Interview with Teo Dechev, President & CEO of Mundoro Capital (TSX-V:MUN) Royalty Generator in Eastern Europe. Mundoro partners with explorers and developers chasing large scale copper and gold.
Both very topical at the moment. Dechev explains what investors may be missing about their business model and the descriptor. We talk about dilution control, exploration expansion budgets, downside protection and partners plans.
Generator and royalty companies take time to get going, but Mundoro has been at this for a while and the market is perhaps tired of the story. Currently they have Vale and Jogmec as partners and perhaps a third to join them in 2021. If the plans of these partners involving focusing on these Serbian assets and they get lucky and find the next discovery then this is a company maker. So clearly Mundoro is not in control of timing. They do however collect fees and have on average been spending $4M on their own exploration programmes. Drilling: 12,441 m in 2019 drill programs and 15,972 in 2018 drill programs. Partner sole funding: $3.764 mln in 2019 and $3.407 mln in 2018.
Matthew Gordon: Give us a 1-minute overview of the business and then I’ll pick it up from there.
Teo Dechev: Sure. The easy way to describe the company is we really strive for that, let’s call it royalty generator model, where we are exploring in Eastern Europe. We do believe in order to make a discovery you have to really leverage what you know and the capital that you have and so we leverage that with partnerships. Those partners are the sole funders of a lot of our exploration programmes. As a result, really the backend optionality of the Mundoro shareholders is those lucrative royalties. Because we focus on very large systems those royalties can become very lucrative because they are on really large scalable assets. Most of our assets are focused on Copper and Gold. You kind of can’t really get these systems without both commodities. So, when you’re looking at the porphyry and the related systems, they really do have both a Copper and Gold component. Nowadays a lot of what we’re focused on is really the Copper side.
Matthew Gordon: Well, the company’s been around a while. How long have you been there?
Teo Dechev: Since 2006.
Matthew Gordon: What are people not understanding about your business? Because it’s market cap, it says here CAD$12.5M. That’s not even real money, right? That’s Canadian Dollars.
Teo Dechev: Yeah, most houses in Vancouver are more than that.
Matthew Gordon: So, what’s happening? What do you think are the problems?
Teo Dechev: It’s a really good question and it’s interesting that you frame that also as a problem. There’s a lot of junior equities in the marketplace. There’s probably 1,600 junior companies. We all want to have a billion-dollar market capitalisation and the real question is, how are you going to get there? What’s it going to cost your shareholder base in terms of dilution? So, yes we’re trading at CAD$12.5M, we’ve been pretty steady and fortunately in terms of the upside of the stock today. But we also haven’t lost 90% of our value in the last few years. So, I think the downside protection is very good. That’s because we run the company extremely well. We’re one of the lowest GNAs in the business. On top of that, we spend about CAD$4M a year on exploration.
So, I think you also kind of have to ask yourself, what is it that you want out of your equity? Of course, everybody wants a 10 bagger, but how are you going to get that 10 bagger? What are you prepared to take in terms of dilution or to get there? So, we’re being very thoughtful about that. We don’t want to dilute our shareholders out of their future discovery in this region. So, we’ve been really focused on getting partners involved in the projects. They’re the sole funders of the programmes. That’s why the name, the Generator Model. The Generator Model over time has a very powerful effect. If you can generate valuable assets within your portfolio, then over time they actually can create a lot of value through incremental steps. I was mentioning this before. I used to be in equity research.
One of the companies I first covered was Royal Gold, back in 1999. I remember running the DCF and thinking well they’ve got like 0.2% royalty on this project, it’s $300,000 here, $400,000 there, how is this going to generate a lot of value? DCF models after 10-years, you might as well forget about that future backend. But that’s the mistake, right. Because those models over time are extremely lucrative. As you build more assets in those layers, they just become profit-making machines for lack of a better description, almost an annuity business, over the long-term. So, what we’re trying to do is create that stable group of royalties on a district that has got so much potential for discovery, so that over time those royalties will become extremely lucrative.
Matthew Gordon: Have you employed the right model for retail investors to get involved with here?
Teo Dechev: No. If you’re going to be running a business where you’re testing targets, you have to be running the Generator Model where you have partners involved. I don’t think that the retail market supports that kind of long-term, long haul investment cycle. That’s not the retail market. So, if you’re in early-stage exploration where you're testing targets and trying to create a new discovery, fundamentally that's a partner Generator Model. So, absolutely it’s the right model. But is it the right model for a retail investor that wants to invest based on a drill hole? No. Because not every drill hole is going to work out in a target testing type of environment.
Having said that, if a retail investor is interested in a programme where they can see immediate results in terms of what’s the next section of that mineralised zone then traditionally the retail speculator market is involved and established resources, where a company is trying to create a larger resource, or develop that resource into an economic, let’s call it feasibility. That’s not what we do. Now when you go to a conference and people ask you, where’s that next discovery going to come in our business? That’s what we’re here for, to create that next discovery.
So, if you buy in at this, yes you call it downside protection and steady Eddie, that’s the opportunity. You can park money there and when a discovery is made, that’s your 10 bagger. You’ve gotten very low cost of capital in and you can make a tremendous return because that discovery will immediately pay because the dilution doesn’t occur the way it normally does in an exploration model.
Matthew Gordon: You’re bringing in partners, why? What’s the conversation with a partner? Is it just for money? Are you operating it? Are they operating it? What are the terms?
Teo Dechev: Yeah, that’s a really good question. There is no plain-vanilla approach. We really want to see capital spent on the projects, so we kind of listen to what our partners are asking for and we fine-tune a lot of our agreements. So, let’s just start with the royalty business. So, I used to cover royalty companies and I’ve seen a lot of prospect generators. I have a cot model, which you know I’m obsessed with data, of 56 companies. So, traditional royalty companies buy royalties. So, basically creating a future cash payment. They need to compete based on their balance sheet. Yes, you can try and be clever in terms of yeah let’s say intellectual knowledge within your team to try and understand if there’s a better return on this asset than what somebody else might see.
But at the end of the day, at the high end where on average I like do delineate this group in terms of the senior royalty companies, anybody that’s making 10M a year and more, consistently on a 3 year run rate, that’s the seniors. Those are the only ones that are cashflow positive in the business. So, then you go onto the next, let’s call it tier and again it’s really important when you’re looking at an industry space to try and compare them apples to apples. Unfortunately, because you don’t have that cashflow on the other side of the business, we’d kind of look at the top end of revenue size. So, if you’re making between 10 and 1M top-line revenue from your portfolio per year, for the last 3-year run rate, that's kind of the mid-tiers.
Those companies have grown significantly in terms of valuation. But they’re still not cashflow positive. So, it’s partially a balance sheet and it’s partially hunting through your own network and your own kind of contacts in terms of what assets you can get into. They fund a lot of development, so that’s in the future those royalties will pay out. So, let’s remember that. In the future, those royalties will pay out. As you and I know and everybody in the business knows, not every single asset makes it into production at the timeline needed. But that's part of the risk in the model. Then you get into the last end and the last end is really what I call the generators. Now some generators work for different reasons, but our view is, we’re here in order to secure that future royalty.
So, rather than me wait for Vale one day to have a Copper mine that they want to potentially go out and sell a royalty to, the seniors, for let’s say $500,000,000Bn I'm here 10-years in advance, and I'm creating that future royalty that one day one of the seniors will want. So, at the back end, we kind of look at there’s a lot of companies, so we kind of say okay if you can do 100,000 a year up to 1M, you’re in the junior space on a 3 year average right. Just always remember the 3-year average because this business can be lumpy in terms of topline. So, what we like to say is, look Mundoro is a junior generator for the royalty.
So, our belief is that in 10-years one of our assets will become the value of a potential future Franco or let’s call it Royal Gold style asset. Because the partners that we deal with have big scale requirements and as a result, a discovery on one of those kind of projects would create a very valuable royalty. So, that’s kind of the way I look at the royalty space. I can give you lots of metrics on how they perform. But we actually do extremely well compared to our peers. We’ve been growing our topline at 56% versus peers at 10%. We’re one of the bottom in terms of GNA. We’ve been generating basically 350,000 a year, whereas a lot of the peers on average are generating around 2.
Matthew Gordon: Have you got the business model, entirely right? Shouldn't there be some shorter-term wins that you should be looking at and if so what could they be?
Teo Dechev: Shorter-term wins are building out the portfolio. So, what else are we adding to the portfolio that will continue running this model? So, yes we don’t talk about our application pipeline because that’s our competition in the business. But yes, every single year we are going out, we are putting in applications and we are building out our portfolio and that creates more opportunities for partnerships. In terms of what is that short-term win? It’s bringing in key assets like that in the portfolio, that’s number 1. Number 2 is every year there is a drill programme on our projects. It’s paid by our partners but there are drill programmes every year, so if an investor is really interested in terms of those short-term wins, well pay attention to those programmes. What’s going to come out of them? You never know when the next discovery can occur from one of these programmes.
Matthew Gordon: How many partners have you got? Who are they? Have there been any successes? When do things actually get moving?
Teo Dechev: Yeah. So, in terms of partners today, we’ve got JOGMEC as one of our partners and we have a partnership with them in Serbia on one project called the Borsko which is actually a tremendously interesting opportunity. It is directly west of the main bore mines which have been in production for 100 years. That project has created a technical success, in that we have discovered through what we call a blind discovery in the industry because it’s under 500m of Andesite cover, it was discovered through structural interpretation and geophysics. That’s kind of like when you say what are those short-term wins, I mean that’s a huge win because now we know exactly where to continue drilling. That target has become more lucrative, more valuable. So, that’s one partnership.
The next one that we have is with Vale. Vale is in 4 of the projects that we have in Serbia and just recently we announced that they are also picking up an additional 2. Those are 2 projects that were previously with Freeport and again here’s another example, Freeport spent CAD$3.2M, let’s call that CAD$4M in a matter of 18 -months and due to internal requirements had to drop their global exploration programme. Which was a real shame because they added a huge amount of value to those assets. To do that amount of geophysics that we did no those programmes took about close to 12 -months out of those 18 -months and on top of that did 9,000m of drilling, proved the concepts and now somebody else is going to benefit from that work. It’s not that when a partner leaves, an asset becomes less valuable, it actually builds a tremendous amount of data that our shareholders didn’t pay for. You just got that all for free.
Now Vale is coming on board, they’re paying the company these near term, year to year payments and that’s the frontend of our business that I was alluding to earlier, that is also a win for us. So, again yes it maintains dilution but it’s an extremely important part of the business. So, I don’t want to un-emphasise that. So, those two partners are working with us. So, now Vale has got 6 projects, JOGMEC has got 1 in Serbia with us. On top of that, we have a strategic alliance with JOGMEC in Bulgaria, which has produced some tremendously interesting projects that are now under application. So, those are all future opportunities for our shareholders.
Matthew Gordon: Technical success doesn’t really kind of work for me. So, why are you excited about it? Why would you use that phrase?
Teo Dechev: Yeah, it’s a really good question. It’s a technical success because we actually found an intact Litho cap, 500m under cover, based on geophysics. As anyone will tell you, geophysics is important but it’s really hard to justify a drill programme on just a geophysical target. You usually want other indicators like geochemistry or other structural interpretation, or maybe a historical hole. So, technical success, we found a Litho cap. The thing is though if you don’t have a Litho cap you’re not going to find the porphyry system. So, it’s really, really difficult in the porphyry world to drill right in the heart of the porphyry on the first drill hole and say yeah, I’ve got a porphyry mine. That’s fantasy, that doesn’t happen. So, you start with technical success and then you build on that data in order to get to the economic success.
Matthew Gordon: How long has JOGMEC been at it with you? In fact, how long has Vale been at it with you?
Teo Dechev: So, Vale has just started. Yeah, they signed the option agreement with us last year, or the agreement. The licences have now finally been transitioned into the joint venture structure and we’ve just started the programme this year. So, the idea is to be out drilling in December. So, it has actually been a very short relationship so far with Vale and we’re just starting that process. We’ve got a lot of really interesting targets to drill out for this winter season as well as transitioning into 2021. JOGMEC has been with us since 2016. So, that’s just right about 4-years. We obviously didn’t do a lot of work this last year on that particular project, but what we have been doing is a lot of reinterpretation of the data.
So, what you always want is, you start with your concept, you spend money in order to drill out or test your concept and then you measure and adjust. You reinterpret, you re-run your geophysical models to ensure that, are you seeing the right correlation and then you plan for your next programme. That’s really what we’re trying to achieve now with JOGMEC is to determine the financing of the next programme in order to continue testing that target.
Matthew Gordon: Do you feel that’s moving at the right pace for you? How do you get them to pay attention and focus in on what you want them to do, in a timely fashion?
Teo Dechev: Yeah. It’s a really good question. I think if a company was relying on only 1 partner, that would be a problem. You can’t make a major company jump to your tune. That’s not how the business works. They sole fund, they decide where things are going to get tested. So, what you can do to manage that risk is have a portfolio approach, have more than one project, have more than 1 partner, fully recognising at the start of every year, that 1 partner is moving forward while another one is thinking. That is how we manage risk.
Matthew Gordon: I’m trying to get a sort of sight as to how big your portfolio of partner companies needs to be to kind of allow you to kind of hit your stride?
Teo Dechev: So, like I alluded to earlier we do have a portfolio approach. We do have other projects in the portfolio, and we are currently in active discussions with other third-parties about those other projects. So, we do anticipate bringing more partners on board. Last year we had 3, this year we have 2 and I’m quite confident that we can bring in another partner. On top of that, we’ve got the strategic alliance with JOGMEC in Bulgaria which is again 3 other applications. I think when I do this analysis and I’d love somebody else to do the analysis as well, but I think what you’re asking is, on average, I mean how much drilling do they do on their projects? So, last year we did about 18,000m, that’s a lot of drilling for a junior. You’re saying, well it’s not really going fast enough Teo, I want things to go faster. Do you really think you can do target testing at a more aggressive pace?
I mean our team is probably one of the biggest in Eastern Europe. So, we’ve got about 15, 20 people, depending on field season, working for us on a regular basis, running all these programmes for our partners. It is fascinating to hear on the outside people saying, things aren’t moving fast enough when inside the company, things are going at breakneck speed. You are just constantly, go, go, go with all of the field teams, creating the datasets, creating that next project. But unfortunately, on the outside people are interested in, when’s that next discovery coming? What we say is, we’re drilling again this year, take a look at what we’re doing, if the next discovery happens on the next drill hole, we’re all going to be happy. If it doesn’t, don’t worry, there’s 25 other targets to go to.
Matthew Gordon: The first time I’ve heard or seen that, and I’ve been through your model, been through the PowerPoint, been through your website, that’s the first time I’ve heard that phrase.
Teo Dechev: The first time you heard breakneck speed?
Matthew Gordon: No, 18,000m.
Teo Dechev: Yeah, we’ve done a lot of drilling. So, between JOGMEC -
Matthew Gordon: Why don’t you tell people that?
Teo Dechev: We used to put those kind of metrics in our press releases, but we find generally people don’t really care about that kind of stuff. In our spreadsheet, we also track how much drilling every single company can disclose and how much we see in press releases in terms of what the average amount that a lot of companies drill. We drill a lot. It’s not around a deposit, it’s target testing. So, it’s over a series of areas in the district.
Matthew Gordon: How much money have you spent on drilling then?
Teo Dechev: So, on average we run around CAD$3M to CAD$4M. I don’t have the exact number in front of me for last year, but I can definitely take a look at that. But on average we spend about CAD$3M or CAD$4M on exploration, every single year. That’s kind of the average run, right.
Matthew Gordon: With regards to partner funding, how much have you collected from these 3 last year, to this year? What’s that worth to you?
Teo Dechev: Last year in terms of partner funding … so they sole fund all the programmes, so probably about 85% of that would be partner funding. What we do on our own is to generate those projects. So, any time that we spend out in the field doing prospecting, reviewing assets, we may do some sampling programmes over areas, those are all our costs. So, on average we spend about I’d say CAD$1.2M per year to run the company and the strategy. As a result, we’re constantly replenishing the applications and kind of growing the portfolio. But the lion’s share of the funding does come from partners.
Matthew Gordon: What else are you getting out of this? Because you said Freeport spent a bunch of money, had to go, you own that data, they don’t, is that right? Is that the way it works?
Teo Dechev: No, when Freeport left that data is ours. It’s actually part of the vehicle that owns the asset and because we’re both shareholders in that vehicle then both companies own the asset. But in terms of sole funding, they sole fund, so technically it’s their programmes. It’s up to them to determine how much disclosure is provided.
Matthew Gordon: what should people be looking for? What is it that they’re not understanding now that you think they need to understand about you?
Teo Dechev: Well look, keeping things simple, again what we do is we pick up projects, we bring them into the portfolio, we bring onboard partners and then those partners fund those assets and explore. So, as I’ve mentioned, we've started exploration on the Vale projects, we anticipate being in a drill programme by the end of the year and that will obviously continue into the first half of next year. By that timeframe, we would also like to bring on board 1 more partner on the existing projects that are available. Of course, there’s the opportunity for the strategic alliance in Bulgaria to bring into fruition the other projects that have already been applied for. The problem is you don’t really have a lot of control as a company in terms of how quickly the governments will grant applications. That is definitely a moving target in these jurisdictions and again, another reason why we have a portfolio approach. But generally, those things are lined up for the next 12 -months.
Matthew Gordon: But you can understand the frustration in the marketplace.
Teo Dechev: You know, I think that the marketplace needs to understand how the Generator Model works. If they accept and understand what they’re investing in, then they will be on side with how this type of a business model evolves over time and how it can build value. So, I think that you can’t invest in the prospect generator or a royalty generator as Mundoro is, and expect the same type of timelines as investing in a traditional exploration company that goes out, raises capital, drills their resource, tries to maybe improve their resource report or take their resource into a PEA. That is a very different business model.
As long as the investor understands the differences between them, they can get easily disappointed in an exploration model, but they need to understand what they’re investing in. So, the Generator Model that we are pursuing is a long-term business model. It creates value over time and you really have to have a very competent team that understands how to control that process over the timeframe, manage the risks over the long-term and if everybody’s doing their job and you get a little bit of luck, then you will have a fantastic opportunity in terms of a discovery.
Matthew Gordon: Right, Teo. I appreciate your time. Thank you very much.
Teo Dechev: You’re welcome.
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