THINKING THROUGH THE MEDINAH/AURYN SITUATION
WHAT’S THE OVERALL GAME PLAN ARTICULATED TO DATE?
Maurizio wants AUMC to become a mid-tier gold producer ASAP, he wants to build a MAJOR mining firm and he wants to trade on a loftier trading venue than the current one. He wants to launch a MASSIVE exploration campaign at the ADL involving multiple JVs with mining firms that are specialists in the types of deposits present at the ADL. Due to the prolonged nature of the Medinah/AUMC saga and all of the delays, I think we might forget that Maurizio has outlined his mission statement fairly clearly. Perhaps we just need to refresh it in our minds periodically.
GOAL #1: BECOMING A MID-TIER GOLD PRODUCER
By definition, a mid-tier gold producer produces in between 300,000 and 1 million ounces per year. How could he possibly get to that level of production? Three years ago, the Caren was scheduled to commence production at the rate of 25,000 ounces per year based on an allowable production rate set at 5,000 tonnes per year. Let’s check the math to see if Maurizio is being consistent with his other projections. In terms of grams, 25,000 ounces equates to 777,500 grams of gold production. This is because 1 Troy ounce of gold equates to 31.1 grams. If you divide this by 60,000 tonnes per year allowable production (5,000 tonnes per month multiplied by 12 months), you’ll get an average grade of 13 gpt being mined. This lines up pretty closely with the 15 gpt grade Maurizio has referred to on previous press releases.
Clearly, there is quite a distance in between 25,000 ounces per year and 300,000 ounces per year. The first question that arises is has the 5,000 tonnes per month allowable production rate increased after the completion of the 3 new “ventilation/safety” raises. Maurizio has already told us that the 5,000 tonnes per month allowable production rate is scheduled to scale upwards with time. Recall from a previous press release that Auryn had already put in a new and improved ventilation system into the Larrissa Adit.
In order to scale up production that much, Maurizio is going to need to develop other gold production sites. The Fortuna Mine seems to be the most likely choice but we don’t yet have projected production figures there yet. The last we heard in regards to the Fortuna Mine is that it had been successfully dewatered and they were removing mud/silt from the adit floors. They were also adding timbering for safety reasons. The plan was to resample the adits before deciding on a production plan if the project were deemed to be economic. The historical production grades from 1940 to 1970 were in between 60 and 90 gpt gold. The price of gold at the time was $35 per ounce. ACA Howe’s report already revealed that nobody to date has even scratched the surface on the Fortuna Vein complex.
If Maurizio wants Auryn to produce 300,000 ounces of gold per year he probably will have to go into acquisition mode. Maurizio and his wife own somewhere around 73% of the AUMC shares when figuring in their Medinah and Cerro shareholdings. In order to do this in as nondilutive of a fashion as possible, MAURIZIO IS GOING TO NEED TO GET THE SHARE PRICE OF AURYN UP MANY, MANY-FOLD. As an investor, I like it when management owns the lion’s share of the outstanding shares. I also like it when management is highly incentivized to move the share price up.
The Covid-19 scenario has dropped a bombshell into the lap of the Federal Reserve. The economy had to be shut down, there was no other way to fight the virus. The timing was awful because the debt levels of the government and individuals were already through the roof. If the Fed were to allow the value of capital assets to drop down, then our entire corrupt banking system could unwind. In order to prevent this, the Fed has been forced to PRINT A LOT OF MONEY FOR AN EXTENDED AMOUNT OF TIME. This will artificially prop up the value of the capital assets so that an overleveraged banking system can get paid back for the money they have already loaned out.
The need to PRINT A LOT OF MONEY FOR AN EXTENDED AMOUNT OF TIME is going to pressure the value of the dollar downwards and support the price of gold FOR AN EXTENDED AMOUNT OF TIME. About the only beneficiary of Covid-19 is GOLD and the producers or about to become producers of gold. In the current mining sector, a firm either has the ability to produce GOLD now or in the immediate future or it doesn’t. Gold producers have always enjoyed trading at a higher earnings per share multiple as the base metal producers. That gap is probably about to expand markedly because the effect of Covid-19 on the base metal producers tied more directly to the economy is just opposite of the gold producers.
As far as the timing of attempting to build a major out of a junior miner, Ivan Bebek of Auryn Resources (“the other Auryn”) recently told a Kitco interviewer: “If you look at a handful of companies and their share price performances, including ours, everyone’s gone up between 30 and a few hundred percent. And I think that’s the first sign of money coming in,” he said. “I’d like to think it’s 10 times easier to raise money today than it was six months ago. And I think every mining executive would agree with me.” [end quote] Keep in mind also that interest rates are near ZERO for those that qualify for debt financing. Gold projects may all of a sudden qualify for debt financing.
For the most part investors are smart and they can see the writing on the wall. However, they are not necessarily very quick at acting on their convictions. The “generalist” investors have historically been slow in coming around to gold investments. For the most part, statistically speaking, almost nobody has much exposure to gold. Similar to Goal #1 above in regards to desiring to be a mid-tier gold producer, management is going to have to move up the share price markedly in order to do it in as nondilutive of a fashion as possible.
With the mid-tier miners and major miners having shuttered most of their exploration activities, the number of new discoveries, especially GOLD DISCOVERIES, is de minimis. Replacing the amount of ounces a miner produces is not just a good idea, it is existential. The mid-tiers are going to want to take out any new gold producers in order to not only replenish the ounces they produce but also to gain access to the economies of scale afforded to the majors. Nobody, however, can match the dynamic growth profiles of a new gold producer.
One might anticipate some synergies between the incentive to move the share price up during hyper-growth mode and the potential audience looking for investments in gold producers especially those new gold producers whose share price has not moved yet OR WHOSE SHARE PRICE HAS RECENTLY DROPPED BY 99.7%.
GOAL #3: TRADING ON A LOFTIER TRADING VENUE
Yet once again, this goal also coincides with the NEED to move the share price up. Many loftier trading venues come with it the need to keep the share price over “X” amount. A loftier trading venue would also grow the universe of potential investors, especially institutional investors. CREDIBILITY would also be greatly enhanced.
GOAL #4: TO LAUNCH A MASSIVE EXPLORATION CAMPAIGN UTILIZING JVs WITH “SPECIALISTS” IN THE DEPOSIT TYPES PRESENT AT THE ADL
At the “informational meeting” hosted by Auryn in Las Vegas about 3 years ago, Maurizio admitted that developing the Pegaso Nero Cu-Mo porphyry project at the ADL would be way too big for Auryn to tackle. The CAPEX for projects of that scale is often in the billions of dollars. Maurizio had permission to state that Freeport McMoRan had already signed an NDA with Auryn and was sending a team to the ADL to evaluate the project. Maurizio also mentioned that two other firms, both even larger than Freeport, had shown interest but he did not have permission to use their name. Maurizio has always surrounded himself with the best of the best. If you want to get the job done right you need to start with HUMAN CAPITAL and develop strategic alliances with those more advanced along the learning curve than you are.
From an investor point of view, there has been a dramatic paradigm shift in the mining industry over the last 15 years or so. Mining investors want guaranteed shareholder rewards for incurring the risk they have taken. They no longer want management to take the profits and roll them into new exploration programs designed to block out new MR/MR. The market just doesn’t value ounces in the ground very generously. An ounce of gold in the ground in the DRC has nothing to do with an ounce in the ground in Chile, Canada or the U.S. Investors want share price appreciation but they also want cash dividends that are treated in more of a tax favorable manner. They want share repurchase programs. The CEOs of firms concerned more about MR/MR than shareholder rewards are now gone. Soon we’ll be able to confirm that today’s mining investors want EXPOSURE TO GOLD PRODUCTION more than anything else. People writing about the mining industry will soon be talking in terms of pre- and post-Covid-19 realities. The key now is how incentivized and how capable is management in moving the share price up and/or providing guaranteed shareholder rewards.