Abitibi Royalties (RZZ-V) Out of McEwen's shadow
Ian Ball, former president of McEwen Mining, opens up. We talk opportunity next to Canada's largest gold mine through Abitibi Royalties.
Ian Ball made a surprising career choice earlier this year. He left the relative comfort of McEwen Mining - groomed by Rob McEwen, the company's chairman, controlling shareholder and also the former head of Goldcorp, to the position of president - to join a much smaller junior explorer called Abitibi Royalties. He'd been at McEwen for over a decade.
Or maybe it wasn't so surprising.
In leaving, Ball, the right hand man of McEwen - who is no conservative in his approach to company building and discovery - showed he too is a risk taker, not just a career seeker.
Ball, now President of Abitibi, says in leaving McEwen he looks to create something according to his own vision, "the best gold company in the world," he says at one point in a recent interview.
In describing his approach to building companies, and the reason why he wanted to join Abitibi Royalties, he turns to analogies meant to inspire awe, examples that struck him earlier this year and last in the tech sector. He looks at market darlings Uber (car sharing) and Airbnb (house sharing) that have turned traditional industries on their heads and garnered massive, multibillion-dollar valuations in doing so.
Take Uber. Ball was introduced to it last year at a conference by a friend while waiting for a taxi. It amazed him, especially after it got an $18 billion valuation. This for an app that connects urban hitchhikers with nearby cars willing to pick up rides foregoing the taxi.
"And I said, 'They don't own any cars. They have no drivers. They basically took the taxi model and blew it out of the water and now it has a valuation bigger than Barrick.’”
If it all sounds a little grandiose, in it there's a healthy tinkerers heart that Ball attributes to McEwen: to question fundamental assumptions. Such industry revolution helps drive Ball's pursuit of opportunity in the mining sector.
"It stuck in the back of my head because Rob had always instilled in me that you have to question the fundamental assumptions of a business if you want to be successful," Ball says. "For him, it was the Goldcorp challenge. Giving away the exploration data for free – no one had ever done that." That challenge led to multi-million ounce discoveries at Goldcorp's Red Lake mine.
For Ball, in striking it out alone, he sees revolution in Abitibi, which owns assets adjacent to the Canadian Malartic gold mine in Canada, the country's largest gold mine that is now owned by Yamana Gold and Agnico-Eagle Mines. Abitibi holds a couple royalties on small extensions/satellite deposits to Canadian Malartic and a 30% joint-venture interest, free-carried to production, on lands adjacent to the Canadian Malartic deposit that look to hold some growing gold mineralisation (the JV interest could grow: Abitibi contends it has a right of first refusal to buy 70% more, but Yamana and Agnico disagree. It's in the courts.)
"I knew I needed a different model," Ball says. "I knew I couldn't just go out there and move rocks. Because that's proved to be a terrible long-term investment. I looked at the discoveries that made Goldcorp and Barrick and they're few and far between. And I thought the odds are not in my favour that that was going to happen. I looked at the royalty space, and I looked at Franco's net asset value and said, 'Geez it's almost like when they raise equity they're getting capital for free.'"
He asks rhetorically: "How am I going to compete against that?"
He continues, "I looked at other royalty players and it looked like they're on the fringe. It's like the junk bond market, more players come in, yields come down and if you want to get that old yield you've got to take on riskier assets. This seems like a fool’s game."
Which brings him to Abitibi. It has a tight share structure (~10 million outstanding), with possible near-term revenue - meaning it may not have to raise cash to survive - and meantime Agnico and Yamana are fleshing out recent discoveries on joint-venture lands that, if they prove more fruitful, could mean ore down the road heading to local mills, without the need for fresh and expensive mine builds.
Ball says, embellishing, "I don't know anybody in the mining business that has this model."
There are some strong attributes in Abitibi to hail.
It is right next door to the Canadian Malartic mine, a new mine which churns out some half a million ounces of gold a year from an open-pit. It doesn't hurt that Osisko, which owned the mine, was recently taken out for more than $2 billion by Yamana and Agnico-Eagle in a bidding war with Goldcorp.
To the south of the mine Abitibi holds a 2% net smelter royalty return on a small satellite gold deposit that is set to generate some modest income next year (low millions). It also has joint venture grounds to the east of Canadian Malartic where there's an additional royalty on the Barnat Extension (essentially part of the Canadian Malartic deposit) that may bring in revenue come 2016.
It's modest stuff.
More interestingly, however, is the possibility for deposit expansion on joint venture lands, owned between Abitibi and now Agnico-Eagle and Yamana.
It's not pie in the sky stuff.
Exploration - headed up by Yamana and Agnico now - is moving ahead and recent drilling hit wide intercepts with gold in the 2-3g/t range including 110 metres @ 2.85 g/t Au, 43 metres @ 2.39 g/t Au and 34 metres @ 2.29 g/t Au. These come in what Abitibi calls the North Odyssey target and expand on previously known mineralization nearby. Meantime, parallel to the broader gold mineralization, the joint-venture partners are turning up narrow - 1-2 metres - and very high grade gold intercepts, with as much as 1.5 metres @ 105.5 g/t Au, but more typically 1-2 metre hits in the 10 g/t Au range.
The uniqueness for Abitibi here is that were the ongoing discoveries to prove economic, there might be little capital needed to be spent. Existing mills in the area are soon set to be ore-less. It's part of what attracted Ball to the junior.
"This property should become quite valuable when you have three mills around you two of which are running out of ore," Ball says.
He's talking about Agnico's Goldex mill 13 kilometres to the east, where there are four years of reserves (7.6 million tonnes grading 1.5 grams/tonne gold in an underground deposit) and even less at its nearby Lapa mill (1.5 million tonnes grading 6.0 g/tonne gold).
Turning to Goldex's low reserves, Ball notes, "And, seeing that, I said, 'Ok that's interesting because these guys just became your partner and they have a mill running out of ore and it's going to take four years plus to drill out Odyssey and do the development. The time frame is sort of similar.’”
Similarly, with Lapa running out of ore, he references the new, narrow, high grade gold at Odyssey.
In this Ball settles on an analogy for Abitibi that is closer to home - in junior exploration, not tech: MAG Silver. "For me that was the benchmark I wanted to see Abitibi become," Ball says. "They're beside the world's largest silver mine (in Mexico, with a minority interest in a major silver discovery that they made). We're beside Canada's largest gold mine."
He readily admits Abitibi, with its new gold mineralisation, isn't near the scale of MAG's discovery. But then to make Abitibi more valuable he may not need to get there, he argues.
"It just didn't seem a fantasy that you could get 20% the market value of MAG," Ball says, which would be $100 million to MAG's $500 million enterprise value. "I looked at it and said it seems to me at $35 million (Abitibi's market cap) if you don't have to issue more shares it doesn't take a lot of value creation to bring the share price up. That was my simple math."
Very McEwen all this, setting high expectations, being wary of dilution.
And Ball's showing other such traits of McEwen: aligning with shareholders through ownership. Ball, noting the lesson, is taking his salary in shares in a roundabout way.
He had asked to get paid in shares, straight up. But the TSX wasn't too keen on it, he says. So instead he agreed to take his salary but turn around every pay cheque and put it all into Abitibi shares. He'll do it for at least the next year, he says.
"People said, 'Are you doing this because you're a nice guy,'" Ball recounts. "And I said, 'No I'm doing this because I want to make money.'" |
