This article shares a unique opportunity I encountered at PDAC 2018. With the demographics at play in the Western world, there is a need for younger people who will take up the mantle of older generations. Some of the ideas we young people find may look different from what we're used to and this interview presents one of those ideas. It's certainly not like anything I've seen before, but aspects of it make a lot of sense. It's my pleasure to share an interview with John Rothermel and Neal Hawkins with you.
Simply put, the idea of the Silver Nickel Company is to secure ownership over patented mineral claims in Arizona that have potential salvage value as real estate.
There is lots to unpack about that simple idea.
First, note that these guys amassed a portfolio of special mineral claims with their own money that gave them a chance at great upside of a mineral discovery but covered some downside by allowing them to sell the land for real estate development. As a mining bug, it would be a tragedy to see all that land get lost to urban development because they're not making these patented claims anymore! They imbue the owner with special rights. If you think of the financial-legal dimensions of mining, those rights are valuable.
There are questions around any particular claim over whether you can amass a sufficiently large land holding around it to ever unlock the value associated with the mineral rights, but the premise of Silver Nickel is clear.
This kind of "land bank strategy" makes a lot less sense with claims that are staked in the modern legal framework. It's much more common for such staked claims to lapse and become available for staking again. That's great for giving new people a chance to work up some land package, but it doesn't allow for someone to hold on to patented claims for hundreds of years because of the intrinsic value of the special legal rights.
If initial work programs with staked claims aren't successful, then it becomes hard to justify further exploration work and the claims lapse. Someone else may come around later and take another kick at the can -- sometimes it's the 3rd, 4th, or 50th person who comes onto a property who has real success -- but patented claims and patented mineral rights are a different story. They are a throwback to another time when citizens exercised greater rights relative to the governments. They won't just lapse and be available to be staked again -- they will be held by someone somewhere. The only question is whether the owners know what they have, what it could be worth, and if they have the means to undertake a meaningful exploration program? If not, they will they sit undeveloped or be sold as real estate plays.
These things sometimes get thrown on the trash heap and it's worthwhile to pick through them to see if there's anything of value hidden in here.
The guys from Silver Nickel haven't exactly thrown their claims on the trash heap yet, but they are motivated sellers. I've introduced them to one group in Vancouver and had two main pushbacks:
1, the claims were too small.
2, they are valued like real estate and that doesn't make sense -- they're too expensive.
The size issue is simple enough. As John and Neal describe in the interview, they hang onto the patented claims and know what land is available for staking around them. They can expand around some of these patented claim immediately for the right partner. It makes sense for them to restrict their holdings to the patented claims, but it may put them at a disadvantage if someone scoops some of the land they have in mind. Regardless, I'm comfortable that it's possible to assemble sufficiently large blocks around some of their patented claims to make something that works as a marketable exploration project.
The valuation question and influence of real estate is more complicated. It's fair that some of these claims may look more expensive than other patented claims with similar work history off in the desert nearby, but that speaks to what Silver Nickel is all about!
These guys are doing this with their own money. As they say in our interview, this isn't "other people's money". And I will go further to point out this affects what type of risks they are willing to bare. There's valuation risk and funding risk, of course, but the real killer here is liquidity risk. Buying land that could work as a real estate play provides a backup to the mineral exploration and decreases your liquidity risk. It provides them with another way out.
If and when the day comes that Silver Nickel winds down, the owners have a way out regardless of the mining market. The way out is the real estate valuation. It might break their heart to sell some of that land as real estate because they believe they're so prospective, but it's smart business from their side to pick patented claims that have proximity to urban development.
I suspect this liquidity risk could be a big deal. The Silver Nickel claims may look expensive relative to other patented claims out in the middle of nowhere with similar work done, but that other land may have no buyer! Or a small set of possible buyers who know what it might be worth and are willing to pay pennies on the dollar of that number, especially in a forced-selling scenario.
All that to say, if you bought one of these patented claims in proximity to a city and were forced to sell then you might get 95% of what you paid for it. In a rising real estate market, you might even get more! All for selling it as real estate as a worst case scenario. If you bought something out in the middle of nowhere for potential mineral values, sat on it for a while, and then were forced to sell it -- you might get 50% of what you paid for it. The cheaper claims may look like better value on the way in, but may look a lot worse on the way out.
It's really appropriate that the Silver Nickel Company focused on that possibility because most of these claims will be unsuccessful as exploration projects. That doesn't mean there's not a deposit in the ground, it's just that fundraising and doing the work is hard.
Silver Nickel have really covered themselves in the way they've designed the fundamentals of this business.
You can imagine how, if you were using your own money, you'd really want to make sure that you have a reliable salvage value. And just imagine how much more risk-averse you'd be if it was your retirement!
If it's somebody else's money, then you'd probably focus more on the upside. Your primary goal isn't protecting your downside, it's selling the dream of the upside. First you have to sell it to people who will fund the exploration work and then you have to sell it to somebody who will buy the whole thing!
After thinking on the Silver Nickel story, it's clear to me that they're onto something conceptually and it's worthwhile to look closer at their projects. Could any of them find new homes with groups in Vancouver or elsewhere in the world?
For the real serious speculators out there, I think it would be best to buy these things in a private company rather than taking them directly into a public company. You don't want to make too much noise about which patented claims your looking at first for fear of someone scooping you on the surrounding claims. Of course, you could stake them yourself if you're able to incur the expense.
The right private group may be able to take everything in Silver Nickel and then work on packaging them up into a series of properties that are more palatable for the public markets. That requires some serious funding and expertise, but it's such an interesting idea that I felt compelled to share it with you.