This is a complete transcription of the interview. Please message me if you notice any typo's that I may have missed.
Tom Wallace: Ladies and gents, today, I'm privileged to be speaking with Gianni Kovacevic, one of the leading experts on modern energy, emerging markets and natural resources with a particular expertise on the copper market. He's an avid proponent of realistic environmentalism and a sought-after speaker whose lectures have been featured at events all over the globe. His book, My Electrician Drives A Porsche, was the basis for the world's first zero emission book tour. Gianni is the executive chairman and CEO of CopperBank Corp, a junior mining company that in 2015 and 2016, had the most insider buying out of any company on the exchange. Today, he's going to be talking to us about the copper market and the tremendous investment opportunity it presents as well as how CopperBank is positioned to capitalise on rising copper prices. Now, here is the interview.
Gianni, can you tell me a little bit about your investing background, how you got into the commodities industry, and yeah, a little bit about your upbringing?
Gianni K.: Yeah. Well, I’m born and raised in Vancouver, Canada and I always tell people what software and computers are to Seattle is what natural resources are to Vancouver. If you're a young person and you live here, you get the rub off, the natural rub off of people in this business and then, it's very cyclical and I've participated in four cycles now, which it's sort of like really high highs, really low lows and as a younger person, you buy your first junior mining share and you perhaps make money but then, a crash comes and you lose some money.
Once you've been through a couple cycles and you understand the volatility, you hopefully learn to embrace it. You can't get upset when the market goes sort of into a bear cycle, the Rick Rule mentality, right? He likes bear markets because that's when you become a buyer. In this last bear cycle that we had, 2012, ’13, ’14, ’15, that's exactly what we did. We wanted to be buyers, so we were very greedy while other people were very fearful. Then, you have to, of course, pick commodity and how you structure things but that's how I got involved.
Tom Wallace: We were talking just before about the dynamics of the copper market and the things that are going to drive copper in the future. Can you talk a little bit about how oil is on the decline and how copper is on the rise and maybe talk about how they're no longer going to be sort of joined together?
Gianni K.: Yeah, because oil is the dominant commodity by far. That's even at these low prices, the overall oil market is with one and a half trillion dollars where copper is a 100-billion dollar market. If you look at a 40-year chart of oil and copper together, they're highly correlated for many reasons, U.S. dollar, they're the commodities, they go into these commodity baskets and as oil goes up, really, many commodities, they act like one monolithic group up and down. You can look at them as a basket and we saw that, the oil around 2003, ’04, ‘05 when everything went higher and then it went low into the 2008 crash.
I believe this is going to decouple, and it's going to decouple because of overwhelming supply and demand differentials between these two products. Oil on the supply side, we have new ways to extract oil. There are many countries that produce oil. The world's oil supply comes from 4,700,000 individual wells. On the demand side for oil, as we go into things that are more efficient or adoption, the electrification of energy, as I say, and also the efficiencies and things like that, we will eventually start using less oil, still very important to the global economy but not a growth industry.
Well, when you go away from fossil fuels, mainly oil, it means electrification and when you do this kind of electrification of energy, it is incredibly intensive user of copper. By a power of magnitude, four or five times more copper for each megawatt of utility or each power unit as you wish, the way you create, transfer and utilise energy, but where does copper come from? If we understand, okay, we … As we go away from oil, we use more copper and oil comes from 4,700,000 individual wells, 50% of primary copper production comes from 20 different mines. Of course, they should behave differently.
If we believe we're going to go away, slowly but surely away from fossil fuels and the answer is to have more copper and there's not a lot of compromise to give us that copper, the only way you're going to have more copper is a higher copper price. The inducement price is around three and a half dollars. This is the price where you can actually build another copper mine. BHP Billiton tells us this, the world's largest integrated mining company. If oil’s going to be a boring in price, well, copper will decouple and it'll decouple definitively, and it will decouple in the long run, which also makes it one of the interesting commodities that people should focus on, to be just hyper aware of the little things that are to be taking place in that market. I think it's a good place for people to invest.
Tom Wallace: Can you talk about the end users of copper and their buying habits? What have they been doing in the past when copper was in the doldrums and what are they doing now?
Gianni K.: Well, I will suggest to people that if you're the purchasing manager of Pirelli and you make electrical cable in that division and you've been in a boring and or falling copper price environment, there's no reason to have price vision and weight into the future until it changes. Once you start having prices that are rising and you have margin players that come in and do paper trades on copper, like the China Chaos Fund is, these guys, this hedge fund, now the buyer can no longer go hand to mouth. He's now tripping over themselves, these different buyers to have physical supply.
Unlike oil and gold, it is not hypothecated to kingdom come. We do use the copper. All the copper produce for the most part is consumed in the fabrication process or cabling or windings or piping and what-have-you. I think right now, when we're doing this interview on July, what is it, 23rd, 24th of 2017, we reach that that tipping point and it's like my friend Robert Friedland would say. It's like a school of fish. All of a sudden, it just changes.
Now, if you want price vision, and I've asked this question to people that fabricate and produce products out of copper, which means they’re buyers of significant amounts of copper and they would agree with me, if the price of copper is going to be much higher in the future or could be much higher in the future, at this point, you have to start making long term vision. You can no longer go hand to mouth. The price spike we're seeing now, I think, is happening because of many reasons but this musical chair is all of a sudden, we have 101 people trying to sit in 100 chairs. For the past five years, it was always 99 people trying to sit in 100 chairs, get cap to your premium. Now, there's a premium.
Tom Wallace: You're a bestselling author, your book, My Electrician Drives A Porsche. I’m about halfway through reading it and for somebody who has no idea about the copper market or the fundamentals driving it, it's an excellent primer to the reasons why people should be interested in investing in copper. What gave you the motivation to write the book specifically as it relates to copper?
Gianni K.: Well, that's one underbelly theme of the book, is copper because of the future of electrification, the greener and cleaner that we create and utilise energy, the more that is demanded of copper. That's one of the lines that's repeated in the book but the book effectively starts by saying you need to be a participant. If you're an investor, if, you need to understand and comprehend, I think more on the fringe, the macro markets. You need to understand global politics and demographics. The book is about a young electrician who enlightens his family doctor and they go on this global journey of enlightenment to better appreciate energy consumption, China, which is the big growth market in the world, the future of energy, the future of green energy, going to conferences, being a contrarian, not paying 25 cents for your investment advice.
Actually, investing in yourself so you could not have … really know the difference between cotton and corn and of course, these skills last a lifetime. When you surround yourself with like-minded thinkers and like-minded sort of thought leaders, which we can get on the internet, it’s readily available for everyone, and that's what they do. The theme that they pick is copper because of its pervasive nature in the future of energy and it was coming out of a, sort of a bear cycle and there was a big opportunity there. I think it's a book that I think most people will enjoy. It gives them sort of …It's really my story. That's what happened to me, and just enlightening how did someone from Hobart or Kansas City get involved in this stuff.
Well, these are some of the clues and tips and travel and you have to invest in yourself. If you know how to do this, it’s a big opportunity. Right now, it's copper. Copper might become frothy in five years. We sell all our copper investments and we look at what's next. Don Cox would always say … this is the brilliant economic historian out of Chicago, never invest in the story on page one. That's the efficient market. Invest in the story on page 16. That's headed to page one. That's what we want to do as contrarian investors. We want to make a career out of investing on page 16 stories.
Tom Wallace: So back to copper, in terms of supply and demand where is old this copper going to come from? Are we finding usable deposits or is there going to be a real supply crunch in the near future?
Gianni K.: A lot of money was invested in exploration for resources in general. I'm talking all the way from the 2003, ‘04 period up until the correction, 2013, let's say where budgets really got curtailed and not much happened for that last couple of three years. We didn't find that much. Now the bulks had a lot of investment. There's about a trillion dollars invested in this resources in general and people tell you and statistics will say that 600 billion or so was invested in the bulks and then you had about 150 billion invested in exploration in copper, gold or sort of the non-ferrous and great precious metals. They didn't find much.
What was the biggest success story in copper exploration of the past cycle? It was Oyu Tolgoi, Robert Friedland’s Mongolia, copper gold project, which is now in early phases of production. It's run by Rio Tinto and they are now doing the next expansion of the deeps and they will invest five and a half billion dollars and in the year 2027, it will reach maximum capacity around 500,000 tonnes of metal output per year. This was the biggest success story. Where's the copper going to come from? Well, we have to make the industry. You have to make those deposits, which have already been discovered, which is, there wasn't a lot but certainly there is inventory pipeline, you have to make them economic. The way you make them economic is this inducement price, which is around three and a half dollars for it. A good 70% of those projects require that in order to make the economic case to put them into production.
Even in this scenario, if you look at the future demand of copper and you have to have the optimistic view, the neutral view, and the pessimistic view but if you look at the optimistic view, I am an optimist, we need around 35 million tonnes of copper annually by about in 2035. This is only 17, 18 years away. Currently, the market’s 24 million tonnes. There's a shortfall, let's call it 10 million tonnes. Where do we get 10 million tonnes of additional output? Impossible. There's no scenario that provides 10 million tonnes of new copper.
If you use the neutral case, let's say maybe we need 30 million tonnes because the electrification doesn't happen as rapidly as the Robert Friedland and I are sort of suggesting to people, maybe, maybe the industry can give us five to seven million tonnes of new demand with a really high copper price, not even 350, like four or $5 copper sustained for a long period of time. The industry could spit out this five to seven million tonnes of new copper output maybe.
In a pessimistic view where the world goes into an abyss, electrification does not occur as we've been suggesting, then the copper price probably would be very boring in that scenario. However, your research comes back to the future of energy. I don't see a scenario where you adopt from copper with the electrification of everything. Does not matter what you talk about. It's all electricity and they're not going to substitute aluminium for all these things. They can't. Aluminium is part of the solution. It cannot all be copper. It's a combination of aluminium and copper but if you want to make things more efficient, you actually have to remove the aluminium out of the equation. You need more copper. I think even using the neutral view, it is going to be a very, very positive investment, copper that is, for any global investor and it’s becoming now, this week of course, it's a page one story so let's see what happens.
Tom Wallace: Let's go on to your company, and yeah, I know you're the CEO of CopperBank Corp. Can you talk about the founding of the company, how it all came together?
Gianni K.: Yeah. The year 2014 when the market went to hell and projects were available and there was major … Sorry. The majors were divesting and the juniors couldn't finance themselves. We wanted to get together with a group of investors, very patient. It was effectively a five-year strategy and we purchased three projects. We purchased one from Antofagasta and we purchased one from a junior and then, actually another one from a junior as well.
We had three criteria. Of course, it’s copper. We wanted … only wanted copper because of the future of energy and the special nature of copper but the projects we bought, we had to be able to send our children to work there. That's one criteria so we weren't interested in going to observe a stand, as they say. These projects would have had to have a lot of money spent on them because what we're buying is research. We want to take our technical team and we want to go over the data a different way and look at it a different sort of philosophy and go into that age-old situation where how many projects became mines, where a major jumped up the project in a bear cycle, junior took it over, sold it to another major and it became a mine. You cannot count that high.
Then, the third criteria, we have to be comfortable that we can move the project forward to a more senior company in normalised markets, which means it can't be in a place or a project that's been recycled over and over and over. We had no interest in that, so those were our three criteria. We basically ended up with projects in the United States, which we like, in established mining camps. We are in Nevada and we are in Alaska.
Then, as we went into 2015 and 2016, our mandate was to buy more projects. We were not successful in buying more projects. We could not find the quality, the criteria and the ability for us to add value there. The two things we did in 2015 and 2016 is we really understood technically our projects so that when markets normalised, we could efficiently and very quickly do big bang for the buck work programmes to establish greater value on those projects. This doesn't cost one penny. You just have to crunch the data with good people. We never paid a dollar in salaries to our group. We all earned it in share value.
The other thing we did is we didn't cry in our beer. Our share price was cheap. We bought our shares. We had the most insider buying of any listed company in Canada in the year 2015 and the year 2016 and so as we … Here in the summer of 2017, we finally did a financing with our group. We put $1.9 million together and we are now drilling our Alaska project all summer to drill rigs and we look to update the resource in subject results after the drill programme so in the next 90 days, 120 days, a lot of news flow with CopperBank.
Tom Wallace: Can you tell me a bit more about your project?
Gianni K.: Pyramid is located in Alaska and if people are listening to this interview, just picture this in the theatre of your mind. Location matters with copper projects. We consider this project, and this is a very bold statement and I want people to scrutinise it, but we believe that pyramid is one of the best situated copper projects in the world. If you imagine the finger pearl that comes off of Alaska, the Alaska Peninsula, we're located about halfway down. We are closer to Japan than Los Angeles. We are the closest project in the Western Hemisphere to the Asian smelters. It's located approximately on the 55th parallel, which is where Prince Rupert, British Columbia is. There's no ice here. This is ice-free, deep water port all year long. The ore body is four kilometres, 300 metres in elevation from where a deep water port could be. This is a tremendous logistical advantage. Location wise, it's very good.
The project, which was drilled in three passes of drilling, the year 2010, 2011, 2012 … It was drilled by Antofagasta, very competent people, friends of mine and they’re partners. They own shares in my company. They did not drill it like a junior would drill it. Their idea was to do how big is this ore body. They came up with after three passes of drilling. They did a an initial maiden resource. This was commissioned in May of 2013. They were also going to do another pass of drilling, the fourth pass, and then they cancelled the drill programme the summer of 2013. The resource was released and we now have a maiden resource, which is about 170 million tonnes of a 0.5 copper equivalent and if you want to increase the cutoff, it's .65 copper if you increase the cutoff, okay?
This project is still open in many directions. Our aim is to have people recognise pyramid as a project of merit and so that we are entered into a peer group of any 20 or 30 projects that an analyst or an investor would put together. We're not in any such list at this moment but our objective is to be entered into this list. We currently have one billion 400 million pounds of copper with the initial maiden resource. If we can increase that to go over 2 billion pounds or 3 billion pounds and have the tonnage maybe around 300 million tonnes, we would, in my opinion, qualify to be in anyone's top 20 or top 30 list because of its location, because of logistical advantages.
By the way, the project’s situated on private property, not government land so it's a different scenario than Pebble. This is a private property project. That's exactly what we're going to do this summer. For this little investment, we have the opportunity to significantly increase our tonnage and our grade. There are three zones in the pyramid deposit. The west zone, which was the last area discovered is the lowest grade portion of the project. We're not going to drill that at all just now. We're going to focus on the north zone and the main zone where much higher grades are associated to the project.
With this drilling that we do, we have two drills, two rigs spinning on the project all summer and we are updating our resource subject to results shortly thereafter. Our consultant is on site middle of August. If we can increase this tonnage, I think this is a very interesting opportunity for our group. The peer group that I speak of trades between two and four cents in established pound of copper on the ground, so that's where the metric. As we enter that peer group, one would think we could have a value roughly of two cents a pound or maybe higher depending on how people look at the project.
We're currently trading at less than one penny per pound in the ground. It's around three quarters of a penny per pound in the ground, so we can be re-rated in the next 90 to 120 days, CopperBank, one, because we find more copper. We need to we need to drill and come up with results. Two, if we enter the peer group and we trade on the bottom end of the valuation metric, around two cents a pound in the ground, and three, in a rising copper price environment, it lifts all boats. This is a pretty, I think a pretty compelling value proposition for any investor. If you look at the chart, our price had been very stable but you've got three reasons why we could potentially be re-rated for our pyramid project. That’s a good offering.
Tom Wallace: Can you tell me a little bit more about the infrastructure that's located near the pyramid? How far away is the pier or roads to the project?
Gianni K.: Yeah. That's an important question. What we did in last year is we, and we did a press release on this, we commissioned an engineering group called Dowell to give us vision on those critical components of the project, port, power and access to the site. Access to the site is relatively simple. It's only four kilometres. You look at any project around the world and usually, you need some hundreds of kilometres of road access, power access, concentrate moving back and forth, people, camps, facilities. We only have four kilometres, so you don't have to use your imagination too hard. The number is not big for road access.
We are envisioning approximately 50,000 tonne a day, just as a hypothetical number, to give us what do we require for port and power. That would require between 40 and 50 megawatts of electricity, so we would envision having off-the-shelf diesel generators, 40 to 50 megawatts, and the diesel would come from a refinery called Tesoro, which is closer towards Anchorage, Alaska. The port facilities, which could potentially be multi-used, meaning aggregate in other facilities, we have significant deep water access and if you envision something like a 30% concentrate, that port should be able to do 200,000 tonnes a year, which is the 50,000 tonnes a day of concentrate coming out for the hundred thousand tonnes of metal. The numbers were a little bit confusing there as I put them out but effectively, something like that would cost, ballpark, $70 million. That's the pricing.
Then, you're basically at the mill. This could also be something that's financed and moved forward with the private property owner, so we would look at all options there. The point I'm trying to illustrate is that those critical components of infrastructure are quite economic to a … from a mining perspective because usually, you associate billions of dollars with the port for the capex. We don't have that scenario because of the superior location of the project.
Tom Wallace: Can you talk about the financial state of the company and how many shares are outstanding?
Gianni K.: Yeah. We issued shares to buy projects. On day one, we had 134 million shares. I love this question when people ask me … Some people will suggest we have a high share count. Well, it was our design. That's not the question you ask. I'll give this tip to all your listeners. The first question you always ask, don't ask how many shares are outstanding and all the other things. Reverse engineer it. You ask them, “If I buy a share in your company, what do I get? How many pounds of copper? How many ounces of gold? What's in it for me?” They'll give you a number. Then, you reverse engineer it. “If I buy a share,” then you say, “Well, what does the share cost? Is it $1,000 a share or is it 10 cents a share?” Then, you can decide if it's good value.
The point I'm trying to articulate here, I don't care if a company has 10 billion shares outstanding. If I get a yellow Corvette for each share I buy, it can have as many shares as you wish. That doesn't matter to me, long as my value proposition is there. Then, you ask the hard question. “What's in it for me two years from now on a per share basis? What's my promise?” This is the promise we always gave, limited dilution. Our company was attributed about 20 pounds of copper for each share from the beginning. It was one of the cheapest copper listed companies in the world. We were trading at five cents, 10 cents, so very, very low valuation.
We have had almost no dilution. You lost less than two pounds of copper per share over three years. Other companies, they do a 30 or 40% diluted financing to keep the lights on. You lose 40% of your value on a per share basis. Now, we've diluted the company by 15% to do the financing, to do the work programme at pyramid. If I increase my pounds, and I'm just going to use a hypothetical number, this is not official number, but if we increase our pounds by 50%, that's highly accretive. That's a good allocation of capital. My job is to lift this dilution of 15%, is to increase the pounds at pyramid by a minimum of 15%. Can I do that? I think I can and that's exactly what we're trying to do. We have 174 million shares out, actively drilling and we are the largest shareholders the company and it's really about the per share value and that's why CopperBank is so special.
Tom Wallace: Can you tell me about the management team and who you have supporting you, what value they can bring to the table?
Gianni K.: We're surrounded by a strong technical team and we have a collective 350 years of experience between the group and they’re geologists and they’re engineers, and they're all doing something else. They have other jobs. There are advisors and we basically check the technical information and now that we're drilling, everyone's had input and some of the holes are quite obvious where to drill. We also have the input of SRK, which is doing our research estimate, the update subject to results, of course. We want to make sure that the holes we drill are really high value and will give us a bump in either tonnage or grade for the project.
These people, I've known for many, many years. I've been able to cobble them together as a group and so I'm surrounded by … As Rick Rule would say, you need to have adult supervision in the room. I'm a good storyteller but we also have to have good technical people around you and it's a collective. The person that's really heading up the oversight on the technical side is Brigitte Dejou. You can see her information. She was a career tech person and she worked at the Red Dog Mine, which … and her team, they were credited as finding all the extra mine life at Red Dog. She also worked as a qualifier for Sean Roosen and his team at Osisko for a few years. We're very happy to have Brigitte in the group and she's also a director of the company, I might add.
Tom Wallace: Is there anything else you’d like to cover about CopperBank or your prospects going forward?
Gianni K.: I think we’ll leave it short and simple. I think people can look at the chart. Anytime, there was a small dip in the share price, you see intensive insider buying. We support the company and it's been built on levels of value. We get re-rated in the market, very clear in the chart. I’d like to tell people that, what's your downside? We have no debt. We have no forced work programmes. We've already demonstrated that if we're not active, we don't dilute the share base. There's always value there. It would take tens of millions of dollars to duplicate the work in our projects. Your downside, is it a penny? Maybe two. I don't know.
What's your upside? You got to look at that risk reward and if people use CopperBank as a proxy to follow all these themes and they can also follow it for performance and for people to have a little bit of CopperBank in their portfolio, I don't think they're going to be upset. You just, you put it away and let me do my work. We're three years into a five-year strategy and I can say now, I can see the finish line. I don't know the value of the finish line but I can see it and I think the value only goes higher for, as we move this strategy forward.
You can also go to CopperBank’s website, which is being remodelled right now but just in the existing state, go to the energy zone and I have a fantastic treasure trove of videos talking about modern energy in the pivot, some of the talks I gave. Coincidentally, I gave the keynote at the World Copper Congress in April in Chile, which is the biggest honour in our industry usually reserved for presidents and kind of major company executives. CopperBank gave the keynote, so we're very proud of that. You can also see the first video there has a voiceover description of exactly where we're drilling this summer in Alaska. If you know anything about the business, it's very obvious why we're so excited about this summer drill programme, so let's leave it at that.
Tom Wallace: One final question that's not related to anything we've been talking about but I think that a lot of people could get some benefit from, who would you consider your mentors? It can be any number of people and what was it specifically that drew you to them?
Gianni K.: Well, I think for business practises, I like to follow what I call the 4% club. These guys are perennial winners. They write the biggest check. They turn the lights off on the way out with the exit strategy. I like Lukas Lundin and Ross Beaty. They're my heroes. These guys really know how to run a business. They've had tremendous success. It's not luck. You don't have that much success because of luck. They surround themselves with really smart people. Presentation-wise, I think Robert Friedland taught me how to make a good presentation and we know he's the best. He is the king in our business, so as a younger person in the industry, I look to people like him to hopefully provide informative, interesting presentations that resonate with people. Then, as far as CopperBank, I'm hoping to have a product that we're very proud of modelled after the Lukas Lundin and or Ross Beatty type of model, lead by example. Those are three good names that most people would recognise them but these are all three of my friends and I think you won't go wrong if you follow any one of those three.
Tom Wallace: Gianni, what's your website address and the ticker that CopperBank trades under?
Gianni K.: CopperBankCorp.com. The tickers are all listed there. We're listed on the Canadian Stock Exchange because it's economical. I always joke that we throw pennies around like manhole covers, so even this kind of extra costs, we've been careful on. My personal website is my last name, dotcom about the moniker and if you could start out on the YouTube video. Thank you.
Tom Wallace: Okay. Thanks for spending the time with me today, Gianni. It's been an absolute pleasure having you on the show.
Gianni K.: Yeah. Thank you. Nice to meet you.
Tom Wallace: Ladies and gents, you can find all the links for today's interview in the description box below. Please hit subscribe and head over to JuniorInsider.com and become an insider so you can receive exclusive content. If you'd like to find out more about CopperBank Corp, I'd encourage you to visit their website or to hear what other people are saying about the company, visit CEO.ca. Stay tuned for more interviews.