David Cole, president and CEO of Eurasian Minerals (TSX: EMX; NYSE-MKT: EMXX), took some time during a visit to Toronto to chat with The Northern Miner about the company’s business model, recent developments and upcoming catalysts.
The royalty and prospector generator holds about 70 projects covering 1.4 million acres across five continents. Its key assets include the Leeville Royalty property that covers part of Newmont’s underground gold operations in Nevada’s Carlin trend, the Malmyzh porphyry copper-gold project in Far East Russia held by private firm IG Copper (51%), and Freeport-McMoRan (49%), with Eurasian holding a 39% interest in IGC. It also has organically grown royalty interests in Turkey, and the Cukaru Peki royalty property in Serbia. The following is an edited transcript of the Sept. 7 interview:
The Northern Miner: What led you to form Eurasian Minerals in 2003?
David Cole: I spent the first 18 years of my career with Newmont Mining. While I was with Newmont, I was typically on the pointy end of the stick, going around the world doing generative exploration. I did work in the mining environment just to understand what that environment was like. But my passion has always been value creation through the discovery process. And I had the opportunity to work in Indonesia, South East Asia, Nevada and the Western U.S., as well as Peru and the Andes. One of my last positions with Newmont was as the exploration manager of Turkey — that was very educational, and I had a passion for the exploration potential in Turkey.
During this process, I was fascinated with what made money and what didn’t. It was clear to me that the royalty model was very, very intriguing. I saw Pierre Lassonde build Franco-Nevada on the back of royalty acquisitions that he made in the Carlin trend. And the fact that Pierre Lassonde made an exorbitant amount of money off his royalties — with few employees and few headaches — I thought was enviable. So I always had a lot of respect for that.
In addition, there was a prospect generator by the name of Lyle Campbell who was executing the private prospect-generation business model in Nevada. He built a portfolio organically in the state of Nevada by staking properties, adding value by doing good geology, selling those properties off, and keeping advance minimum royalty income flow coming in and production royalties coming in from a portfolio. This portfolio augmented in value over Lyle Campbell’s life. I thought this was just a fabulous example. So with these two models in mind, I left Newmont to found Eurasian Minerals and pursue the prospect-generation business model, and leverage the value of discovery.
TNM: When did you leave Newmont?
DC: I left Newmont in February 2003, and we had Eurasian public by December on the TSX Venture.
TNM: How has the company’s business model evolved over the last 13 years?
DC: Our business model initially was pure organic growth of a portfolio executing the prospect-generation business model, where we acquired large tracts of prospective mineral real estate, added value and sold or joint-ventured assets.
We added the ability to make strategic investments, where we used the same geological talent and the same business acumen that we had around the world doing prospect generation. And if they identified a strategic investment [we could] make it a share placement or an open market placement. That has led to such things as our investment in IG Copper, which has the big copper-gold discovery in Russia.
And as our understanding of the prospect generation process and business evolved, we realized that what we really wanted is a good royalty. Tweaking the prospect-generation business model into a royalty generation business model where 100% of the project equity is available to our customers has facilitated more deal flow … what I really want is a good royalty. If I can negotiate a royalty upfront I am more likely to get a good one, as opposed to a joint venture, where you have an option to dilute to a royalty.
TNM: What stage are the projects at when you negotiate a royalty?
DC: These are typically early-stage assets, where we are acquiring properties and adding value with geological interpretations. It is largely model driven. And we sell these projects and keep a royalty in these properties. Also, we have stage gate payments or advanced minimum royalty income flow that comes in alongside these deals.
What we realized is that organically growing a portfolio of royalties is an accretive business, but it takes a long time for it to come into fruition because of the lead time to go into production. To help leapfrog the process, we felt it was prudent to buy royalties.
We did go out and buy the cash-flowing royalty on the Leeville mine in the Carlin trend, where Newmont is the operator. We’re just delighted to own that royalty. We bought it because we believe in Newmont’s ability to find more ores on the property … they continue to announce favourable results within the corridor.
To augment our portfolio of organically grown royalties, we should buy royalties if and when we can. There are a couple of good examples in our portfolio of royalties that we bought, namely the Leeville royalty, but also on the royalty in Serbia, on the fantastic new [Cukaru Peki] discovery, which Nevsun is advancing on the Brestovac licence. This is the former Reservoir Minerals property, which Nevsun purchased. It is a key asset and royalty in our portfolio that we’ve purchased.
TNM: The company has 30 projects in the U.S., including the Leeville royalty. What are some other interesting projects there?
DC: In addition to our key asset and assets in Nevada, we are also one of the largest landowners in Arizona. That would include a nice property position in proximity to the Resolution [copper] discovery in Superior Arizona. We have the Superior West property, which is in the hands of BHP Billiton. We have done a myriad of deals with major and junior companies in Arizona on the properties that we have there.
Newmont has already completed the Leeville Turf 3 ventilation shaft [in Nevada] at the expense of US$300 million. They anticipate doubling production, which we are delighted to hear. We already saw an increase in the royalty payment over the last few months.
TNM: How much of an increase should you see in the royalty payment over a year?
DC: We expect to see the royalty move from being a $1.5-million-per-annum payer to over $3 million.
TNM: Given Eurasian is active globally, how does the company balance its exposure to a country’s geopolitical risk with the country’s mineral potential?
DC: We have a history of doing this. It speaks to your focus on the United States. Early in the history of the company when the market was strong, we were dominantly in pioneering regions of the world, places like Serbia, Haiti, Turkey, et cetera. During the downturn, we have shifted our focus and worked in top-tier, politically stable venues, which include the western U.S. and northern Europe. We now have 50% of our portfolio in the United States.
TNM: How much of that has to do with investors becoming more risk averse and investing in companies in safer jurisdictions when commodity prices fall?
DC: The best way for me to explain it, which is actually a twist on your question, if you don’t mind, is that we want to get the best bang for our prospecting dollars. We want to acquire the most prospective mineral real estate for the cost. When it was a competitive environment, we went to crazy places like Haiti, Serbia — we were pioneers in Serbia. We were in Kyrgyzstan. We were in Turkey. In the downturn, we went in prospective areas in Nevada, Arizona, Sweden and Norway and to a lesser degree in New Zealand and Australia. So it depends on the ratio of competitor activity and geological political risk.
TNM: Did the recent political events in Turkey play a role in the company’s decision to sell its Akarca and Sisorta projects to two Turkish firms in August?
DC: It certainly would look that way if you look at how the events unfolded, and then we sold. We were negotiating the sales long before the failed coup. Those deals were in the works. They were not precipitated because of the change in the political environment. They were precipitated by our business model.
TNM: The company’s latest management discussion and analysis noted it had a $2.6-million working capital position at the end of June, and that it might raise additional capital to complete its planned programs. How long will the working capital last?
DC: That can last a long time because we are operating at near cash flow neutrality. Keep in mind that before that, we sold Akarca for US$2 million, which includes the cash equivalent of 500 oz. gold, which is paid to us every six months, in addition to other cash payments coming in. So between the US$2.6 million we had in the bank in June plus another [more than 2-point million] — plus we sold Sisorta for a quarter million, which is C$3 million, which is collectively C$5.6 million. We spent a little bit of money, but because we are operating near cash flow neutrality with the deal flow we have, that 2.6 could last a long time.
TNM: How much cash does the company have?
DC: It is safe to say C$4 million.
TNM: Would Eurasian look to raise more money in the near-term to fulfill its planned programs?
DC: That is not necessary because of the additional monies we have gotten from our deal flow.
TNM: What are upcoming catalysts that investors should look for?
DC: Ongoing revenue and exploration upside from the Leeville royalty property is an asset within the company. Advancing the Cukaru Peki royalty property in Serbia — long-term this is an absolute company maker. Another hands-down company maker is our strategic investment in IG Copper — one of the bigger new copper-gold discoveries in the world — and that is the Malmyzh strategic investment. This could become the most lucrative, once crystallized. The organic royalty interests that have been grown in Turkey, including Akarca, Sisorta and Balya, which are being fast tracked to production … would be value drivers. Collectively these are worth more than our market cap by a margin. TNM
— Eurasian shares closed Sept. 15 at $1.40, up 141% year-to-date, helped by higher commodity prices, continued deal flow, including the sale of Akarca, and the recent strategic industry law approval for Malmyzh, signalling support from the Russian government and a new development phase for the project. Eurasian has 74 million shares outstanding and a $103.5-million market capitalization.