The junior resource sector is a people business. In my view, making money consistently in a sector which is fraught with risk and failure, without a doubt, is inextricably linked to the quality of the people who are running the companies with which I am investing.
This statement, and statements like it, are very likely the most common answers you will hear from many pundits throughout the industry. While this should now be common knowledge, however, I still hear from investors who invest and lose money with “butchers, bakers and candlestick makers.”
So, why does this still happen? I’m not totally sure. Maybe it’s the potential for a quick buck or simply investors caught up in a narrative. Whatever the answer may be, I’m sure it will continue in the future, and that’s too bad. While it makes a select few rich, overall, the promotion of mediocrity is really bad for the sector.
In saying this, today I have for you a conversation with one of the sector’s ‘greats;’ a man and a group in which it’s worth investing.
This person is Dr. Mark O’Dea, Chairman and Founder of Oxygen Capital.
Oxygen Capital has a great track record of success within the sector, as they have provided a ton of value for their shareholders through the sale of many of their projects, such as Fronteer Gold, Aurora Energy and True Gold.
In our conversation, I asked O’Dea about the secret behind Oxygen Capital’s success, lessons he’s learned while working in the sector, his view of jurisdictional risk and more. There’s a lot to glean from O’Dea’s answers – Enjoy!
Brian: In my opinion, one of the biggest issues facing most people is their lack of self-awareness. Whether it be in their investments or their personal lives, many people either have no idea or are prone to lying to themselves about where they are strong and where they are weak and, thus, typically fall short of their goals and aspirations. Oxygen Capital and its managing partners definitely don’t have this issue, as their track record for success within the resource sector is among the best I have seen. What has and continues to make Oxygen Capital successful within the resource sector?
Mark: When you start working on a project, you know reasonably soon, whether it has the potential to be an economic deposit or not, and if it doesn’t, there’s really no point in faking it. It’s a waste of time, it destroys the trust of shareholders, and it builds the wrong type of working culture. So, you’re much better off focusing your efforts on finding the right project. We have lived by the philosophy of “good projects and good places” for 20 years now and it has worked out really, really well.
Over that period, I’ve been CEO and/or Executive Chairman of a number of public companies that have been acquired, because they were underpinned by projects that were either operating mines, or advanced projects that could ultimately become mines.
For example, Fronteer Gold, among other things, had the high grade Long Canyon deposit that ultimately became a mine built by Newmont, after they acquired Fronteer in 2011. It is now one of their lowest cost mines in the USA. Aurora Energy defined and advanced one of the largest uranium deposits in Canada back in 2009, and it was ultimately acquired by Paladin in 2011. Its Michelin deposit needs higher Uranium prices, but it’s got all the attributes of a long life mine. And most recently, at True Gold, we built an open-pit, heap leach gold mine in West Africa, and shortly after we poured our first gold bar in 2016, we were acquired by Endeavour Mining. So, all of our big successes have been underpinned by high quality projects that were either mines or had the potential to become mines.
Today, we’ve got four companies at Oxygen – Pure Gold, Liberty Gold, Sun Metals and Discovery Metals. We’ve created, in my view, one of the best exploration and development pipelines in the business. And all of our companies continue to be underpinned by good projects, in good places. At Pure Gold, we have the large Madsen Gold Deposit in Red Lake Ontario, which is currently the highest grade gold development project in Canada today. We just finished a bankable feasibility study that’s underpinned by a two million ounce indicated resource, at almost nine grams per ton, with another half million ounces of inferred gold. It’s going through the final permitting process and ultimately the goal is to become the next Canadian producer.
Liberty is rapidly advancing three big open pit gold projects in the Great Basin of the United States. They’re excellent projects in a Tier 1 jurisdiction. We recently put out a PEA on Gold Strike and it shows that it’s got the makings of an excellent low cost mine. It’s very appealing. And we’re about to start drilling Black Pine, which is another big Carlin-style gold system that has exciting size potential.
Finally, Sun Metals, we just made a highly disruptive discovery in BC, which was frankly, one of the best high grade copper-gold intercepts in Canada in 2018. We’re about to get back in there this summer and continue drilling to build continuity and size. We are all very excited. So, all of our businesses are underpinned by real projects and that’s been the key to our success.
Brian: Over the course of my life, I have learned that a large portion of what it takes to be successful is not being afraid of failure. The caveat being that it doesn’t pay to be irrationally courageous, either. Firstly, do you agree? Secondly, can you give an example, in terms of your personal resource sector career, of how you used this philosophy to overcome adversity and be successful?
Mark: I would agree with both points, this business is like a treasure hunt, and you know you’re going to make a lot of wrong turns, and hit a lot of dead ends along the way. But when you persevere and ultimately get to the prize, the reward can be spectacular for everyone, and it’s worth it.
We look at dozens and dozens of projects every year, and the key is to know, A, what makes a good project, and those are things like grade, size, strip ratio, metallurgy, all those kinds of things. The second is knowing when to keep going and when to stop.
In my opinion, it is perfectly fine and, in fact, preferable to cut your losses and move on, if your project isn’t shaping up into something meaningful. So, maybe the metallurgy is fatal, or the strip ratio is too high, or the grade is too low, or maybe you just got the geology all wrong. Whatever the reason, failure is part of this business and winning teams in my opinion need to be able to try and fail and quickly move on to a better project. That’s what investors expect of you.
Brian: For me, jurisdictional risk is an interesting subject because everyone has their own criteria for what constitutes risk. For most, jurisdictional risk is most closely tied to the politics of the country in question, or the politics of a neighbouring country.
Over the course of your career, you have worked in and run mining companies in a variety of different countries around the world. These countries range from premier jurisdictions, like Canada and the United States, to some of the more difficult places, like Burkina Faso and Turkey. How have these experiences shaped the way you view jurisdictional risk?
Mark: In my view, risk comes in many forms and I put risk in two categories. One is subterranean risk. Everything below the ground, and the other is above ground risk. And so, 50 years ago in our sector, all the risk associated with mining was subterranean and related to the deposit itself. Did it have the grade and the size or not? And today, all those subterranean risks are still there, to the exact same extent, but layered on top of it all are the above ground risks. Which are, in many ways, far more challenging, because they’re difficult to manage and they can take a lot of time.
I’m talking about things like regulatory, permitting, social, and geo political risk, and mining is under increased scrutiny today. Regardless of the jurisdiction you’re in these days, each jurisdiction has its challenges, whether it’s from local communities or an environmental group.
From day one, your project needs to be positioned in a way that benefits the local community, regardless of where you are. And that means employment, a better way of life and environmental protection, and if you get these three correct right out of the gate, then you are at least increasing your chances of success down the road.
Brian: At the moment, bearish sentiment within the resource sector appears to be very prevalent. As a consequence, many of the junior companies that I have spoken to are finding it very hard to raise cash to further develop their projects. Oxygen Capital companies have a great reputation when it comes to their ability to raise cash. First, how is it that Oxygen companies are able to raise cash in difficult markets and, second, in your opinion, why is the junior resource sector on a whole, seemingly, having a hard time attracting investment capital?
Mark: Since 2013, we’ve been in a bear market; gold spiked at US$1890 /oz in 2012, and then we’ve been bumping along in the US$1200s to US$1300 range for about six years now. And, during this period, there have been some pretty massive structural changes, with traditional funding having exited the space and dried up. ETF flows have stolen liquidity, and passive money is taken over from active money. During this period, we’ve been able to stick to our knitting and we’ve been focused on buying, exploring and advancing great projects in great places, and building our pipeline. Our businesses have been able to grow in this bear market because we’ve been able to attract some of the best investors and name brand backers in the sector, and I’m extremely thankful for their support in backing our companies. Since 2012, we’ve raised about $500 million dollars in 30 finances. And that includes the CapEx to build the Karma open-pit mine in Burkina Faso.
The biggest challenge to raising new capital today is the decimation of actively managed resource funds. These funds kept the ecosystem going for decades and most of that capital has now migrated into passively managed ETFs, which don’t participate in financings. It has also shifted into other speculative industries, which hasn’t helped. But I do fundamentally believe, that the relevance and approval of the sector is going to have a renaissance as the demand for green technologies puts a bigger and bigger focus on the need for metals in our modern lives.
Brian: Having attended many resource sector focused investment conferences over the years, it’s clear, to me at least, that the majority of investors in the sector are in their, so-to-speak, ‘golden years.’ The younger generations, mainly the millennials, on mass, are virtually absent, with their attention seemingly more focused on cannabis and crypto. The question that comes to my mind is, why? Is it a matter of relatability? In your opinion, why has the resource sector failed to attract the millennial generation’s investment dollars, thus far?
Mark: I think that is an important question, but I’m not sure we’re getting the answer right. The broader market has been booming, other sectors have been on fire and generating great returns, in sectors that are more topical and, frankly, cooler. In contrast, you look at the mining space and the equities have been going down for eight years, so there hasn’t been an opportunity for them to make any money. So, they’ve been staying away and that’s one answer.
The other answer, I think there’s a cognitive dissonance between understanding the role of mining in propelling a greener, more sustainable society. That vision requires metals. And, ultimately, I think a connection needs to be made by people, who are embracing electric vehicles, wind turbines, solar panels, and recognize that they all require metals. Lots of metal, which can be extracted without destroying the environment.
As an example, Tesla just published an article today saying there’s not going to be enough metal to supply the electric vehicle demand that’s anticipated. And that’s all copper, cobalt, nickel, etc. What end consumers and investors need to realize is that, mining and environmentalism are all part of the same continuum. We’re all on the same team. And people can feel good about extracting metals from the ground, to build a sustainable greener future, while still protecting the environment. It all needs to be able to coexist as part of the same ecosystem.
Brian: Within Oxygen, you tend to focus on de-risked projects as part of your ethos. A great example of an advanced de-risked project would be the Madsen Red Lake Gold Mine, which is owned by Pure Gold, in Red Lake, Ontario. Red Lake is a prolific district. What are your reasons for focusing on gold right now and what do you see as a future for Red Lake?
Mark: Almost all of our success as a group comes from projects that have been worked on in the past and we have effectively “rediscovered” them. We can include the Michelin Project that Aurora had, Goldstrike and Black Pine at Liberty Gold, Karma at True Gold, Long Canyon at Fronteer Gold and Madsen at Pure Gold. These were all past producing mines or previous exploration projects that were forgotten and put away for various reasons including low metal prices or changes to corporate direction.
Madsen is a perfect example to highlight. This was a past producing mine for 38 years, it produced 2.5 million ounces of gold and effectively lay dormant for 20 years, owned by the predecessor company Claude Resources, who worked on it intermittently, but never advanced it to the stage of developing a new geological understanding and getting it back into production.
Pure Gold picked it up in 2014, and consolidated the property for a net cost of $8.7 million dollars and the team has focused on re-interpreting, compiling, integrating, every bit of data they could for two years on this project. We came up with a new geological model and the Company is now sitting on the highest grade development gold project in Canada, with a million ounces of reserves, drilled off at six-and-half meter centers, and sitting within a 2.1 million ounce indicated resource with another half million ounces of inferred resource. It’s an extraordinary accomplishment and these are all new ounces. This is not a remnant project that we’re going to go in and salvage. These are brand new ounces sitting outside of historical development. So, that’s a pretty important fact to include in there.
Madsen, even though it’s evolved from a historical legacy project, it is actually a big part of the future of Red Lake. It’s a sunrise asset today. We’re about to move through the final permitting process and into production with a high grade gold reserve of one million ounces, with the potential to provide decades of production in Red Lake. Meanwhile, the Red Lake mine complex itself is a sunset asset and it’s starting to wane. So, I think Madsen is going to be a very, very important component of the whole consolidated Red Lake package.
Brian: In my opinion, distinguishing if management teams are owners or if they are solely employees is integral to understanding the motivation the team has to succeed. Not only is it integral to understand how much of the company insiders own, but at what price.
How important do you think it is that management own shares in their own companies?
Mark: I think it’s vital, I think it’s one of the most important things that a shareholder should look at, when they invest in a company. How much skin in the game does the management have? There’s a massive difference between being an employee and being an owner. Being an owner of your company, through owning a significant portion of shares, is a really strong testament to your dedication and your focus on making it a successful venture. For example, at Pure Gold, we recently had five year options that were about to expire last month and everybody in the group, all the board and senior management, exercised those options and held the stock, adding three million shares of insider ownership to the books.
One of the things I have learned over the years is that when you have a project that you truly believe in, own as much of it as possible. I’m one of the largest shareholders in each of the oxygen companies, and have been regularly adding to my position at Pure Gold and Liberty Gold.
Brian: Mark, it has been a pleasure. Thank you very much for sharing your thoughts on the resource sector and, most importantly, educating us on the Oxygen Capital group of companies. Before we end, do you have any final thoughts or advice for resource sector investors in 2019 and beyond?
Mark: I will leave you with a quote from Miles Davis, who knew what he was talking about when it came to jazz when he said, “Time is not the main thing. It’s the only thing.” He wasn’t talking about mining, obviously, he was talking about music. But I think it is equally applicable to the mining sectors.
In this business or any cyclical business, if you get the timing right, the results can be spectacular, beautiful. And to me, it feels very much like the timing is right for the resource stocks to resurface and breakout from this bear market in the very near term.
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Until next time,
Brian Leni P.Eng
Founder – Junior Stock Review
Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do NOT own shares in any of the companies discussed in the interview. I have NO business relationship with Oxygen Capital or any of its associated companies.
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