I read TradeRich’s comments the other day about selling his Medinah shares at 1% of the value he paid for them, after going through what he and the rest of us have gone through. That was hard to read. I understand that you have to do what you have to do, but I hope nobody else is going through what he must have been going through in order to make that decision AT THIS PARTICULAR MOMENT IN TIME WHEN EXTREMELY HIGH-GRADE PRODUCTION IS FINALLY COMMENCING AFTER ALL OF THESE YEARS.
Placing a VALUE on the ADL Mining District has always been a difficult task. What we do know to be a FACT, is that Maurizio and his colleagues, the “smart money”, were buying shares of Medinah several years ago, at 100-times the current Medinah share price of $0.0009. When you factor in the Les Price situation, let’s round that down to 50-times the current price. From a mining industry point of view, what has happened to the VALUE of the ADL Mining District since then? It has gone up markedly as accomplishments, like intersecting the DL2 Vein and partially VALIDATING the stellar historical shipping grades, have taken place.
Auryn now has a completed PRODUCTION ADIT to transfer the extremely high-grade ore from the belly of the mountain to the plateau surface. The “gallery” was recently completed as was the “ventilation/safety egress chimney” linking level 3 to the “old workings”. This provided SCALABILITY as Auryn can now simultaneously mine from level 3 as well from several different underlying sub levels in a safe fashion. It also provided OPTIONALITY, in that Auryn can now focus their exploitation efforts on the levels with the greatest vein widths and highest vein grades. SERNAGEOMIN recently signed off on the new ventilation/safety egress systems. This allowed Enami to receive regular shipments/consignments of DL2 Vein ore.
The recently completed “COMPREHENSIVE METALLURGICAL ANALYSIS” identified “flotation” as being the most effective methodology to “beneficiate/concentrate” the ore. A shipment made to Codelco/Enami’s DIRECT SMELTING FACILITY revealed excellent recovery results including 57 gpt gold, 970 gpt silver and 3.3% copper. A lot of VALUE enhancement has occurred since Maurizio was buying Medinah shares at the 9-cent level. At the same time that these improvements were occurring, the share price of both Medinah and Auryn were literally falling off of a cliff. Clearly, either “the market” or Maurizio and colleagues, have/had it wrong. But how can you identify which party had it wrong?
What is the irrefutable ARBITER of VALUE? It’s earnings capacity. We have finally arrived at the MOMENT OF TRUTH. I’ve been criticized for being too positive on the prospects for Auryn and Medinah and too positive on the geology of the ADL Mining District. My approach is very different than that of most mining investors. My time horizons are very long. My share purchases go straight to the “sock drawer”. I’m not a big fan of looking at stock quotes all day long. I’ve been through enough mining deals from start to finish that I have my own approach with these stocks.
I simply list out all of the steps, from A to Z, that a junior explorer is going to need to traverse in order to get into production. For me, the two biggest risk boxes I was able to check off on, in regards to Auryn/Medinah, were the confirmed intersection of the DL2 Vein and the VALIDATION of the historical shipping grades and the recent checking off, by SERNAGEOMIN, of the new “Ventilation/safety egress chimney” directly leading to the important industry concepts of SCALABILITY and OPTIONALITY. Auryn will now be able to mine level 3 at its 2 separate working faces as well as several underlying sub levels which will also have 2 separate working faces per level.
I sense PROGRESS not in share price improvement but in the number of risk boxes I’ve been able to check off on and how many are left to check off on. I add incrementally to my position as the risk boxes get checked off on. Management has to earn my buy orders. I added 4 million Medinah shares with the checking off of each of the 2 risk boxes cited above. I know that I have an ace up my sleeve in that no matter what twists and turns the share price of those shares in the “sock drawer” takes during the journey, I know that once EARNINGS appear, the market will find the proper valuation. That’s when true VISIBILITY presents itself and difficult to understand geological principles no longer matter. Everybody understands EARNINGS.
I’m going to attempt to explain Maurizio’s chosen approach and how critical it is, when this is the approach taken, to keep your eye on the FINISH LINE and what that’s going to look like no matter what today’s share price quote looks like. I’ve referred to the World Gold Council’s statistics dozens of times on this forum. It really, really, really, takes an average of over 24 years for the tiny percentage of successful junior explorers (most often-quoted as 1-in-1,000) to go from the commencement of exploration efforts all of the way into production. These are ULTRA-HIGH RISK MARATHONS. In an industry characterized as one involving the taking of ultra-high risks in search of ultra-high rewards, what do you think is going to happen to that lucky 1-in-1,000 mining corporation that goes into extremely high-grade gold production with only 70 million shares issued and outstanding and the price of gold near all-time-highs? There can be no guarantees, but then again, this is not exactly rocket science. What initially attracted us speculators/investors to this sector was probably the 30- and 40-baggers that we either already participated in or that we read about.
The no frills, ANTI-DILUTION, “bootstrapping” approach, adopted by Maurizio, by definition, is going to lead to a slower pace of development than an approach involving selling shares or ownership percentage points early on, in order to buy fancy equipment like “jumbo” drill rigs.
In essence, there are 2 ways to build a mining company. The way that 98% of companies are FORCED to do it, is to DILUTE the heck out of their share structure early on, before any success is attained, and sell a bunch of shares at ridiculously low-price levels in order to drill out a prospect and have a consulting firm execute “scoping studies” then a “pre-feasibility study” (PFS) and then a “bankable feasibility study” (BFS). That’s just how it’s always been. There usually aren’t any alternatives to this approach.
This is the STANDARD APPROACH taken by almost all junior explorers and developers. It is less than ideal because the price that willing financiers will pay you for your shares, prior to any exploration success, is going to be extremely low because your project has not been DERISKED yet and there’s nothing riskier than bankrolling a junior explorer. Exploration financing is an ultra-high-risk endeavor and willing financiers are going to demand steep discounts to even the existing low share prices. “Private placements” of funds sold to financiers like me, have a hold period during which we purchasers are not allowed to sell our shares. These financiers are going to need to be compensated, via a deep discount to existing share prices, for this lack of liquidity, because a lot of bad things can happen to a young mining company during that hold period.
For a project the size of the DL2 Vein project, the bill attached to this very common STANDARD APPROACH involving formal drill programs and the execution of a variety of studies, is typically somewhere around $30 million and it might take somewhere around 5 years to accomplish. This is simply what you have to do in order to sufficiently DERISK the project in order to attract a major miner with the financial wherewithal and technical expertise needed to advance the project, hopefully all of the way into PRODUCTION. THE MAJORS AND THE FINANCIERS CONTROL THE PLAYING FIELD.
But what if you didn’t need to attract a major miner or outside financier and you could bypass the DILUTION associated with doing what a major or outside financier would FORCE you to do, prior to them being willing to get involved?
Perhaps 2% or so of mining companies can take the IDEAL APPROACH as opposed to the STANDARD APPROACH, but a certain list of “ingredients” need to be present in order to pull this off. First of all, the mining project needs to be an UNDERGROUND VEIN type of project like the DL2 Vein project. This is because an OPEN PIT type of project necessitates a formal drill program and the execution of all of those studies. Why? Firstly, it’s because the drilling is needed to design the optimal open pit design by a process called “kriging”. Secondly, the CAPEX of these projects is often approaching $1 billion and almost all junior explorers need both a major miner and its financial wherewithal as well as the vast amount of technical expertise necessitated to pull it off. Rule #1: VEIN DEPOSITS, where a formal drill program is OPTIONAL and not mandatory, only will qualify for the IDEAL APPROACH.
Besides being a VEIN project, the IDEAL APPROACH necessitates a Maurizio-type figure willing to bankroll the project all of the way until a POSITIVE PRODUCTION DECISION can be made. Advancing the necessary funds while charging zero interest is beyond IDEAL and don’t expect to ever witness this again in your lifetime of making mining investments. For a low-grade deposit, you pretty much have to take the STANDARD APPROACH and do the drilling and execute the studies in order to just arrive at a POSITIVE PRODUCTION DECISION. So, low grade (2-3 gpt gold) deposits WILL NOT QUALIFY FOR THE IDEAL APPROACH because you really need to sharpen your pencil on those projects just to confirm that the project is a “GO”.
The historical shipping grades at the DL2 Vein project were so high that a POSITIVE PRODUCTION DECISION became a no-brainer for Maurizio. Snow White and the 7 dwarfs could mine the DL2 Vein and make a fortune. Maurizio actually provided the funds needed to bring the project all of the way into production and well past the POSITIVE PRODUCTION DECISION stage. This included paying for the drifting of a PRODUCTION ADIT (the Antonino Adit) to the site within the belly of the mountain where the artisanal miners ceased their high-grade mining operation many years ago. The MINE CONSTRUCTION phase started a long time ago.
The historical shipping grades can only be trusted, however, if Auryn were to commence their production efforts IN CLOSE PROXIMITY to where the historical shipping grades were achieved. This is where Auryn decided to commence production at. Let’s recap for a second. The IDEAL APPROACH necessitates 1) A VEIN DEPOSIT, 2) A Maurizio-type figure willing to bankroll operations and 3) a relatively HIGH-GRADE VEIN DEPOSIT (perhaps over 8 to 10 gpt gold). The historical shipping grades of 64 gpt gold is what made the POSITIVE PRODUCTION DECISION possible without a formal drill program and the execution of all of those studies.
THE PRESENCE OF THE ”OLD WORKS” (levels 0,1,and 2) WERE A GODSEND IN REGARDS TO THE AURYN VENTILATION/SAFETY EGRESS SYSTEM
One of the biggest expenses in any underground vein project is the construction of a VENTILATION and SAFETY EGRESS SYSTEM. VENTILATION SYSTEMS usually involve a system of vertical “ventilation raises” and “chimneys”. It is extremely expensive to “go vertical” in underground mining operations. The ventilation systems usually involve 2 large fans. The “intake fan” will bring in fresh air from surface and the “exhaust fan” will drive the blast residue and its toxic gases out to the surface. This system of “raises” and “chimneys” could easily have cost Auryn another $20 million to $30 million or so. Auryn was extremely fortunate in this regard in that the artisanal miners had already constructed 7 vertical shafts, now serving as “ventilation raises”, as well as 5 vertical “chimneys” leading to the plateau surface. Let’s add a #4 to the IDEAL APPROACH list, i.e. an already completed ventilation/safety egress system. This might belong in the “beyond ideal” category. This provides SCALABILITY and the ability to simultaneously mine level 3 and various sub levels. This will “supercharge” any future earnings.
The IDEAL APPROACH would also involve a deposit with not just high grades, but also a NEAR SURFACE deposit (close to fresh air), and a deposit with EARLY PRODUCTION OPPORTUNITIES that could provide significant cash flow and perhaps even act as a catalyst for further development activities. When you have a large mining district like that of the ADL, the cash flow could also strengthen management’s bargaining leverage in developing other deposit types present like that of the Pegaso Nero, the development of which WILL necessitate a formal drill program and execution of those studies mentioned. The PN would admittedly not qualify for the IDEAL APPROACH. Think of the DL2 Vein project not just as a potentially huge money maker, but also as a “catalyst”.
Auryn’s situation fit the bill nicely for taking the IDEAL APPROACH. They didn’t need to drill out the property and execute all of those reports. They had 30 years-worth of historical shipping grades (although only about 2,000 tonnes) from the same area where Auryn is to commence production. That’s what you need i.e. PROXIMITY TO HISTORICAL WORKS WITH WELL-DOCUMENTED SHIPPING GRADES. Auryn didn’t need a “defined resource” (MR/MR) to attract a major miner for its money and expertise, it had Maurizio to fill the gap until EARNINGS could take over in driving developments. Maurizio provided the funds necessary at zero interest rate i.e. no “COST OF CAPITAL”.
Auryn did not need to raise money to pay for a VENTILATION SYSTEM which also provided a safety egress system. Maurizio was able to make a POSITIVE PRODUCTION DECISION without incurring many tens of millions of dollars of cost because the GRADES were so high that the POSITIVE PRODUCTION DECISION became a no-brainer. What Auryn did have to fund was the drifting of a PRODUCTION ADIT in order to access the high-grade ore at the spot where the artisanal miners ceased their mining activities.
What Auryn was able to accomplish was INSANELY RARE. They were able to successfully bypass massive levels of DILUTION in BOTH their share structure and in the percentage ownership of the project. They were not FORCED to sell massive amounts of restricted shares, at ridiculously low prices (because of the RISK), in order to fund drilling and the execution of those studies. They were able to advance straight into production and avoid not only this DILUTION but the number of years needed to execute a formal drill program and execute all of those reports.
Historically, not many mining companies have had all of the “ingredients” needed to take this IDEAL APPROACH. Of the many, many dozens of junior explorers I’ve invested in, this is my first IDEAL APPROACH. Part of the reason that it was an IDEAL APPROACH from the point of view of shareholders is that, along the way, Maurizio shouldered most of the RISK burden. Most juniors spend the majority of their time searching for financiers. It is a very good thing when management owns 60% of the shares of a mining corporation. This way, the financial incentives of the smallest shareholder lines up nicely with those of management and if management had significant financial wherewithal, it would be highly motivated to advance funds for further development without its share position being DILUTED. Notice also what management DIDN’T DO. They didn’t sell themselves ultra-cheap shares in order to fund developments. They did just the opposite, they provided funds without charging interest. In valuing mining assets and mining corporations, I’m always looking for “comps” or “comparable” mining situations. Where in the heck are you going to find one for this situation?
BEING ABLE TO TAKE THE “IDEAL APPROACH” IS BEYOND RARE
Here’s the problem with being able to take the IDEAL APPROACH. It is so rare that many observers will, as if by default, say that without a formal drill program and formally blocked out ounces of “MR/MR”, and without all of those studies, you just can’t have anything of “VALUE”. If you ask them why, the answer might be: “It’s because EVERYBODY does it that way, any you just can’t shortcut the system. It’s always been done that way.” Baloney, EARNINGS CREATE THE MOST DEFINITIVE FORM OF “VALUE” ESTIMATION THERE IS.
That “no MR/MR translates into no VALUE” mentality only lasts until the first dozen or so truckloads of ore have been shipped. After that, it won’t resonate. The people cutting the checks don’t care if you have blocked out ounces of “MR/MR” or a 150-page “Bankable Feasibility Study” in your top desk drawer. Financiers need those things, not the people cutting the checks, and certainly not investors that choose to focus in on EARNING POTENTIAL. Auryn has already gathered most of the information contained in a PFS or BFS. The recently completed “COMPREHENSIVE METALLURGICAL ANALYSIS” performed in Peru added nicely to this accumulation. We now know that “flotation” and “direct smelting” work just fine for the DL2 Vein ore. For those that are big fans of “gravity separation” beneficiation methodologies, there will be plenty of opportunities for deploying that methodology. At the current level of the DL2 Vein, a combination of “flotation” followed by smelting, for the lower grade ore, and DIRECT SMELTING, for the higher grade ore, works the best.
What an investor needs is for SOMEBODY WILLING TO TAKE THE RISK associated with the lack of those drill results and studies. This is where Maurizio stepped in and I would guess that it was the historical shipping grades that allowed him to take that RISK and to arrive at a POSITIVE PRODUCTION DECISION. Once the POSITIVE PRODUCTION DECISION was made by Maurizio, the company commenced the drifting of the Antonino Adit. Keep in mind that the process of drilling out a deposit and performing those studies DOES NOT PUT A PROJECT INTO PRODUCTION, IT ONLY LEADS TO A PRODUCTION DECISION i.e. A “GO” OR A “NO GO”.
After performing the drill program and executing those studies, the junior mining corporation is typically left with a massively diluted share structure and a lesser ownership percentage of the project. The next task then becomes finding a willing financier to fund into production that damaged company with a MASSIVELY DILUTED SHARE STRUCTURE AND A LESSER OWNERSHIP PERCENTAGE OF THE PROJECT. After that occurs, if it occurs, there is not much of the pie left to split up. Ounces in the ground are not ounces in the truck. The markets don’t give a mining firm much credit for “ounces in the ground” any longer. This is because those ounces may never end up in a truck. Would it have been nice if those artisanal miners of the DL2 Vein would have drilled out the entire vein? Sure, it would have been nice but they didn’t. Maurizio rolled the dice and he won.
WHEN TAKING THIS “IDEAL APPROACH”, WHAT DOES THE “FINISH LINE” LOOK LIKE?
For Auryn, the “finish line” might be likened to a ribbon-cutting ceremony with the first truckload of high-grade ore sitting at the top of the North Road aimed down towards the processing facilities. Part of the “ceremony” would be the appending to the back bumper of a metaphorical IDEAL APPROACH “congratulatory bumper sticker”. In the case of being able to take the IDEAL APPROACH, the bumper sticker would read: “This truckload of high-grade ore is owned 100% by Auryn. The proceeds from the sale of this ore will be divided by only 70 million shares in order to calculate the EARNINGS PER SHARE for Auryn and its shareholders. The EPS will then be directly tied to the SHAREHOLDER REWARDS (share price) earned by Auryn’s shareholders.”
For the vast majority of mining companies unable to take this IDEAL APPROACH, their version of the bumper sticker might reference perhaps 470 million shares outstanding instead of 70 million. An owner of 1 million shares of Auryn would theoretically be entitled to one-seventieth (1/70th) of the proceeds resulting from the sale of the ore, in the case of the IDEAL APPROACH versus perhaps one-four hundred and seventieth (1/470th) in the case of the company unable to take the IDEAL APPROACH. If that company had to give up half of its ownership percentage perhaps to a “royalty streamer” in exchange for funds, then that 1/470th figure becomes 1/940th. The IDEAL APPROACH is not for everybody or for every mineral deposit, but if you can pull it off then things could get interesting.
There’s nothing wrong with the STANDARD APPROACH for building a mining company if you don’t have the “ingredients” necessary to take the IDEAL APPROACH and earn that bumper sticker. As the owner of shares of mining majors, I like it when juniors with a significant discovery are FORCED to use the STANDARD APPROACH. When I’m in those shoes, I like it when the shareholders of the juniors shoulder that risk. I doubt that most mining investors even realize that there is a different way to build a mining company than by taking the STANDARD APPROACH.
As investors, our focus, over the last couple of years, probably should have been, put the shares in the “sock drawer”, and concentrate on the progress being made towards achieving that bumper sticker and the reaching that finish line. Because we are investors trying to make a profit, our focus was probably on the share price and “the market”. Can “the market” recognize when a mining company is taking the IDEAL APPROACH? Of course not, that is, not until they see the bumper sticker on that truck rolling down the road and get an appreciation for potential earnings.
Well, there it is! Similar to the way you cut down others and twist their words, now you do the same to me. You interject and assume things I’ve said (or never said) so well, you’ve been promoted to poster boy for that old ass-u-me phrase. 
You know it’s true. By the way, didn’t I just recently post that your suspicions about Les Price turned out to be right after all, way back then?
I, for one, am looking forward to the fact that AUMC has a lot going for it, despite the setbacks and lack of transparency. I’ve been disappointed too, but I also know that MC has s-l-o-w-l-y been meandering in the right direction. I’ve read your posts about how this investment has been dramatically decreasing for the past “7 years.” We can all see that, no doubt. But not every setback has been MC’s fault.
