“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” - Bertrand Russell
I’ll never forget my first bull-market mining investment conference. An “analyst” hosting a standing-room only workshop was banging the table about a 20-cent exploration stock, shouting, “They are going to make a massive discovery!” while attendees wrote down the ticker symbol.
I later learned the analyst had a big position in the company at 5 cents with warrants to buy additional shares at 10 cents and was already seriously in the money.
Unfortunately, no economic discovery was made and the stock fell 95% within a year as the commodity boom went bust. I ran into the CEO of the company, and we got to talking about the analyst. Casually, the CEO told me the analyst had sold all of his stock over 20 cents.
*
You will never hear analyst Joe Mazumdar bang the table for any mining stock.
He knows from experience -- spanning exploration, business development at majors, metals trading, research and more -- that mining is inherently risky, even when you think you have a sure thing.
Joe left independent brokerage firm and investment bank Canaccord Genuity in late 2015 to join Brent Cook’s Exploration Insights newsletter. He recently dropped by CEO.CA HQ to talk about it.
Before we begin -- here’s a quick look at Joe’s education and work experience, via Linkedin.
Education:
- Masters in Mineral Economics at Colorado School of Mines (2001-2003)
- Masters in Exploration and Mining at James Cook University (1992-1994)
- Geology degree from the University of Alberta (1983-1988)
Work Experience:
- Director of Research and Senior Mining Analyst at Canaccord Genuity (2012-2015)
- Senior Mining Analyst at Haywood Securities (2010-2012)
- Director of Strategic Planning/Corporate Development at Newmont Mining (2006-2009)
- Senior Market Analyst at Phelps Dodge (2003-2005)
- Consulting Geologist at Iamgold (2000-2001) and North Minerals (1998-2000)
- Regional Geologist at Rio Tinto Minerals (1994-1998)
- Exploration Geologist at Mount Isa Mines (1992-1994)
- Field Geologist at Trigg, Woollett and Olsen Consulting (1989-1991)
- Field Geologist at Noranda (1988-1989)
ETHICAL RESEARCH
In his six years as a sell-side analyst at Haywood Securities and later Canaccord Genuity, Mazumdar’s role was to write independent research to support sales and trading business in the sector. However, as recent cuts at GMP indicate, less and less brokerage revenue is coming from trading these days. The slack has been picked up by investment banking and underwriting (what little there is), which is essentially marketing, not research.
Mazumdar says he never felt pressured by his employers to write recommendations, but his calls occasionally came at odds with some at the firm.
“Every analyst struggles with it. Brokerage firms have several components that include sales and trading, mergers and acquisitions advisory, new issues plus research. These components are not necessarily incentivized the same, which drives different behavior. A sell-side analyst of junior mining companies tends to be at the fulcrum between the sales and trading departments whose clients are the institutional funds or retail investors whereas the bankers’ clients tend to be the actual mining companies. A lot of the pressure is on the research analysts and they can become the focus of the tension.”
He has a lot of respect for those that can endure the pressure and not have it affect their opinions or recommendations.
“It is difficult in the current market to add a company to a research analyst’s junior mining coverage universe if there is no revenue-generating model. An analyst may like a company and the potential upside but if the company doesn’t pay the street or the firm doesn’t have a relationship with the management team or board, formal coverage may be relegated to a lower priority.”
“Analysts should not serve as the cheerleaders for companies,” he says.
Joe seems relieved to leave behind the conflicts -- both real and perceived -- in his new role at Exploration Insights (“EI”).
EI is run by Brent Cook, a respected economic geologist, and makes money from subscribers paying for the research -- keeping no business with the companies it covers.
“Brent and I have the same vision for a product that will not change,” Mazumdar says. “In my opinion, it is an ethical research platform that is free of the issues of divergent incentives that others may have to deal with.”
In his first six weeks with EI, Mazumdar has already contributed several high-value stories, including a brilliant assessment of the geopolitical situation and investment climate in Argentina. In Sunday’s issue, Mazumdar and Cook discussed the true cost of streaming deals to exploration companies vs. traditional debt and equity financings.
Mazumdar provides an overview of the EI portfolio:
“We cover a few prospect generators that very few investors are looking at, as they tend to be illiquid. But in the current market environment, the issue is nobody is exploring. There are not many explorers with the relevant experience and technical expertise that are well funded to advance their prospects. One that we recently highlighted was Mirasol Resources.”
“I like the fact Mirasol is diversifying their risk at multiple levels by operating in two countries, Chile and Argentina, focusing on multiple deposit types and commodities in locations with different access and infrastructure.”
“You want a few of these prospect generators but it’s not about picking one. All of them we cover are ethical, they know what they’re doing, they have the relevant experience, they are focused, and one should hit something.”
“Then you have a pool of well-funded developers advancing their respective projects to near-term production. There are not many of these that make sense in the current environment. They require continuous diligence to ensure that their development timeline is proceeding according to plan and there are no red flags that have emerged while keeping a close eye on their working capital. These companies tend to be more liquid and can create short-term buying and selling opportunities depending on news flow.”
“The next level would be the junior producers that are actually making money in this flat gold price environment, such as Canadian producers Claude Resources and Lake Shore Gold. Both companies have either met or exceeded their 2015 guidance and continue to generate free cash flow while paying down debt.”
“We tend not to cover larger companies such as Newmont or Goldcorp because it’s too difficult to add value. There is a lot of risk in a single-asset junior miner, but at least I can get a significant amount of technical information. It is harder to get that kind of information from a major company.”
SOME ADVICE FOR GOLD MAJORS
He did have advice for gold majors, however.
“There’s a geological limit, I believe -- somewhere between 3 and 4 million ounces of annual production -- where a gold company stops being able to grow at a decent rate. The larger projects that are needed to ‘move the needle’ tend to require higher upfront capital expenditures and create a bigger footprint that can be harder to permit and obtain social license. Currently investors are much more focused on return on capital than growth.”
“Goldcorp could easily go the way of Newmont or Barrick, who have been involved in divestments to repay debt as some of their projects have been suspended due to local issues including Pascua Lama and Conga. Goldcorp’s production profile is getting to the point where it will be too difficult to grow or even replete. They may have to re-think their strategy with their new CEO. I would choose quality over quantity.”
Mazumdar learned how gold majors allocate capital while in business development and strategic planning at Newmont. He’s proud of some of the deals Newmont didn’t do.
But there’s one deal that did get done which he still regrets. “I still feel for doing Miramar,” he says. Newmont sold its royalty portfolio - which resurrected Franco-Nevada - to raise cash to buy the Nunavut gold developer and its Hope Bay project for $1.3 billion.
“That investment went to zero whereas Franco Nevada currently trades at US$7 billion and is now only about 20% below the value of Newmont Mining.”
“Hopefully I learned something.”
Mazumdar, who grew up in Winnipeg and Edmonton, is Bengali and moved from India when he was four. He became interested in geology as an excuse to travel and eventually married an Argentine geologist. He cut his teeth before the mining boom of the 2000s, which he says is creating demographic problems in the industry.
“People who only know the recent super commodity cycle had no concept of the other side, they are getting a taste of it over the past few years. Slowly we’re weeding people out that were more interested in mining the market rather than the actual commodity, they have the flexibility to do other things whereas I do not (laughs). The current market demands a value add at every stage and all need to deliver.”
COMMODITY AGNOSTIC
Mazumdar is commodity agnostic when it comes to evaluating investments.
"If somebody is doing the right thing with an asset that makes sense in the current price environment, then that’s the one I want to own regardless of the sector."
“You always want to be in the lowest cost quartile to cope with price swings and these tend to be the higher-quality assets.”
Junior companies and investment bankers pitch their projects using discount rates of 5% that are unrealistic, according to Mazumdar. Discount rates are used to risk-adjust future cash flows of a mining asset. Given the volatility of the market and uncertainty inherent in many projects, is 5% enough?
“How conceptually can you expect to get a double-digit return from an acquisition if you paid a 30% premium on a 5% discount? How is that ever going to work? The only way is if the company is valuing more exploration upside or applying a higher gold price. When these projects fail to deliver on the upside or the gold price is not there, companies start taking impairment charges and write-downs to compensate for their irrational exuberance.”
The conversation turns to Rubicon Minerals, a gold developer that saw more than 98% of its equity price wiped out in the last year after it attempted to build a mine in Red Lake, Ontario from a PEA without a Feasibility or Prefeasibility Study. Mazumdar had previously recommended the stock, and I wanted to get his take on it.
“There was a lot to like,” said Mazumdar, who visited the gold project three times. “It looked like a nice deposit in Red Lake, an excellent place to find high-grade gold as Goldcorp were having success with their mine. Rubicon had a big land package and it was in Canada. Also, Royal Gold and the Canada Pension Plan had put their stamp on it. The downside risk was the project was advanced on a scoping study and not a feasibility study. The problem here is that a lot of the inferred ounces were at depth which would have been too expensive to drill out to an indicated category.”
“The former management team at Rubicon Minerals was awarded the Northwestern Ontario Developer of the Year award (April 2010) and the Colin Spence Award for Excellence in Global Mineral Exploration (AME BC). And they raised, predominantly in equity, about C$850 M since 2002.”
“Everything seemed to be going well when they raised some debt with the Canadian Pension Plan. However, by mid-2015, I found their second-quarter filings rather light for a company that was expected to be in commercial production by the first half of 2016. Also, they had spent a lot more on capital development than forecast.”
“When I downgraded the stock due to the lack of disclosure, Rubicon highlighted some issues underground. So disclosure appeared to be less than complete and management credibility became an issue. Then the former CEO spoke at the Denver Gold Show providing little indication that the Phoenix gold project was in violation of its ammonium emissions from its plant. Another disclosure issue.”
“The story got ugly quickly and they recently stated their resources are about 80% less than what they previously estimated. SRK, a reputable consulting firm noted in the 2013 PEA on the Phoenix gold project, that they thought the drilling data was “…sufficiently reliable to interpret with confidence the boundaries of the gold mineralization and the assaying data is sufficiently reliable to support the mineral resource estimation.”
EI subscribers knew Rubicon was in trouble October 11 when Cook published a detailed letter about
problems with the deposit. That turned out to be a timely call -- Rubicon’s shares have plummeted from 68 cents to 3 cents since. Anyone interested in reading that report can contact Exploration Insights via their website and request a copy. With the addition of Mazumdar, EI now has two experienced mining risk managers writing independent research you won’t find elsewhere.
“I have spent considerable time in the field with Joe,” Cook said when introducing Mazumdar on December 6. “He is a solid and experienced geologist who knows the financial side of the business very well. Better yet, he is not coy about saying what he thinks.”
“As my ex-boss Rick Rule says, hire someone smarter than you.”
Mazumdar and Cook are both speaking at the Metals Investment Forum on Saturday, Jan. 23 and at the Vancouver Resource Investment Conference Jan 24-25, 2016. Just don’t expect them to pound the table on any new ideas - leave that to the fools and fanatics.
Get Brent Cook’s and Joe Mazumdar’s best ideas in your inbox every Sunday.
