During the Prospectors & Developers Association of Canada convention in Toronto in March, PearTree Securities sponsored a panel discussion moderated by Anthony Vaccaro, publisher of The Northern Miner, to tackle the issue of alternative financing in the mining sector, including royalties, streaming, private equity and flow-through financing. Panel members were David Harquail, president and CEO of Franco-Nevada (TSX: FNV; NYSE: FNV); Stephen de Jong, president and CEO of Integra Gold (TSXV: ICG); Trent Mell, president and head of mining at PearTree Securities; and Dan Wilton, director at Pacific Road Capital. The following is an edited transcript.
Anthony Vaccaro: We all know from the point of view of issuers and shareholders that there’s been some dissatisfaction with traditional debt and equity markets. So the idea was to take a harder look at alternative financing: royalties, flow-through and donation flow-through, and private equity.
These alternative financing methods are structured to encourage a long-term perspective. It doesn’t really make sense to talk about alternative financing methods if it just exacerbates problems with current models.
Let’s open it up with Dan. In a previous conversation we noted there seemed to be well-grounded optimism at this year’s Prospectors & Developers Association of Canada convention, especially with regards to gold. Dan, what’s gone on with gold since January?
Dan Wilton: We were talking about momentum and the sustainability in the recent move in gold, and what’s causing it. I think some of it has been the fact that many generalist investors have been underweight gold for a long time. You came into the end of last year with a lot of big banks calling gold to go below US$1,000 an ounce. So there was a fair amount of negative or short interest on the golds.
And with a bit of geopolitical fear, you had some upward movement, and a combination of things — short-covering, particularly — gave it an initial leg. And then lo and behold, some of the generalist investors who walked away from the sector for the last few years had a look at the end of January and mid-February and realized that some of the best-performing stocks year-to-date on the TSX that would show up on their screens were gold companies.
Then you had a bit of a herd mentality kick in, with people trying to chase performance. They don’t want to be the ones underperforming because they haven’t held gold, so that pushes things up again. You’ve seen remarkable moves in gold equities because of that.
Is it sustainable? I think it is. You won’t see sentiment turning really negative again any time soon. We hope — I’ve been wrong about that before [laughs].
AV: There’s always a danger of over exuberance in the gold sector, and David, you’ve had some choice words to say on this very topic, as well as on the importance of investment discipline.
David Harquail: What Dan is talking about is a bit of a weather vane in the marketplace. The wind blows one way, and the stocks follow in that same direction, but it’s always going to spin around.
This is a long-term business. The average time from discovery to developing a mine has moved from 12 to 15 years. So you’re actually building your mine through an entire commodity cycle.
What you want to do is not worry about the hot money that’s coming through. They don’t care about a mine — all these equities are just poker chips for them, and they’re going to be in and out of the thing.
You can’t build a company based on the market weather vane. You have to take your project to completion and hold on to it to protect your margins, so you can make money and reap the benefits of whatever your discovery is over a long period of time.
I turn my screen off. I won’t even look at the markets because it only makes sense if I’m going to sell my stock on a particular day. And I’m always long. We buy things and keep them forever because we love land that has great geological potential.
And we think the most wealth in the mining business is not from timing the market or from financial engineering, or using your paper that has different valuations than someone else’s. It’s just being exposed to lands that host a discovery you’ve made. And that’s how we built our company — we’ve been buying interests in land when people have been giving them away, and later on we’ve had the money to explore them, and we’ve been very lucky.
All this focus you get from the newsletter writers in terms of trying to time the market — in time it is a zero-sum game.
AV: Stephen, would you like to weigh in? Integra Gold has been like a bright light in the industry over the past 12 months. And how do you think alternative financing has evolved from a junior’s perspective?
Stephen de Jong: I cannot agree more with what David has said. You can try to time the market as much as you want, but it’s not going to work.
We have a model at Integra that we treat every day as if it’s the last day of the rally. At some point the market may turn, but if you take an unbiased look at say a five-year gold price chart, you’ll see spikes, and then you’ll see the price go right back down again.
I started at Integra in 2012, and it wasn’t the best time to take the helm of a gold company. It was a $10-million company at the time, and now it’s at $200 million. So we’ve raised a lot of money and had a lot of success taking money when it’s there, as long as there’s a value opportunity.
With the conservative approach, you win either way. If the market goes down you’re going to be an outperformer, and if it goes up, everybody wins.
AV: How do you manage shareholders’ expectations, especially those who don’t share your conservative view?
SJ: You make decisions and you get faithful shareholders around that. Outperforming in a down market is a great way to gain faithful shareholders, and you get to a point where shareholders trust you. You do have to take a stand sometimes that go against what your shareholders think, and fortunately for us it has worked out, for the most part. We have to do what’s in our shareholders’ best interest, but we can’t listen to every single shareholder every single day … that’s not what we’re paid to do.
AV: Trent, a big part of your model at PearTree is attracting the right investors, especially to charity flow-through financing.
Trent Mell: We see charity flow-through as a natural evolution, with royalties and streaming having come of age. In Canada we have the benefit of 25 years of experience of a flow-through regime that has led to meaningful exploration and development in the country. Look at Éléonore, Voisey’s Bay, the diamond mines up north, and I can go on — there have been a lot of discoveries positively influenced by our regime.
Charity flow-through is a little-known tool, just because of the way it’s implemented, a lot of it goes on behind the scenes. But most flow-through deals last year were in fact charity deals, and it has come of age, even if there is a lack of education about it and the tax advantages.
McGill University, Vancouver General Hospital and SickKids hospital in Toronto are three charities we like to highlight that have outed themselves as having been recipients and benefitted from the generosity of our clients. We have philanthropists that have been very, very active in charitable giving.
AV: Turning to private equity, Dan, could you tell us about the true role private equity has to play in the junior market?
DW: Part of the challenge of the expectations surrounding private equity is understanding what a private equity investor is, and what it is not.
We are an institutional fund manager. Our limited partners are mostly large U.S. pension funds and university endowments. These are stable, long-term investors who are seeking a specific exposure to commodities or real assets, and minerals are a subcomponent of that.
So we are bringing quite a different source of capital to the mining sector, one that traditionally hasn’t been there. These are not investors who will generally go out and buy a share. They would allocate funds to a fund manager, and not do direct investments.
It got a little bit of hype as things were coming off in the mining sector and people saw a new source of capital for the market that would raise their share price. And that’s sort of not what we do.
What we do is deploy capital into situations where we can help something happen. So most of our capital has been deployed building mines — construction equity. For example, mineral sands in Kenya or a diamond mine in Lesotho. People are leveraging our equity to bring in bank financing, and other equity, and actually get things built.
The people who have been good at that in this part of the cycle have been people like David and his peers, who have contributed enormous capital to achieve goals and get things built.
We have the benefit of our investors being long-term. They’re 10-year funds with no redemptions and the money is committed. When we say we can deploy it, we can deploy it. We can be long-term, through-the-cycle, patient investors.
That’s been one of the challenges of the equity markets in recent years: a real short-term focus.
DH: By default, the short-term money has blown up. We used to be driven in bull markets by the resource funds that were specific on resource stocks, and the trouble is that most of them were open-ended, so they got all their money at the top of the market and got all the redemptions at the bottom. I can’t think of a more systemically doomed way to invest in the marketplace.
The resource market is quite simple: you buy when everyone else is selling, and don’t buy things when everyone else is buying.
So those funds are designed absolutely wrong, and they’re always gaming the system, trying to make money within cycles because they only had a short period of time.
The generalist funds and the pension funds that look long-term are telling us that they’re looking at gold and other commodities as an asset class … and just show us that you can outperform gold.
And that’s kind of what we’ve built our business model around: with relatively little risk and the right timing, we can do better than gold itself. And that’s what we’ve done for the last eight years, and the institutions absolutely love it. They don’t want to be surprised by sovereign risk, metallurgical aspects or social issues on-site.
I think they found management teams would take their money and not tell them about all these challenges at the projects, and they didn’t get the returns they expected.
There’s a huge amount of money that wants to come into the business … we’ve invested $2 billion in the last 18 months. We just did a deal with Glencore but we didn’t want debt, so we said to the market “Please help us,” and we asked for US$550 million. We were offered many multiples on top of that. We upsized the deal to US$950 million at the end, and my biggest problem is that I have to pro-rate these people back, with some getting only 20% of what they asked for.
My problem is that there is so much demand coming in … what they want is a steady business that can do better than the commodity itself, without taking undue risk.
And they don’t want to do it through the equity market anymore. There’s too much financial engineering, too many people are skimming and there are too many machines working against them. They’re looking for direct investments. You see pension funds working through private equity firms putting money directly into businesses.
And I see a lot of them looking at royalties and streaming themselves, with long time horizons … so they don’t have to worry about the casino of the equity markets.
AV: Stephen, how do you manage dilution for shareholders?
SJ: The last few years have been carnage. There’s no other way of saying it. But there have been a few shining stars. It’s been a great proving ground for our company. For a company at our stage, it’s always a question of: Where does the value creation come from? Do you build it now and dilute yourself, or are there other value-creation opportunities that are equal but less dilutive down the road, assuming it’s all equity. The other thing is, as you progress, you open yourself to opportunities such as debt or other options. At Integra, we tend to have a simplistic approach: get the share price up and stay away from debt as much as possible, until getting right to the end. Like many things in life, if you keep it simple, it can work out really well.
TM: I’d add there’s no toggle. There’s no either/or in building a capital structure. It’s going to take a little bit of everything. Since 2008, streaming, royalties and private equity have had the upper hand, but as the market turns, a well-managed company like Stephen’s will outperform the market and there will be opportunities to build an appropriate capital structure.
We like to think of our particular product as being appropriate in the early stages. You don’t put a royalty on an asset before you know what’s there. I’ve been in that situation, where a royalty gets put on too early and you end up really paying for it.
We don’t provide the kind of heft a Franco-Nevada could provide, but you can layer in your options. We can provide help in increments.