TNM Roundtable: Pros and cons 
of the farm team

Taking notes during the PwC-TNM "Strategies for Cash Deployment" roundtable in Toronto in April 2017: Stephen Mullowney, partner in the corporate finance practice, focusing on mining, at accounting and management consulting firm PwC Canada. Credit: Erik Rotter for George Matthew Photography.Taking notes during the TNM-PwC "Strategies for Cash Deployment" roundtable in Toronto in April 2017: Stephen Mullowney, partner in the corporate finance practice, focusing on mining, at accounting and management consulting firm PwC Canada. Credit: Erik Rotter for George Matthew Photography.

The Northern Miner was privileged to host a new Roundtable discussion in partnership with PwC in Toronto in early April, with the year’s topic being “Strategies for cash deployment.”

It’s an issue that has new resonance as money flows back into the mining sector after six long years of belt tightening and stressed balance sheets. More and more producers are closing substantial financings and announcing sustainable, positive cash flow, and mineral explorers are seeing an upswing in investment dollars, especially for gold, copper and lithium.

But most mining companies agree it’s time for prudence in how they allocate this new capital, and want to avoid the mistakes of the recent past that included overcapacity, runaway capital costs in new mine development and overpaying for acquisitions.

At the TNM-PwC Roundtable in the PwC Tower in Toronto, from left: Andrew Kaip, managing director of mining equity research at BMO Capital Markets; Anthony Vaccaro, publisher of The Northern Miner; Joe Fazzini, CFO and vice-president of corporate development for gold explorer Eastmain Resources; Elena Mayer, Client Relationship Senior Manager, Mining, at PwC Canada; and Salma Tarikh, staff writer at The Northern Miner. Credit: Erik Rotter for George Matthew Photography.

At the TNM-PwC Roundtable in the PwC Tower in Toronto, from left: Andrew Kaip, managing director of mining equity research at BMO Capital Markets; Anthony Vaccaro, publisher of The Northern Miner; Joe Fazzini, CFO and vice-president of corporate development for gold explorer Eastmain Resources; Elena Mayer, Client Relationship Senior Manager, Mining, at PwC Canada; and Salma Tarikh, staff writer at The Northern Miner. Credit: Erik Rotter for George Matthew Photography.

Stefan Ioannou, base metals mining analyst at brokerage house Cormark Securities. Credit: Erik Rotter for George Matthew Photography.

Stefan Ioannou, base metals mining analyst at brokerage house Cormark Securities. Credit: Erik Rotter for George Matthew Photography.

We assembled a diverse group representing many dimensions of the mining sector: Dustin Angelo, president and CEO of junior gold miner Anaconda Mining; David Cates, president and CEO of uranium developer Denison Mines; Joe Fazzini, chief financial officer and vice-president of corporate development for gold explorer Eastmain Resources; Stefan Ioannou, base metals mining analyst at brokerage house Cormark Securities; Andrew Kaip, managing director of mining equity research at BMO Capital Markets; John Kearney, chairman, president & CEO of developer Canadian Zinc; Stephen Mullowney, partner in the corporate finance practice, focusing on mining, at accounting and management consulting firm PwC Canada; Stephen G. Roman, chairman, president & CEO of junior gold producer Harte Gold; and Annie Zhang, associate at TD Asset Management, including comanager of TD Precious Metals, Resource and Energy funds.

The 20-page report will be included in an upcoming issue and available for free on our website on May 10, but there were quite a few interesting areas of conversation with respect to the best way to deploy cash.

At the TNM-PwC Roundtable in the PwC Tower in Toronto, from left: Stephen Mullowney, partner in the corporate finance practice, focusing on mining, at accounting and management consulting firm PwC Canada; Stephen G. Roman, chairman, president & CEO of junior gold producer Harte Gold; John Cumming, Editor-in-Chief of The Northern Miner; and John Kearney, chairman, president & CEO of developer Canadian Zinc. Credit: Erik Rotter for George Matthew Photography.

Annie Zhang, associate at TD Asset Management, including co-manager of TD Precious Metals, Resource and Energy funds. Credit: Erik Rotter for George Matthew Photography.

One touched on the growing popularity of major companies taking small, private placements in junior explorers of up to 19.9% (with 20% being the threshold in Canada for becoming a significant shareholder, with the responsibilities that implies). The major winds up with stakes in a dozen or more juniors and can add to its position or trim back, depending on how the junior’s project progresses.

You can see a bit of a David Garofalo thread through some of the activity: he was CFO of Agnico Eagle Mines at a time when they were modern-day pioneers of this investment style; he was CEO of Hudbay Minerals when they set up their “farm team” of more than a dozen juniors; and now as CEO of Goldcorp, he is overseeing the gold major’s creation of a similar satellite of junior-sector investments.

Zhang said Agnico Eagle and Goldcorp were “taking the lead with a different approach to make investments at an earlier stage in companies. It seems like it’s a little bit of a lower risk, and over time you can see how the project develops going forward.”

Andrew Kaip, managing director of mining equity research at BMO Capital Markets. Credit: Erik Rotter for George Matthew Photography.

Kaip agreed that it is “a healthy approach” by the large companies to invest in junior companies that have large land packages that are under-explored, and provide them the seed capital and the risk capital to advance their projects and make discoveries.

Fazzini also liked the “sex appeal” of Agnico’s model of taking the 20% stake. “It’s going to take 10 years to figure out some of those development-stage assets. So rather than going all-in and full-out M&A, and buying something completely, you put in your 10 or 15 or 20%, you sit there, you support the story, and you kind of let it unfold and see what happens. That way you’re not committed over the long-term if you can’t get a permit, or the project doesn’t shape up the way that you thought.”

Kearney warned the strategy can lower liquidity in the junior’s stock and the “takeover premium that might have been there has gone, because somebody else has the first row. And if that major decides they’re not that enthusiastic, they’re going neither forward nor back, they can completely stall a situation.”

Roman added that if the major decides to sell the block, “it puts a completely negative pall on the junior company, with everybody saying, ‘Oh, they walked away, so it’s got to be a lousy property.’ It may not be, but that’s what the market thinks.”

 Joe Fazzini, CFO and vice-president of corporate development for gold explorer Eastmain Resources. Credit: Erik Rotter for George Matthew Photography.

Joe Fazzini, CFO and vice-president of corporate development for gold explorer Eastmain Resources. Credit: Erik Rotter for George Matthew Photography.

David Cates, president and CEO of uranium developer Denison Mines. Credit: Erik Rotter for George Matthew Photography.

David Cates, president and CEO of uranium developer Denison Mines. Credit: Erik Rotter for George Matthew Photography.

Dustin Angelo, president and CEO of junior gold miner Anaconda Mining. Credit: Erik Rotter for George Matthew Photography.

Dustin Angelo, president and CEO of junior gold miner Anaconda Mining. Credit: Erik Rotter for George Matthew Photography.

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