By Remy Blaire
Acquisitions made by noteworthy mining entrepreneurs and leading resource investors are watched very closely. Rick Rule, president & CEO of Sprott U.S. Holdings, spoke with Ross Beaty, serial entrepreneur and founder of Pan American Silver (NASDAQ: PAAS). As part of Rule’s ongoing “Know-Who” interview series, Beaty outlines the strategies he employed over the past decades to find success in building resource companies.
Beaty spent his early years as a geologist in the resource development business. After working for the large mining companies and coming to the realization that entrepreneurship and corporate development were a better fit for his energy and temperament, Beaty set off on a journey to find success.
Rule reminisces about the first investment with Beaty that his clients were exposed to and the lessons that were learned throughout the years. Both Rule and Beaty have experienced several commodity cycles and understand the importance of planning for the rebound in metals prices. They discuss timing and positioning as investors eye their portfolios amid broader market volatility.
Rick Rule: Equinox [Gold] was your first public vehicle. Unlike a lot of your peers in Vancouver, you never focused on a single asset. You always had the sense of building a multi-commodity company. Talk to us about your first public success. How did you build Equinox? What was the strategy? What mistakes did you make? What did you do right?
Ross Beaty: It was my first company. I knew nothing about public companies, nothing about the mining business as a public company vehicle, as a CEO of a company. I was learning as I went. I have a tremendous amount of energy, a lot of enthusiasm. I found I was a good salesman so I could create good stories and I could use them to sell stock, which gave me the money to pursue other various dreams.
I wanted to have a lot of eggs in a lot of baskets because I knew it was a high-risk business. If we had a lot of opportunities for discovery, we would probably make a discovery. This business is all about high risk and high reward. If you have many, many [high-reward] opportunities, the odds are you’re going to actually discover something that could actually make a buck for shareholders.
In public markets, given the fact of outsized risk, you want to be looking for things with outsized returns like 100% or 1000%. That’s the target that you should always have. I had dozens and dozens and dozens of projects. We had joint ventures with every company under the sun because if I could use someone else’s money on properties that we had exposure to, I felt that was like a zero-cost option on discovery. That worked because out of all those dozens of projects, we really only made one major discovery.
We had exposure to many, but we only had one major discovery, which was a classic story. We staked the property — one of our many, many explorations that we staked among thousands and thousands of square miles all over North America, the one property we made a discovery on. But we didn’t know that.
It was just one of the dozens of properties where we optioned into three parts. A big U.S. mining company drilled it. [They] spent a million dollars and drilled down to 500 feet. They were looking for an open pit target [but] found nothing, and gave it back to us. We were then approached by LAC Minerals, another big mining company. And they figured, there might still be something there that was missed. They drilled up to 550 feet and hit this 200- to 300-foot interceptive — [something] like a quarter ounce-per-ton, a real bonanza deposit. And that was the big discovery that launched that whole company to success.
In the meantime, we had a zinc mine. We had a gallium project, a lithium project back in the ‘80s. We were looking for lithium, before anybody even knew what it was. I was looking for lithium because I knew it was a battery metal and that someday this would be important. We looked for platinum and palladium. Found nothing. Spent millions of dollars of other people’s money on that search.
Gold Holdings Canada. We bought a gold mine in Nevada that gave us some cash flow and it gave us a cache as a producer. That was Buckhorn Mine. We then went and bought another mine from the Lundin family called the Eastmaque. We bought Eastmaque, which had the American Girl Mine in Southern California.
Neither of those made a lot of money but they gave us value as an operator. They gave us an income statement. And that was important too, to have a real mining company. The real value came from the exploration success. But in the meantime, [the cash flow from the mines and our market presence as a producer] covered the cost of our operations. That allowed us to finance to credible investors who wanted a company with a real income statement.
I made so many mistakes. The biggest mistake was spending three years trying to permit in California — a gold deposit called Zenda, which is in Kern County near Bakersfield. We spent three years. Rick, I remember taking you to that deposit. It had a gold resource at 50,000 ounces. It was going to be 3-year mine life for 50,000 ounces a year. I wasted three years of my life on that.
If I learned one thing from that [it’s]: If you’re going to be building a public company, go for size. Don’t waste your time on little things. They just aren’t worth it. If you’re trying to build a company, try to build something big because these big deposits can make big money. If you have the good fortune to have that exploration success or timing success, then you can build something significant.
Rick Rule: What constitutes big? Does that mean 100 ounces of annual production and 1 million ounces in total?
Ross Beaty: There’s no magic number of ounces. You can have a deposit that has 100 million ounces like Pebble (Northern Dynasty). It’s almost a goose egg of value if you can’t permit it and if you can’t make it work.
The number of ounces is just one metric. It’s the quality of the ounces, the location of the ounces, and back in the ‘80s, a million-ounce deposit was considered a world-class deposit. A million-ounce deposit was huge then. Today, everybody has million-ounce deposits. They’re a dime a dozen now.
On the other hand, 30 years later, the world uses a lot more gold. You need a bigger gold endowment to actually move the radar [in the sense of investor sentiment and market value]. I’d rather have 1 million ounces of high-grade gold than 100 million ounces of really, really low grade that you can’t make money on because that’s worth nothing.
I’d rather have a great deposit in say Nevada or Mexico, where you can actually mine successfully and is a great place to work, or Canada, for example, than ten times that in a place like Russia or other parts of the world that are just extremely difficult to mine in. Often, you build something and then it will be stolen from you.
Rick Rule: Let’s move on to Pan American, which, by anybody’s standard, was an unqualified success. I remember, with a lot of fondness, the first private placement in Pan American taking place at $0.50, and I remember the stock, not immediately but by stairsteps, going to $40, $45, or some number like that. It’s a highly successful operating silver mining company today.
You begin to depart from prospect generator and you moved into a different mode of operation: a producer, an acquirer, a consolidator. Was that an accident too or was that a considered strategy as a consequence of lessons from Equinox?
Ross Beaty: Good question, Rick. I spent nine years building Equinox and making all manner of dumb mistakes. But if there’s one thing I am: I’m a fairly quick learner. I learn from my mistakes and make other ones. I had all this baggage built up after nine years — chasing all over the world looking for things and blowing shareholder money — [and] I was determined not to do that again.
When I sold Equinox to Hecla in 1994, I really wanted to find something new. I wanted to keep my team and really start something fresh.
I started a silver company because I realized there really wasn’t a pure silver company for the market and I had a lot of very loyal shareholders at that time. They were willing to bet again.
From the very start, I wanted to build a silver company that would be a world leader. I always said I wanted to build the number one preeminent silver mining company on the planet for equity investors who wanted an alternative to mined silver bullion. So that was always our strategy. We don’t get there by just being an exploration company. You have to be an operating company. You have to have huge resources. You have to have large production. You have to become a real industry leader.
There are a few deposits in the world that are just amazingly rich and they are never-for-sale companies. Once they discovered them, they build empires around them, a handful of them.
I thought if we just put our heads down and acquire as cheaply as we could as many silver deposits, we would ultimately get there. I also thought the silver price would rise quickly because I looked at the demand-supply fundamentals and I thought the silver market was pretty much underpriced. And I thought that by the end of the decade, the price would double at least to $10 an ounce from $5 and everything would be fine. The tide will be coming in and I’ll be going crazy buying things all over the place and it will be a happy story.
Well, of course after six years, by 2000, 2001, the silver price went down to an all-time low in real terms. It went to $4.02 an ounce. So I was completely wrong on where the silver price went to that point. But we had actually gone and ran around focused on pure silver deposits, trying to build a really big company levered to the silver price for equity investors. And they came to us.
There were no ETFs at the time. We ended up getting wonderful premiums. We had some great successes in Mexico and Peru. We had a calamity in Russia chasing a huge silver deposit there, financing it and starting construction [only to have] it stolen from us. Fighting these thugs who stole it, and ultimately getting our money back and walking away wasted four years.
At the end of the day, after 20 years, we are now the second largest primary silver-producing company in the world. And I’m very, very proud of what we’ve achieved. It has been really a great run.
Rick Rule: Is it true that part of your thesis now is: the best place to explore for you is in the headframe of a mine? In other words, it seems to me like you’ve made 10 or 12 acquisitions that I can remember in the time that we’ve known each other where you bought a deposit which seemed marginal at the time and turned it into either a tier 1 or a strong tier 2 deposit. Is that a correct observation?
Ross Beaty: It really is, Rick. It goes to the philosophy of the company, because I knew there were silver deposits around the world that if we went – and this is in the 1990s where we did all our big acquisitions — when the silver price was low and the market was distressed, the values of the silver properties would be very low because there were so few of them around the world and companies just weren’t in very good shape.
So, it was an opportunity to acquire them very cheaply. We went all over and I think I’ve been to every silver deposit in the world. And because there are so few of them, it’s a rather small market. If you pick up a few, all of a sudden you become an important company.
We just picked up one after the other, after the other. Struggled through the bear market, and just barely — we had one operation. We bought a mine, an operating mine in Peru in 1995. By 2002, when the market took this [turn] sort of at the end of about a 5- or 6-year bear market, it was right [at] the bottom. Copper was at all-time low. Silver was at all-time low. Gold was $260 an ounce. And it was just, it was blood all over the street. Nobody could finance anything. That was when I was continuing to buy. I just bought and hustled and did all kinds of investment things to acquire properties and stay alive.
But we almost went under, Rick. We got to the point, at the end of 2001, I think, where we had three months of working capital. We were losing half a million a month in our Peru silver mine. Luckily, we had Bill Gates as a shareholder and he and a few others, including me, bought [something] like a year’s worth of working capital in a financing at a $3 per share price. Stock had gone up and then it came down. And that’s what saved us. I mean if we didn’t have that opportunity, we probably would have gone under.
And then what happened right after that financing, which was in early 2002, the market turned and we had just begun a glorious run which took silver from $4.02 an ounce right up to almost $50 an ounce by 2011. And in that time, we just opened mine after mine. We opened five mines in five years — all the properties that we had already acquired during the tough times. We had a great mining team in the company and they just built mine after mine after mine. [We] ended up with a mine in Argentina, three in Peru, two in Mexico, and one in Bolivia.
We had another small operation in Peru. We actually had eight operating mines by 2007. And that has held us in really good standing today. And as you said, we haven’t really done any exploration in terms of classic large exploration. Every one of the fields was the acquisition of a scrappy little thing or a mine that was shut down, and I just knew each of those mines had the opportunity for additional discoveries. They’ve all been going and now they all have reserve lives [that are] longer than they had when we acquired the mines.
So applying the model, the best place to look for new resources is where we already know there’s a lot. That has worked out really well for us.
Rick Rule: The second observation, that goes to both Pan American and Lumina, that I’d like you to comment on is the idea that amalgamators putting several projects in one company (getting the company larger, more liquid and with higher market cap) give you a lower cost of capital than your single asset competitor. Could you talk about that in the context [of] the strategies that you employed at Pan American and Lumina and the strategies that you’re employing today?
Ross Beaty: One hundred percent. For that, I would say there are horses for courses. And what you have to look at is the strategy of the company. If it’s a Lumina Copper (where you’ve consolidated, in a bear market, a whole bunch of companies into one kind of mothership) … you can build something that really is an option on higher copper prices. That’s kind of what it is in Pan American in the ‘90s.
We acquired all these properties in one company. We just couldn’t get enough because we were trying to be a world leader, don’t forget. And in Lumina Copper, I was trying to have massive, massive leverage to higher prices because I knew the market was going to turn and the price of copper was going to rise — marginal or zero-value copper deposits have higher value at higher copper prices.
So I went in these other properties which were marginal or worthless below $5, but would have real value [at] $10 or higher. That’s exactly what happened. But the Lumina strategy was to buy low and sell high. The strategy of all of the Lumina companies, there were ultimately six of them, was to acquire something cheaply, add some value and sell it. It wasn’t a plan to develop a copper mine because the cost of developing the huge copper discoveries that we had was $2- to $6 billion, and I had no interest in financing that size of capital. It’s just tremendously difficult. It’s tremendously dilutive. It just wasn’t a strategy.
That was one strategy for the Lumina Group: to buy low, sell high. To sell, that’s the key. And we did that. We converted $200 million of shareholder value there into $2 billion of real cash value to our shareholders. And that was a pretty happy story.
Pan American was completely different. With Pan American, we were trying to build a real company that would last longer than me. We were not planning to build a company that we could sell. In fact, what we wanted to have is a premium on our share price so high that we would be immune from takeover by anyone else. And that’s pretty much what happened.
Today, it’s a different story because the company today is a large producer. It’s measured on its EBITDA, on its earnings, its growth, its cost per ounce … all of those things that you compare, say a Pan American to a Hecla or to a Coeur d’Alene or [to] a gold company. As a large, large company, that doesn’t have a lot of exploration leverage [or any] at all, it does have price leverage but not as much as say a grassroots exploration play.
So those were different strategies and I would say we executed pretty well and both strategies had worked.
Rick Rule: I think it’s an interesting observation when you talked about horses for courses. Talk about the fact that you amalgamated a bunch of assets in the copper business and then disaggregated them, sold them all separately. Talk about how that came to you and why it was appropriate at the time because [of] the circumstance that you talked about. If my memory serves me correctly, the first offering in Lumina was $2?
Ross Beaty: It was $1.
Rick Rule: If my memory serves me correct, the liquidation was in the sort of $140 range.
Ross Beaty: Yeah, it was $100 or something. It was a dollar to $100, I think, approximately. If you hold every share and if you got everything, yeah.
Rick Rule: Nobody is naïve enough to believe that all of the stock I bought for a dollar, I kept to a hundred. In the first instance, how did you decide to go into copper business? I know the story, but explain to me why when nobody wanted to be in the copper business, you did. How did you know the copper price was going to go up?
Ross Beaty: Well, I am a serial entrepreneur. It was driving me crazy, the blood in the street and in my own world with Pan American Silver. Things were just awful. Pan American was a producer of silver and zinc. And the zinc price has just tanked. The silver price was tanking. We were losing money. We were almost bankrupt. I tried to keep the mothership alive. We had this disastrous experience in Russia that blew a lot of time and effort and it was really, really tough in 2001. That was the bottom and then the end of an era for the whole business at [the] end of 2001.
And I just tried to say, “Look, I know it’s going to turn. This is a cyclical business. I know it’s going to change. How could I be even more exposed to the turn? How could I build value that’s going to come when the markets turn, when the bear market turns into a bull market? I don’t know when it’s going to happen but I know it’s going to happen.”
You can be someone who puts his money where his mouth is. And I decided that the bellwether of the economy was copper. I’d just been to China. I knew what they were doing. The place is going bananas in terms of commodity consumption and growth. And I just felt I could have done it with zinc, maybe, or lead. Who knows what? Iron or coal? Almost anything at the time. I already have my silver play. I wasn’t going to do another one of those obviously. And Pan American was a precious metal company. It didn’t really [appear] that gold was the right thing to get into. I didn’t want that, those kinds of conflicts.
So I decided to build a copper plant. And because it was a bear market, Rick, it was a golden opportunity to buy. That’s when everybody was selling. Why? They didn’t think copper had a future. Nobody wanted to hear the word copper.
The majors, like BHPN and Phelps-Dodge, were saying, “Oh, we’re going to control the price of copper and we’re going to keep it so it’s low enough that it would not encourage new supply and it’s high enough that we’re going to make a little bit of money with the best deposits in the world.” And of course, that’s a pile of nonsense. I heard that and just laughed.
So I went around and bought all these copper deposits in the bear market, and the bear market lasted for two years. It ended in 2000, well 2002 for gold and 2003 for base metals. Well, once it turned in 2003, we had just listed the company — that was when we did the dollar IPO financing. Just by … I mean none of this is skill really. Markets are pretty predictable. Anybody could have [made] this call on copper. But we had accumulated by that time. We had been very aggressive in going out and buying all these copper deposits and putting it in one vehicle.
Well, as soon as that copper price took off, the whole strategy changed from buying to selling. But before we could sell, we had to actually prove these deposits had value. To do that, you explore a little bit. You update the resource. You put some economics around the resource. You get rid of any fatal flaws in the properties. You secure the land title. You get rid of any social problems, if they exist, [by dealing] with them in a good way. You make sure the tax receipt is right. A lot of these things have little problems. You just solve those problems. And then you basically take the project, wrap it up in a box, tie a beautiful bow around it and then put it for sale. And we did that four times and we had massive, massive successes.
Rick Rule: Maybe it’s partly markets, maybe it’s partly your skill as a storyteller, it amuses me that your cost of capital was lower when you amalgamated them. And your return on capital employed was higher when you segregated them because, it’s probably true that, had you tried to sell all six companies in one wrapper, you would have received a discount … if the market proceeded to do that.
Ross Beaty: For sure, Rick. I mean the Lumina story was just an absolute textbook example of really nice financial engineering through the aggregating and then the disaggregating of separate vehicles — individual companies, each one property per vehicle, real value. [There was also] successful exploration, where we took [known resources] around, as you put it, the headframe and just made these things bigger. We tripled their resource in many cases.
If you drill around these huge copper deposits, typically you find a lot more. And that’s what we did. We took properties, that were drilled [and dropped] by five other major companies because they declared them worthless, and just drilled a little bit more and added to the value. But the magical thing in all this was the fact that the tide came in. The copper price went looney. I mean the copper price went looney from $0.70 an ounce in 2002 to ultimately $4.60, I think. That was the high in 2007. And then it went down like a rock in 2008-09 [before] bouncing back up to over $4 again in 2011. And by that time, we were pretty well out of the business.
Sprott Media will publish Part 2 of this interview ‘Rick Rule Investing “Know-Who” With Ross Beaty’ on the web site. Check back soon for the conclusion of the interview segment.