The Mining Play

Auryn/Medinah - 2020 - 2nd Half General Discussion

“MASGLAS is currently working into going public. We expect to finalize the process by the end of 2020.” – Maglas.com

This most certainly may not be “it,” and in fact “it” certainly might never happen, but for the past couple of years I’ve been thinking that if “it” ever were about to commence, it would probably come out of a long dead silence and be signaled not with fanfare and searchlights, but with some innocuous little offhanded blurb on one of the conglomerate’s websites. Seems like that would be in keeping with Maurizio’s understated style.

– madmen

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BARRICK GOLD CEO MARK BRISTOW: "The prospect of a serious reserve crisis is looming."

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Hi MrB and Dentman,

MrB-thanks for that article. As suggested by the article, the statistics are beyond dire for the majors and mid-tiers that have NOT been regularly replacing their Mineral Reserves/Mineral Resources in order to offset what they have been producing now that the price of gold has taken off and production rates increased. Investors are smart, they’re not going to buy shares in a major miner whose pipeline of production opportunities is near empty. These majors have painted themselves into a corner and are going to have to pay through the nose for any (especially gold) discoveries made by the juniors. In the mining sector, it seems that management of the majors is always either overpaying for assets when the POG is rising and then writing them down later or not doing any in-house exploring when the POG is on a roll like now. The investment sweet spot within the mining industry is always changing but as more and more mining analysts chime in the sweet spot is now the juniors with discoveries in hand and especially those that nobody has ever heard of.

What does a “perfect storm” for a near term gold producer look like?

  1. Exploration has been tough to do in these times of Covid-19. This benefits the juniors like AUMN/Medinah with a discovery already in hand.
  2. Exploration is very expensive. This benefits those juniors that have already done most of their exploring and made a legitimate discovery. The exact number of ounces of MR/MR in a newly discovered gold deposit is not critical to know right now. The people that buy these deposits can estimate those numbers without tens of millions of dollars needing to be spent in order to come up with an exact number.
  3. Even if a major were to make a significant discovery tomorrow, it still takes an average of nearly 20 years to get a new discovery into production especially if you’re starting from scratch in the permitting process. That boat has already sailed. THE MAJORS NEED TO CATCH UP BY ACQUISITION.
  4. The MR/MR on the balance sheets of the majors is at a 32-year low.
  5. New discoveries are at a 31-year low.
  6. Just 10 years ago, the average major had 20 years’ worth of production in reserves; today it is 10 years. But this is compounded by the fact that there are no new discoveries out there for a major to choose from in order to play catch up. The supply of new discoveries is de minimis; the demand is through the roof. Acquisition prices are going to continue to go up. The availability of cash for the junior with a solid discovery is so high that they now have the option to go it alone at least for a little longer during the derisking process. The stage of development of new prospects being scrutinized for acquisition is going be lessened.
  7. A major replacing the ounces it mines is not a luxury. It is existential.
  8. Today, juniors with near term producing gold assets have OPTIONALITY. Money available to go into production by themselves is everywhere if you choose to fly solo and you have some expertise. Selling your discovery is a viable option with the prices increasing. Joint venturing your discovery is another option being sought out by majors as well as juniors with a discovery. Royalty streamers are popular and have a lot of money to aim at juniors with a discovery in exchange for a royalty stream. The prices and terms available for the juniors with a discovery is going to get more and more favorable through time because new discoveries are going to get even fewer. The low hanging fruit has pretty much already been plucked.
  9. Those doing the exploring find themselves digging deeper and deeper while going after lower and lower grade deposits in more and more risky geopolitical environments. This will obviously keep metals prices high but if you have no pipeline to produce from it does a major no good.
  10. The travel restrictions associated with the Covid-19 pandemic have lessened the ability for the majors and mid-tiers to do due diligence on prospective acquisitions. You might expect a whiplash effect as these restrictions are now being lifted.
  11. Companies like Auryn/Medinah with a valid discovery that nobody seemed to appreciate will do fine in an environment like this. The inherent risks like not being able to get financing are getting less and less in this environment while the potential rewards are getting larger and larger.
  12. Companies like Masglas with 20-plus prospects for a major to choose from will do just fine. I don’t think it is happenstance that Masglas has opted to go public NOW as all of these stars are beginning to line up nicely.
  13. The average cost to mine an ounce of gold worldwide is now approximately $907 per ounce. The POG is just under $2,000 per ounce. Through hedging a producer could lock in that margin today.
  14. The Federal Reserve has painted themselves into a corner. They have too much debt on the books and they can’t even service the existing debt without demonetizing the USD. Gold is denominated in U.S. Dollars.
  15. Other Central Banks are doing the exact same thing. The Covid-19 crisis has forced them to. The problem is that the debt levels were already out of control when the Covid crisis presented itself. It’s going to be a race to the bottom. There are limited tools left in the toolboxes of the Central Banks. If you want a strong economy and be able to export products you’re going to have to join in on the “currency wars” and tank your own currency.

Let’s hope that Masglas’ going public is the final step in the overall plan that Medinah shareholders became a part of when AUMC (the old Cerro corporate vehicle which is one-fourth owned by Medinah shareholders) took over the ADL. Although the ADL geological results to date have been very compelling, we need to remember that Maurizio was executing on a much larger plan scale than just Medinah and the ADL before he “adopted” the Medinah shareholders.

The communications from Raul have been hinting that some task needed to be completed prior to Medinah shareholders receiving their AUMC shares. They had permission from the regulators since December 15 of 2019 to allocate and distribute the AUMC shares but clearly something was holding up the process. One communication from Raul cited the need to receive a “full legal opinion” from some legal source. Another cited the need to hear back from Auryn prior to allocating and distributing the AUMC shares.

We’ve been assured by Raul that any perceived delays are actually in the best interests of the Medinah shareholder. My gut is that this refers to management’s intent to dissolve/wind up the old Medinah corporate vehicle as part of the overall allocation/distribution process. With no cash, Medinah would have to sell a tiny percent of their AUMC shares or perhaps a combination of their approximately 11 million AMNP and a handful of their approximately 16 million AUMC shares in order to pay off their debt. You obviously can’t “allocate” the AUMC shares to individual Medinah shareholders until you know how many are left over AFTER paying any remaining Medinah debts. MY THEORY: THE MEDINAH WIND UP PROCESS MUST PRECEDE ANY ALLOCATION/DISTRIBUTION PROCESS AND THIS HAS PROBABLY BEEN THE HANG UP.

Likewise, you wouldn’t want to pay off any remaining Medinah debts from the sale of AUMC (or AMNP) shares if Medinah management knew they were about to increase in value. I’m not sure if this is just wishful thinking but this explanation would sure align with Raul’s assertion that perceived delays actually benefit Medinah shareholders. MY THEORY: DON’T PAY OFF MEDINAH’S CREDITORS VIA THE SALE OF ASSETS IF THOSE ASSETS ARE ABOUT TO APPRECIATE IN VALUE. WAIT FOR A POSITIVE CORPORATE DEVELOPMENT FOR AUMC THAT MIGHT INCREASE THE SHARE PRICES OF AUMC AND/OR AMNP AND THEN PAY OFF ANY MEDINAH CREDITORS WITH THE PROCEEDS OF THE SALE OF HIGHER PRICED AUMC OR AMNP SHARES.

Recall that Maurizio is Medinah’s largest shareholder and his financial interests align with those of the average shareholder. Recall also that Medinah’s remaining debt is noninterest bearing. WAITING for share price moving AUMC developments to occur might make sense especially if the Medinah debt is noninterest bearing. Management knows that the Medinah shareholder still has liquidity since “MDMN” still trades albeit at a 99.7% reduction from its previous high. All Medinah shareholders are frustrated and anxious. However, the combination of three realities might justify the past patience of Medinah shareholders in waiting for their AUMC shares. These three are the fact that Medinah’s debt is noninterest bearing, the Medinah shareholders do have liquidity and Medinah/AUMC management are one and the same and they obviously know if a run in the share price of AUMC in the near term is likely. More AUMC shares will be available for allocation to each Medinah shareholder if Medinah’s debt is paid via the sale of higher priced AUMC or AMNP shares.

If this theory is correct and an increase in the share price of AUMC will precede any allocation/distribution process of AUMC shares to Medinah shareholders then theoretically the share price of Medinah, as holder of about 16 million shares of AUMC, should rise proportionately prior to any allocation/distribution process.

My theory: In order to enhance the value of Medinah’s AUMC or AMNP shares as well as the share price of Medinah itself, positive corporate developments need to occur and be released to the public. AUMC owns 100% of the ADL Mining District. Good news could potentially come from the Caren and/or Fortuna Mines, the LDM and the Hochschild JV there, the Pegaso Nero or any of the breccias, skarns, mantos, etc. Management cited that a modest amount of production could occur at the Fortuna Mine by the end of 2020. Short of some type of tender offer or strategic alliance being entered into by Medinah, successfully clearing the hurdles needing to clear in order to go into (especially gold) production at any site at the ADL would obviously be the ideal scenario. With the price of gold at levels approaching $2,000 per ounce, some serious money could be made due to the high grades seen at the Caren and Fortuna Mines and amenability of the ore to processing by low cost gravimetric methodologies.

Maurizio has stated that the plan at the ADL is to carry out a “massive” exploration campaign by signing multiple JVs with parties holding expertise in developing the various deposit types present at the ADL. From a frustrated shareholder point of view, I would think that ANY POSITIVE DEVELOPMENT after a 99.7% drop in the share price would be more than welcome.

American Sierra or “AMNP” owns the Pangue and Caren placer claims at the base of the northern downslope off of the ADL plateau. AMNP also owns the Fortuna project, the Llano project, the Mali project and the Poseidon project. Those last four projects were vended in by Masglas.

When you consolidate all of the various “Maurizio” projects held by Auryn/Medinah, AMNP and Masglas you can get a feeling for what Maurizio has been up to over the last decade or so. AUMC’s ADL project, AMNP’s Puange and Caren placers and Masglas’s Colliguay project (the Empressa Caballos project which borders the Pangue and Caren placers to the north) are all contiguous in a north-south direction. The ADL has both intrinsic value as well as STRATEGIC VALUE. These projects could easily share a common ore processing facility if put into production. In turn, their chances of being deemed ECONOMIC are enhanced by the ability to share a common processing facility. The chances for the commissioning of a processing facility are in turn enhanced by lining up guaranteed sources of feed for any mill. Keep in mind that Dick Sillitoe was brought in to study prospects on a “regional” basis. Maurizio has apparently been thinking more on a “regional” scale than the average Medinah shareholder who has been thinking on a “district” scale. Remember the press release that cited that Dick Sillitoe was brought in to evaluate matters on a REGIONAL BASIS.

Masglas (Maurizio’s private firm) had accumulated about 25 projects prior to vending in four of them to AMNP. Most of these are hosted by the Chilean Coastal Cordillera and/or Atacama regions. Some are located in Peru. Recent history tells us that he was wise in staying away from the High Andes where POWER and WATER issues have become problematic. Nowadays, everybody seems to be heading towards the relatively underexplored Chilean Coastal mountain range. When you factor in all of the Masglas acquisitions as well as the ADL and AMNP’s placer properties you need to keep in mind that the price of gold has moved up about $600 per ounce since a lot of these projects were acquired.

We Medinah shareholders own about one-fourth of the action at the ADL Mining District. We have never been told the overall game plan that our investments have been incorporated into due to circumstances. Maurizio has already stated that he wishes to build a mining major. He also has cited that he wants to be a mid-tier gold producer in the not too distant future. Might the ADL Mining District be the flagship in this endeavor?

TIMING PARAMETERS

From a timing point of view, for Maurizio it seems to be a very fortuitous time to having already assimilated that many prospective mining concession groups during some rough times for the mining industry after the 2011 highs in the POG. From an industry point of view, the elephant in the room has been and still is the LACK OF NEW DISCOVERIES and the dwindling supply of Mineral Reserves/Mineral Resources (MR/MR) on the balance sheets of the majors and mid-tiers. This fact plus the recent surge in the POG have not only increased the chances for this large group of “Maurizio concession groups” to be ECONOMIC but also in demand by the larger mining groups in need of growing by acquisition after shutting down many of their in-house exploration efforts. The majors now feature a lot of cash in the coffers and big fat share prices with which to do deals.

Maurizio appears to be acting in the context of a “prospect generator”. These are the players with some regional expertise (for Maurizio it’s in Chile and Peru) that do the due diligence on prospects and advance the projects to a certain level of development at which it becomes wise to bring in partners with money and/or expertise if the “prospect generator” is not in a position to advance the project by himself.

What we don’t know is if Maurizio is already in bed with a certain major and/or mid-tier for whom he is acting in an “agency” capacity. This is often carried out by certain majors/mid-tiers taking wishing to remain anonymous taking “options” in a concession group. A recent filing by Auryn cited a “related party” that was holding a mining option that picked up the tab for the annual taxes on the ADL concessions but didn’t want to get paid back.

In the past “AHC” or “Auryn Holding Corp.” used to advance funds but if I recall correctly, they always wanted to get paid back and they were not necessarily “option holders”. Does this mystery party pay partly for this “option” they have by picking up the tab on the annual taxes/”patentes” for all of the ADL’s annual taxes? From a disclosure point of view, management has to disclose “related party transactions” for arrangements made “not at arm’s length”. I’m not suggesting that there is a powerful party already “in bed” with AUMC but I did find that disclosure of interest.

A PERSONAL EXPERIENCE

I’m big into the mining and precious metals sector. Recently my holdings in the precious metals ETFs (GLD and SLV) went on a tear and I finally said enough already, I’m happy with my profits so I’m going to cash in on them and I did. Like a mining/precious metals junkie I started looking around for bargains in the sector. There weren’t any that fit my desires. Everything had already moved up in price.

I then did some more deep digging while hunting for viable prospects that had not moved up strongly already. As you might suspect, I looked at Medinah and the fact that it was down 99.7% from its previous high. Of course, I couldn’t help but buy a bunch more. Then I thought about how to locate juniors with viable prospects that were contained in some type of mutual fund or ETF BUT THAT HAD NOT ALREADY GONE NUTS IN PRICE. There’s no such thing. How about Masglas? There exists a pooling of about 20-plus prospects all held under one roof. It hadn’t gone nuts already because it was privately held. Then somebody brought it to my attention that their website said that they are about to go public by year’s end.
I think that Barrick’s CEO Mark Bristow hit the nail on the head when he said, “The prospects for a serious reserve crisis is looming”. This defines the sweet spot for investing in the mining industry for the next several years. The focus will be on near term gold producers THAT HAVEN’T ALREADY MOVED UP IN SHARE PRICE WITH THE CURRENT BREAKOUT IN THE PRICE OF GOLD.

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So sad blows my mind that big names are involved and we still are garbage

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I completely agree with your macro overview on the prospects of late stage exploration companies with DEFINED resources. Over the next 2-4 years we will witness a wave of acquisitions that will make the early 2000’s feel like ripple. However, the big boys will initially focus on acquiring resources that will move the needle (500k+ ounces, minimum M+I resource or P&P reserve), followed a second round, a couple years later, of the more speculative inferred resources. The small exploration plays with no defined resource will need to either a) find the working capital to turn the drills or b) enter into highly dilutive JV options, like M’s deal with Hochschild to prove up the asset.

It’s always fun to hear your theories but, in a fraction of the amount of time it took you to write this post, you could have called Maurizio for a high-level update. I can safely assume you haven’t made that call based on your speculations.

This investment could be an absolute home run at some point down the line but for all of the gold bulls who have sat in MDMN while the rest of the sector has absolutely ripped, there is a massive opportunity cost. My only advice, these spec plays need to be a minuscule portion of your portfolio. If it works great, if goes to zero (which is only a small step below where it currently trades), no big deal.

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John, I would love to give Maurizio a call or email him and get a “high level update”. Are you able to share his number or email via PM please

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Per the 8/14/20 OTC Markets quarterly disclosure report under paragraph 5, Issuers business, this is mentioned:

" The Company provides logistical support to
Hochschild’s work on the project and receives a net management fee for doing so. To date Hochschild has performed
various field works and an IP Geophysical survey."

The financial statements show no income from any sources over the last two years so this is either indicative of Hochschild not doing anything requiring logisitical support by AUMC or they are not doing much of anything at this point.

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