On Friday December 15th, I attended Corner Bay's annual meeting in Toronto. Here are some highlights from notes I took. Warning, this is very long!
Peter Mordaunt started out the meeting by saying that the capital market's are in turmoil. Corner Bay' represents real value and the smart money will eventually come back and drive the share price to reflect the true value of the company.
He said this is a pure silver play and one of the more attractive one's at that. He indicated that the 3 largest primary silver producers have less than desirable balance sheets.
Peter said that if the price of silver fell to $4 per ounce CB would still be economic but most other primary silver producers would likely have to close.
Peter then provided an overview of his outlook for the price of silver.
§ Barrick had announced that they would bring on the Pasqua (spelling?) project; this had the potential to add 10% to the world silver supply. This project has now been put on the shelf.
§ The U.S mint recently announced that their inventories have been completely depleted. They were using 1.6 million ounces (continue to?) per month on silver coins.
Peter felt that silver has a much brighter future than gold because there are real fundamentals that drive the price of silver. In his view, silver looks reasonably attractive in both the short and long term.
During the past year, CB has addressed two of the greatest risks and that was the reserves and the metallurgy.
They have determined that heap leaching is the most cost effective recovery process. In response to a question, Peter said that recovering the silver using conventional milling equipment would result in a higher recovery rate, but is significantly more expensive and as a result does not maximize shareholder value.
For the most recent financing, 95% was picked up by institutional money managers, or what Peter refers to as "smart" money.
He outlined 3 key areas that will be addressed in the next year.
1) Complete feasibility study. It should be close to 90% done by this time next year. This will involve preparing a preliminary process design, mine layout and completion of a cost estimate with an accuracy of + or - 15%. He further pointed out that the new VP of Operations (more on that later) would manage this. Although the work will be contracted to outside firms, the Operations VP, will be an integral member of the team. Additionally, he/she will coordinate closely with potential debt financiers to ensure that the proposal does not in any way jeopardize their future participation. (i.e.: using a consultant that the financier does not have confidence in).
There are a number (4 or 5?) of gold mines in the area that use heap leaching. C.B can draw on their experience to optimize the design of the mine. In addition, drawing on actual data from nearby operating mines will give the Bank's confidence in the quality of the feasibility study.
2) Continue Exploration. C.B intents to invest as much money as they did in 200l. They will undertake infill drilling to further delineate the deposit (will be used in the feasibility study) and some step-out wells with the best potential.
They want to target high quality zones. What was interesting was that Peter said that the cost of finding the existing deposit was only 1.5 cents/ ounce, which is really quite remarkable. I think it's reasonable to expect an increase in recoverable reserves ranging from 15% - 50%.
3) Secure project financing. Peter was very confident that CB would be able to obtain the necessary debt financing for the project. He expects that of the Cdn$60 million required to develop the mine, $20 million would be raised using equity and the remaining $40 million would be in the form of debt. CB plans to pay back debt as quickly as possible.
In response to question about hedging requirements linked to debt financing, Peter did say that one lender had proposed that approximately 15-30% be hedged (enter into long term fixed price contracts with a purchaser to ensure stability of income).
Banks don't like taking risks and get worried about financing a large project only to have the price of the prime product collapse. Locking in prices up front reduces their risk. But locking in too much reduces shareholders upside. Peter said that the amount of hedging requested by the potential debt holders, approximately matched the production of gold and he is quite happy to hedge all the gold and let the silver float.
This is a VERY VERY IMPORTANT POINT FOR ME!! If CB is forced to hedge a large percentage of their silver production in order to secure financing, this will limit our upside in the event that silver moves significantly higher. As I see it, this project has limited downside and enormous upside potential if the price of silver rises dramatically, provided of course that silver production is not hedged to any large degree. This is a prime reason why I am a shareholder. This will be a key question I will be asking at next years annual meeting.
With respect to hiring additional staff to manage the development and operation of the mine, Peter indicated that there is a lot of excellent talent to choose from. In excess of 150 resumes were received, of which at least 40 were well-qualified candidates. He anticipated that a new V.P of Operations will be named early in the new year and a new VP of finance will be named in the 3Q 2001.
Peter indicated that the first 5 years of production are fabulous, but the attractiveness tails off in the 9th and 10th year. They hope the exploration program will generate more high-grade reserves to help enhance the attractiveness of these later years (and the entire profile I assume).
In response to a question about CB's plans for the healthy amounts of cash generated from the mine, Peter suggested that shareholders can expect a decent dividend, with remainder going to pursue other opportunities. As large shareholders, management's interests are closely linked with ours.
Peter outlined the reasons why he felt that Sonora is one of the best places in the world to develop a mine:
1) Close to the U.S
2) Close to the sea and ports
3) Lowest exploration costs in the world
4) Access is excellent. Trucks can drive right up to drill rigs to collect samples.
5) The province has a number of other mines in the area and is receptive to mine development
6) There is little of no use of the land were the mine will be located.
There was NO discussion or mention of a buyout.
In summary, I think this is an excellent silver play. My view is that management is very capable; focused on managing risks and maximizing shareholder value. If the price of silver moves higher in the next year or two, Corner Bay will be well positioned to capitalize, provided silver production is NOT hedged to any larger degree. If silver remains flat, I think we can expect a reasonable return on our investment.
John |
