Greg Fekete and the Future
Continuing from discussions with William Rohtert, Greg Davison and Nick Houghton, last week I had the opportunity to exchange notes with and talk to Greg Fekete, president of TGX. Greg was responding to a number of questions and concerns that I had about what TGX’s plans are for the future. I’ve tried to summarize what mostly what came from a telephone conversation in the text below in the Q and A format that I’ve used elsewhere. These are my words and my recollection and interpretation of what was being said, and I apologize to Greg if I have misrepresented anything.
Q: Given the significant discoveries that the company has been making in the last year and given that RAB Capital owns 20% of the company and could likely aid an outside party in acquiring control of the company at unreasonably low prices, do you think that it would be prudent to implement a shareholder rights plan to prevent the possibility of this.
A: Greg thinks that RAB, given its history of investments and the statements that it has made, has given no indication that it would act in such a manner. Management has discussed the possibility of dealing with a takeover threat. Their conclusion was that implementing such things as a poison pill or shark repellent, with which Greg is quite familiar with being a lawyer, would have expenses in terms of implementation that would be better put to work elsewhere. Greg thinks that the company could and should wait for an obvious sign that something is going on with respect to takeover intentions before implementing anything – he pointed to the fact that the Saskatchewan diamond plays implementing takeover protection recently were responding to obvious threats.
Q: What will be the criteria with which the company decides on how to allocate its money in the next year? Would you consider it an imperative to focus money on the projects that appear to have the highest chance of indicating profitability to shareholders (ie. the rubies), conserving cash to avoid dilution and preserving the shareholder’s stake in the best projects?
A: Greg went to pains to point out that Fiskenaesset, although it has had excellent results that he is excited about, is still at a very early stage. He thinks that it is necessary for the company to follow a careful process in advancing all properties; there is a lot of analysis and planning to be done, and it is limited in how much will be done in Greenland within single field seasons given the amount of analysis and planning required. He thinks that Tsa Da Glisza is within sight of finishing the careful process that they need to follow. TGX has sought the advice of independent professionals on what will be required to complete prefeasibility there and they think that with another summer they can reach it. So, it is too early to prejudice decisions or to say that we can or should immediately work on the rubies or assume that we can start making positive cash flow right away. The decisions to be made in funding will be based on analysis of detailed 43-101 reports that are being generated for all of the properties, in each case from multiple sources of input regarding such things as the geological interpretations. His goal is to have draft 43-101 reports done by December and available in SEDAR in February. Budgeting will be done and refined as necessary before the next field season. Greg says that the company wants to avoid dilution, and is looking into better ways of financing after more than a year of admittedly making very little efforts with respect to financing (more on this later).
Q: Could you compare and contrast the different properties areas and their potential. What are your thoughts on retrieving rubies from the lake water beside Big Red .
A: The company considers all the properties to have great potential. In all cases TGX intends to retrieve representative samples, follow careful process, and avoid the temptation of “high-grading”, which Greg thinks would distort the picture of the deposits for independent evaluation and negatively affect the ability to plan, finance and build an appropriate scale mine. Here are his thoughts on the different properties:
Yukon emeralds
Results from this year’s season were successful and encouraging in their objectives of sampling to confirm emerald mineralization indicated by drilling. The Yukon is a good place to do business – what they need for mining is there, and Tsa Da Glisza is sufficiently accessible to bring in what they need when they need it. For example Greg pointed out that when there was a freak accident with the crusher they were able to find parties almost immediately to do the rather difficult task of retooling the broken shaft and with good turnaround time. The Yukon simply has a mining culture. The government wants mining and has provided TGX with a $700,000 tax credit for the work that was done this year, so this type of rebate has to be considered when evaluating cost of working there in the future.
Baffin sapphires
In contrast to the Yukon, Baffin does not have a mining culture or an entrepreneurial culture, rather more like a welfare culture (although that was not a term he used). For example, the simple task of getting a boat in Baffin becomes difficult because the locals are used to getting their money from government subsidies and take no initiative to engage in any private enterprise like renting out a boat. In addition, the regulatory environment is at minimum one of the worst in this hemisphere.
When speaking of the deposits themselves, TGX has gotten tremendous numbers from Baffin, and the potential is certainly very large given that the prospective marble outcrops seem to just go on and on forever. Having said that, at this point, they still have little proof how much tonnage is in the region, large or small.
Greenland
Yukon has a mining culture, Baffin has a welfare culture, and Greenland has a maritime culture. It might at first seem remote, however Greg pointed out that transporting things to and from Greenland by boat is surprisingly easy given the high volume of ships going back and forth along the coast every day. He mentioned that transporting their bulk samples back did not even require a special ship – they found one that loaded the samples and took them to Ontario, arriving in August (and apparently they have been processed and gem cutting is underway).
Greg pointed out that the samples so far, although tremendously encouraging, are too small to be given large weight in terms of being considered truly representative of the whole deposits. The company does know the geology with much certainty, and may never understand why some of the geology occurs as it does. There are no guarantees what further drilling or sampling will discover. As such, Greg thinks that it will be a difficult decision as to what activities to choose next, and he seems to thinks that the company might not want to tackle all the ruby occurrences at once… so he seems to lean towards focusing on one occurrence.
Siggartartulik
Siggartartulik has flat exposed ledges of ruby mineralization that are easy to extract material from in bulk sampling. The area is relatively flat, making it easier to do activities such as drilling. Most of the rubies are not great quality, although they did find some nice stones, including some very good quality pink sapphires with excellent colour saturation.
The Tooth
The Tooth is actually near the top of a ridge very close to the bay. Being on a ridge makes it difficult to get equipment such as drilling rigs set up, although there are advantages. The mineralization is visible on the surface area wholly encircling the outside of the ridge, giving better confidence of what is there, and the exposed orientation makes it easier to cut out this mineralized area. The rubies are a very good red colour, so it is unlikely that heat treatment would be necessary, and this would result in a premium for the stones.
Big Red
The rubies at Big Red are definitely the best – an excellent red colour and well formed crystals. At the same time, there are no guarantees how much material is there. With respect to talus that is in the lake, Greg thought that if it were to be retrieved, the easiest way would likely be to pump out the water from the lake since it is apparently not a large one. It sounded like Greg thought that Big Red might be the prime target for exploration given that it is has the best gems.
Q: Has the company seriously considered extending activities in Greenland to maybe eight or nine months a year rather than just the summer? From what I can tell, the coastal area is not nearly as severe in temperature as Baffin or the Yukon, and hardy people might be able to work under such weather conditions.
A: More than weather concerns, the need to do careful analysis and planning is the main limiting factor, and the company is hesitant to extend the field season when it might be costing money without being able to expand the timeframe for analysis and planning in order to do things properly.
Q: Why has it taken so long to get full numbers on the bulk samples. For example, the initial results from the sapphires and rubies were derived from a subset of the material and we still do not have any final numbers.
A: The company has done a lot of experimentation with such things as extraction method and optimal heat treating. Testing was done on float so that actual samples could benefit from better methods. Results have been encouraging, with color and clarity improved, in some cases near-gem material moving to the gem category. After taking care of all of the sample stones, numbers will be re-released. Generally all the smaller stones are automatically being heat treated since for smaller stones heat treatment has less impact on value. The larger stones are being scrutinized to determine whether or not to heat treat. Greg pointed out that without having the stones cut and graded, it is impossible to say what you have from raw gem numbers, and the company is carefully compiling this information before releasing it (it sounded like the company was less careful with the emeralds, ran into some difficulties with some early numbers released, and intends to not have any repeats of that). The company is very happy with what they have been getting in results.
Q: How does the company view its prospects with marketing.
A: True North has looked carefully at the business model for Tanzanite One, the successful London AIM exchange listed miner and seller of tanzanite, and believes that there is great strategic importance of controlling the source of gemstones, potentially adding value through marketing with sight holders. Greg even hinted at the possibility of strategic acquisitions sometime in the future.
Potential returns at the retail level are very attractive, which Greg says is the main reason that Aber, Canada’s largest diamond company, acquired Harry Winston ( see www.harry-winston.com – nice to see that they have a few sapphires, emeralds, and rubies for sale in jewellery, standing out their black and white diamond pictures). TGX has done a bit of market research and found that the colored gemstone market rewards those who understand the complexities of market preference, which sometimes are surprising. As with the US market, it seems Canadians prefer the color blue for colored stones. Some parts of the world prefer pale gems, while other parts prefer dark ones, and of course the colors and gemstones have their own followings in different parts of the world. TGX may commission market research from experts in the field as management feels appropriate.
Q: Could you comment on TGX's plans for promotion and financing?
A: TGX has been present at the annual February Tucson gem show (apparently not in a booth yet) in order to rub shoulders with the top gemstone experts in North America, and they certainly have these people’s interest. Last year TGX's pink sapphires were displayed around and they compared very, very favorably to what was at the show. Having top gemstone experts looking over their stones certainly lends credibility to the company, and that seems to be the aim, in addition to getting the exposure to sell the gems to high profile buyers. TGX hopes to have a dazzling selection of gems ready to show around at this February’s show, which is logically followed in the summer by a Las Vegas jewelry show which then allows orders to be made and filled in time for Christmas 2006. TGX hopes to sell some valuable gems next year, get some cash, and boost their image through whoever buys them. In order to gain more exposure in Europe, they are looking at attending the largest European gem show in Munich also, Germany being a country with a sophisticated appreciation of coloured gems.
Speaking of Europe, Greg seems to feel that Europe is an easier place to raise financing money at this point than alternatives are. A factor in this is the cultural familiarity of Europeans with coloured gems -- the British are familiar with them through East African and South Asian colonial possessions, and Germans have long appreciated them, with cutting and trade historically occurring there. Talking to him, it sounds like listing on AIM is being very carefully considered with strategic benefits going beyond raising money in the short term, extending to raising money for mine construction. Key to getting major financing is getting independent feasibility studies done. Some of the big wigs in London financing seem to have plenty of cash ready to dole out if you show them the goods, but don’t have time for small time players that have not proven themselves with professional independent reports.
As far as financings go, Greg admits that the company put little effort into their financings in the last year. The plan for the future sounds like public rather than private offerings, backed up by information released in report form as it is available rather than on an annual or quarterly basis. Releasing relevant information as it is available in reports seems to be the model that the TSX is now favoring and moving towards. Much exciting information will be available in the form of independently certified cut gems and detailed reports before any new financing would occur.
Q: What is needed to get to a feasibility study with coloured gemstones.
A: Greg Fekete compares colored gemstone deposits to diamonds as the closest model. One can’t merely drill to prove feasibility – one needs to bulk sample to show that valuable mineralization extends throughout the target mineralized area. The reason that gemstones like rubies and sapphires are so rare is that their formation was dependent upon the circulation and infusion of relatively uncommon elements like chromium, vanadium and titanium. What shows on the surface can't be simply assumed to exist at depth, although one can’t also rule out that better gems might exist hidden in the ground, perhaps with cavities in the rock having fortuitously been available for larger, higher quality crystals to form into. At any rate, bulk sampling is required before feasibility, and people should be aware that bulk sampling cannot be expected to show positive cash flow, at least it would be incredibly exceptional for that to be the case. Independent professionals who would put their name on a study dictate the minimum drill spacing and bulk sampling required for them to certify reserves or resources, so one has to plan and spend money carefully in moving to feasility.
[My own view as an armchair geologist with no formal education in the area is that the Siggartartulik ruby mineralization might turn out be much more predictable than the emeralds (as appears on the surface), at least in so much as they appear to form in contact zones between layers of mineralization types that stretch over vast distances, as compared to being dispersed around less-predictable veins of mineralization within layers of mineralization. Mother nature’s recipe for rubies – Al2O3 baked slowly at certain temperatures and pressures -- note that corundum by itself is really not so rare -- and infused with chromium, may be a simpler one if you are lucky enough to have widespread chromite mineralization as at Fiskenaesset infused by a vast area of intrusive rock, as compared to beryl Be3Al2Si6O18 which needs the relatively rare beryllium as a component in addition to chromium or vanadium and favourable factors for formation.]
Thanks go to Greg for sharing his thoughts, and I hope that I have relayed them successfully. |
