Hi CS,
I always enjoy your posts. Auryn going into production is obviously a milestone that we’ll all remember. We’ve all heard the adage that the junior mineral exploration sector is an ultra-high-risk investment neighborhood offset by ultra-high-rewards. We know the oft-quoted statistic that less than 1-in-1,000 junior explorers will ever bring a deposit into production. I participated in a class a while back wherein the mining analyst giving the class said that this statistic is way off base and that it’s closer to 1-in-5,000 junior explorers. So, the question becomes what is the transmission mechanism in between a junior explorer actually going into very high-grade profitable gold production and their shareholders receiving those ultra-high-rewards. In the case of Auryn/Medinah, I would suggest that the transmission mechanism is Maurizio himself. I would suggest restructuring that 1-in-1,000 statistic a bit in order to customize it to Auryn/Medinah. What are the chances that a junior explorer can reach that 1-in-1,000 status, and do all of this WITHOUT inducing the significant dilution usually associated with getting a deposit into production? In other words, what are the chances that management of that 1-in1,000 junior explorer cut all of the checks necessary to get into production, charge a zero per cent interest rate and only call in the cash advance if positive cash flow allows the payback of the loan. I don’t want to pretend to have an answer to the statistical chances for this scenario.
The ultra-high-rewards are going to belong to the shareholders of the producing junior that did NOT dilute their share structure to death while joining the 1-in-1,000 fraternity. In terms of geological deposits that bring about ultra-high-rewards, the characteristic that distinguishes the shareholder base being huge gainers from the moderate gainers is EARLY GOLD PRODUCTION OPPORTUNITIES. It is not early copper production opportunities. Why is this? It’s because gold production can be achieved with a lot less capital expenditure than copper production can. The reality is that the typical struggling junior explorer needs to sell shares in order to raise funds for exploration and development only to run into the beyond distant odds of getting the project into production at a time in which its share price is low because it hasn’t distinguished itself amongst its competitors yet. It’s a terrible catch-22 but it is what it is and it helps explain the distant odds. There is no ultra-high-reward owed to the shareholders of a junior producer like Auryn if it had 4 billion shares outstanding when that first truckload of ore comes rumbling down the road off of the mountain.
Auryn/Medinah dodged a HUGE dilutionary bullet when Maurizio stepped up and started cutting checks with zero interest rate on the payback. The payback will be made AFTER the company has become that 1-in-1,000 fraternity brother and ONLY if the company becomes a 1-in-1,000 fraternity brother. This is just opposite the typical junior needing to sell shares when the share price is in the gutter and those shares are certainly not going to be returned if the junior explorer doesn’t get initiated into that fraternity. In the typical junior explorer financing scenario, the investors are taking that “ultra-high-risk” and they are only receiving RESTRICTED securities that are not liquid. If during the time those shares are illiquid, the junior explorer meets its demise like the average junior explorer clearly does, then the financier is out of luck. The financier needs to protect himself from this fate. The financier is going to mandate a STEEP DISCOUNT to even the paltry share price that the junior explorer is trading at prior to becoming a fraternity brother. This is the MEGA-DILUTION that even the successful fraternity brothers often face. This is also the difference between ultra-high-rewards and moderate rewards for these fraternity brothers. As opposed to base metal producers of copper, zinc and nickel, gold producers are awarded a much higher P/E multiple. The problem with a copper-alone deposit is the incredibly high CAPEX associated with going through the steps needed to go into production. There are no EARLY PRODUCTION OPPORTUNITIES in most copper deposits. The potential dilution during this timeframe spent trying to attract the attention of a major is huge. The junior explorers seeking the ultra-high rewards are essentially involved in a RACE to get into profitable GOLD production WITHOUT MEGA-DILUTION if any deposit they are trying to develop does indeed have early GOLD production opportunities.
What I’ve noticed about Maurizio is his laser-like focus on that 70 million outstanding share figure that Auryn sports. He knows that Auryn, the gold producer, will soon be trading at a generous multiple of EARNINGS divided by the NUMBER OF SHARES OUTSTANDING. He knows not to raise any funds from selling shares until the share price reaches, as a total guess, perhaps $6 to $8, if ever. The cash flow from operations will bypass the need to raise funds in the interim period. Going into very high-grade early gold production will protect that rather impressive 70 million shares outstanding figure from becoming bloated.
As your due diligence may have shown, Maurizio has a history of philanthropy. I’ll let you guys determine if his fronting of the money needed to go into production and attaching a zero-interest rate payback policy as well as no payback needed if the company does not go into successful production producing positive cash flow, is a philanthropic move with great financial risk or a somewhat riskless move because he knows what he’s got. Who cares?
A LOW NUMBER OF SHARES OUTSTANDING AND AN EXTREMELY TIGHT SHARE STRUCTURE: TWO DIFFERENT THINGS
The number of shares “outstanding” (“shares O/S”) will serve as the denominator for the “EARNINGS PER SHARE OUTSTANDING” ratio. Investors will multiply this “EPS” number by an appropriate multiple in order to gauge where a stock should be trading at. This multiple will be highly dependent upon projected production growth over time. New GOLD producers fetch the highest “multiple” within the mining sector because of the robust production growth profiles they can generate. The # of shares O/S is highly determinative of the share price of any company. In a situation like Auryn finds itself in, it’s even more important because it also determines the generosity of future cash dividends based on a given amount of cash able to be dividended out and how many ways that cash needs to be split. Later, I’ll try to develop the concept of how Auryn being converted into a “dividend machine” was pretty much inevitable.
As opposed to a low number of shares O/S, a tight share structure has more to do with the “supply” of shares that are READILY SELLABLE at any given time. This readily sellable “supply” variable will interact with the “demand” variable in order to determine a share price as part of the “price discovery process”. The approximately 65% of the shares held in a RESTRICTED/CONTROL SECURITIES format by management are not readily sellable. They are not “readily sellable supply” due to the terms of Rule 144 of the 1933 Securities Act which only permit a quarterly trickle of share sells and only after warning investors via the filing of a Form 144 announcing intent to sell shares. Visibility of management’s intended sales of securities is a wonderful asset for investors. The interesting thing about RESTRICTED/CONTROL SECURITIES is that they share in the same cash dividend distributions as “free-trading” shares. This is why I feel that cash dividend distributions were going to be the primary mode for providing shareholder rewards all along due to this extremely atypical share structure. I personally want a lot of dividend cash flowing into Maurizio’s wallet because I’ve seen the magic that wallet can induce by advancing funds in order to achieve the next level of development or production WITHOUT UNTOWARD DILUTION.
An exceedingly “tight” share structure, like that of Auryn, is conducive to share price appreciation when “demand” exceeds readily sellable “supply”. Share price appreciation is one method of providing shareholder rewards and it also mitigates the effect of untoward dilution if management wanted to raise large quantities of cash through the sale of shares, which I highly doubt will ever occur with the Auryn/Medinah shareholders having access to that magic wallet. Cash dividend distributions is another method of providing shareholder rewards and it is often a more effective method to boost AFTER TAX INCOME because of the existence of “qualifying dividends” which are treated very favorably with the taxing authorities.
SO, WHAT DO WE CONCENTRATE ON NOW AND WHY?
I’m very appreciative of Kevin’s efforts to meet with Maurizio in NYC and relay to us some goals and projections. They listed 5 goals/projections, the first of which was: “Modestly improve the scale of operations.” Kevin made a post subsequent to this stating that we were actually at Step #0 in this regard. This caught me off guard. It turns out he was defining “operations” as shipping to Enami. I was thinking that “mining and stockpiling” extremely high-grade ore qualified as “operations”. Recently we learned that the final draft of the exploitation permit had just arrived and that the truck had just been shipped out to the plateau. Without BOTH of them occurring there would be no shipping of ore. From a “de-risking” point of view, a lot of RISK just flew out the window. As might have been expected due to Covid, both achievements took way more time than they would have without the Covid-related supply chain disruptions and permit approval process being almost paralyzed. I don’t think 2% of the Auryn/Medinah shareholders appreciate the importance of that exploitation permit/”Mensura” being in hand.
We’re still not 100% sure if the September 29 intersection with a vein thought to be the DL 1 Vein was indeed that vein. We do know that management couldn’t reach the earlier projected mining rate of 40 tpd UNTIL intersecting that vein. We have seen video images of ore being stockpiled outside of the new Antonino Adit. I’m going to assume that by now we may have already “modestly improved the scale of operations” but there are no guarantees. With all of the Covid-related delays involved in receiving both the truck and final exploitation permit, the silver lining of this cloud may have been the ability to mine the ore and stockpile the ore. This in turn should jumpstart the shipping efforts to Enami.
One of the things I personally am going to keep an eye on closely are the grades of the ore being shipped to Enami AND GRADED BY ENAMI. Why is this? Just like the grades of the ore previously shipped to Enami and their predecessor processors, they will probably be somewhat consistent and have “continuity”. In a mesothermal vein deposit like this one, the ore being shipped is probably going to be shipped for at least several decades. In this industry “GRADE IS EVERYTHING”. Why is this? It’s because “PROFIT IS EVERYTHING”. Since many of the costs in mining are somewhat fixed, when you talk about profits on a “per ounce” basis, you take what you’re paid for an ounce of gold dore which is around $1,800 and you subtract out the COST PER OUNCE in order to determine profits PER OUNCE. If the relatively fixed amount of cost involved in mining and processing a tonne of ore is divided by 45 gpt as opposed to the more common 6 gpt gold, then the costs PER OUNCE mined and processed will be extremely cheap on a per gram or per ounce basis for the richer ore as opposed to the less rich ore. Since “PROFIT IS EVERYTHING” then “GRADE IS KING” because the costs are so low on a “per ounce” basis. In a day’s work at a mine, you’re going to produce a lot more ounces of gold when mining high grade ore. Each one of those ounces will be more profitable.