New Canadian Mining of Hall (CMHF) inductees Alex Davidson and Doug Silver recently discussed their storied careers and their thoughts on precious metals at The Northern Miner’s recent Global Mining Symposium.
Davidson, a geologist with a track record of discoveries and successful acquisitions and Silver, a geologist and company founder, spoke with Northern Miner Group president Anthony Vaccaro at the TMX Market Centre in Toronto on May 25, the day after they were each inducted into the CMHF.
Both men have made strong contributions to the industry, Davidson as VP Exploration and later corporate development for Barrick Gold (TSX: ABX; NYSE: GOLD), and Silver as an early expert in asset appraisal, founder of the Denver Gold Forum and International Royalty Corp., and a portfolio manager at private equity firm Orion Resource Partners.
Davidson played an instrumental role in Barrick’s growth by guiding it to acquire valuable projects and contributing to world-class discoveries, including the Pascua-Lama gold-silver deposit in the Andes and Lagunas Norte in Peru. He also spearheaded the acquisition of the Pierina deposit – which eventually produced for 18 years at some of the lowest mining costs in the world – based on only nine drill holes.
Davidson recalled that Barrick had opened an office in Peru in 1994, hiring a team of mostly Peruvian geologists as well as an expat American to run the office. When news of Arequipa Minerals’ Pierina discovery broke, the company already had a team on the ground.
“Our guys were able to get there within days and… (they) knew enough to understand the geology and to see the potential,” Davidson says. “Pierina wasn’t a complex deposit. It was basically a saucer-shaped thing and you put the holes in the top and then we did the calculations and figured out how many ounces we thought were there and what we could afford to pay for it.”
Moving quickly allowed Barrick to get the asset instead of Newmont or Buenaventura, who were also active in Peru at the time.
Davidson noted that Barrick’s philosophy under founder Peter Munk was to always pay full price for an asset, then bank on the upside.
“We probably paid more than we wanted to, but we acquired it because we could see the potential from those nine holes because the holes hung together so well, big thick intersections. I mean, it wasn’t rocket science.”
He added: “Peter was never one for buying toeholds in juniors. He said if you think it’s good enough, buy the whole thing. Don’t muck about with the 10% or 20% and then tangle yourself all up. That was a Munk philosophy. And the other one was, ‘nobody remembers how much you paid for it.’ And he was right.”
‘Desperation leads to innovation’
Silver, who said that he has “infinite curiosity,” has worked in many different roles in the industry throughout his career, including starting his own mineral economics and management consulting firm Balfour Holdings.
He said he started the business out of necessity when he was laid off from his job at Anaconda Copper the same day his wife, who was eight months pregnant, lost her job.
“Desperation leads to innovation,” he said.
As assistant to the VP of Anaconda, Silver got to sit in on board meetings, which is how he learned that “the directors had no clue what they were doing. They were reading the Wall Street Journal that morning and that was their strategic plan,” he said.
The problem, he recognized, was the lack of data during the early ’80s, an era before computers were ubiquitous.
“The managements of these companies didn’t have quantitative data to make proper decisions and so I built Balfour with the sole purpose of providing boards with quantitative data,” he said.
Using his severance pay to buy the first laptop that was for sale, Silver built databases collecting information about acquisitions, including how many ounces a company bought in a deal and what they paid per ounce.
“I built an incredibly detailed model for every transaction so that you could compare transactions one-on-one. So I had companies would call me and say, ‘hey Doug, do we buy a gold deposit in Mexico or a gold deposit in Peru?’ And I could say well, you know the average gold deposit in Mexico is trading for this per ounce. You know, just give them quantitative data.”
After growing his databases for 20 years he became a certified appraiser.
“It was like half dozen of us in the world that had mining backgrounds and appraisal training, so then I did appraisals for all the big companies,” he said. “I had no competition and I’ve tried to do that throughout my life. Monopolies are worth fighting for.“
Noting that gold prices are currently fairly strong but equity valuations are “terrible,” Vaccaro asked if either had seen similar situations during their careers.
“I think we’ve seen it before,” said Davidson, recalling that in 2008 the gold price rose several hundred dollars, yet “you couldn’t raise a penny in 2008/09/10. So we’ve seen that before. We’ll probably see it again.”
Silver noted that the profit margins on gold production tend to stay pretty steady, no matter what the actual price of gold does.
“If you look at all of the gold development projects, they’re all talking about having AIC cost around US$800, US$900. And if you’d looked at that three years ago, it would have been US$500 or US$600. They’re just moving in tandem,” he said. “Gold doesn’t need to go up, but the cost will always run parallel so the margins stay roughly the same.”
Silver also noted that he “hates” ETFs “because they’re sucking all the money out of private placements. Everybody’s talking today about how hard it is to raise money. Well, you can put a big piece of that on whoever invented the gold ETF.”