll: Well, it was "in the market" in the 2007-2008-2009 time frame but it was out of the market for a decade since then. Now it's back.
Peter Bell: Amazing. And the permitting spending that you mentioned there -- another mind-boggling stat. To think that they would have spent $35M or so on permitting work and still come to the final conclusion that it wasn't ready to go ahead yet?
Kerry Knoll: If you look at the numbers from that time, I believe palladium was around $500-600 an ounce. It wouldn't be economic today at those prices and it was not economic then. You need a price north of a $1,000 an ounce to have a mine here. Fortunately, we have one! It's $1,600 an ounce and in Canadian we're looking at palladium at $2,200 an ounce. Our cost is going to be under a thousand, I think. We've got a lot of room for profit here.
Peter Bell: And the permitting, again. I guess it's Sibanye who is the JV partner, not Stillwater?
Kerry Knoll: It's complicated. Its Stillwater Canada, which is a company that is owned by Sibanye. That's our partner.
Peter Bell: Okay. But that permitting work that was done -- is there some continuity from whatever entity that did that work to the project now?
Kerry Knoll: This is the same staff. The permitting process was never officially stopped. It was put on hold and all we have to do is restart it. How long it will take to get the permits? I can't answer that. In the mining business, especially in Ontario, that's always a question. We will be pushing it once we have the numbers from our PEA and we know where we're going in terms of size, cost, and all of those things. Then, we're going to drive on and restart the permitting process.
Peter Bell: Thank you. Thank you, Kerry! And Zebra Holdings at 12% ownership of GENERATION MINING. That's not a name I'm familiar with.
Kerry Knoll: That company is controlled by the family of Lukas Lundin, a very successful mining entrepreneur. One of the biggest in the business.
Peter Bell: Wonderful. Great to have their support. They seem to have quite a vision.
Peter Bell: And please can I ask about that high-grade sample from the Sally showing in the pitch deck? The 180 grams of total PGM and almost 9% copper -- was that at surface?
Kerry Knoll: Yes, that was a surface sample that was found on the top of the Sally deposit. One of the theories is that it did not come from the Sally deposit itself, it came from somewhere down below. The Sally deposit, itself, is not that rich so it may be a boulder that was carried up from a deeper source. That could be one of these deeper deposits we are looking for with the passive seismic. And that's why we did the passive seismic at Sally this year. We found some massive sulphides at Sally and we don't think they were formed in the deposit, we think they were brought up from below. If there is a deposit down below and it is rich, then it would be lovely to find it. And that's what we'll be looking for!
Kerry Knoll: We'll be getting our passive seismic results back in the later part of October. Then, if we generate some new targets, we'll be drilling them.
Peter Bell: Kerry, thank you very much for your time.
Kerry Knoll: Thank you, Peter.