In conversation with targeted assets which fit the profile of companies they like to acquire, small undervalued, near term producing Gold assets, probably South American. Building a mid-tier gold producer. They are in a show me stage.
Click here to watch the interview.
Matthew Gordon: Thanks for taking the time to speak with us. We usually get people to kick off with a two summary on the business and then we’ll get into some questions after that.
Geoff Hampson: So Para Resources is a junior mining company. We have a couple of different properties – one in Colombia and one in Arizona in the USA. Both are Gold mining opportunities, and when we started this company we really started looking for mining properties that where there was an existing infrastructure, an existing mill, but also where there was a lot of exploration potential.
So we wanted to bypass the period of time that it takes from a greenfield exploration to a production, by having some small production that could generate cash flow, where the permits were already in place and where there were some under explored opportunities.
Matthew Gordon: If you don’t mind, can I just explore that a little bit further because I think it’s fascinating. Different companies with different strategies hoping for the same outcome. Obviously, it doesn’t always turn out that way. So tell us a little bit about you. I notice you’re a finance guy by background but you’ve got a big team of technical people. So you’ve gone out and identified two assets which meet the criteria that you specified, which is great. Was there any competition for them or did you get lucky or who did you know?
Geoff Hampson: Just about my background, I’ve been an entrepreneur for 35 years. I’ve built a number of different businesses. I’ve been successful in being contrarian and finding my entry point at the low point of the market where the sector was out of favour, and I’m a believer that you make money if you buy well and you have the right people and the right macro environment opportunity.
One of the reasons that we’ve been able to acquire these properties and acquire them relatively cheaply, and if you look at it in the historical perspective, is because the sector has been out of favour and there has been little money, and so junior mining companies have really struggled over the last five years because the cycle changed – particularly with Gold. Some of the majors overspent, leveraged their balance sheet, made bad acquisitions and have spent the last five years really just trying to fix their balance sheet by selling off non-core assets by producing, by not exploring and not increasing their reserves.
And that has traditionally been one of the sources of capital for the junior mining industry because the majors have allowed the juniors to take the risk and do the exploration and they’ve funded some of the juniors as they’ve started to develop resources. That has completely dried up and the retail investors have fled. On the Toronto Stock Exchange, the venture exchange, everybody has been making so much money on marijuana stocks that nobody’s really interested in the resource sector.
So while that’s a problem, it also has created an opportunity and because of that, asset values, equity values, are at historic lows. So we’ve able to manage that by buying cheaply.
Matthew Gordon: So no one sells their good stuff, and certainly not cheaply. So what did you like about these assets specifically? You’re saying you have one in Arizona, one in Colombia. They’re not too far apart, but…
Geoff Hampson: But worlds’ apart. What we liked about them was that – and maybe I can just talk about them individually because in Colombia, after the government made a deal with Farc, vast portions of the country that had been off the grid in terms of being welcoming for Western mining companies, opened up. There have been a lot of small, artisanal, some legal, some illegal miners, and we’ve looked at that as being an indicator of where there might be Gold.
We identified the El Limon mine, which was a relatively small mine, 75 tonnes per day, 25 years, but still producing. When we looked at that mine and the fact that it was fully permitted, that it has capacity for tailings, there’s lots of water and the fact that all around that area there were all these small miners, but the area had never been drilled. So we said, “Hey, this fits our criteria. A small existing mine, fully permitted, that with a little bit of work can be rehabilitated and improved to product cash flow to fund an exploration programme in this valley.”
And so we acquired the mineral rights for a 12km long stretch where there is this a vein system that we know is there because of the small miners and we know that it’s the same vein system because we were able to go and check the geology.
So the idea is that we took this mine, increased the capacity from 75 tonnes per day to 225 tonnes per day and then went out with the government to try and formalise some of these other small mines.
The government told us that would take about six months, but in fact it’s taken about three years, and so we’re just now starting to see the ore coming from these other parts of the vein, and we’re operating, we’re at cash flow break even, but we have a plan over the next year to bring these additional sources on, which will get us up to full capacity.
So the idea is fully permitted, ready to start producing and exploration potential. We’ve looked at hundreds of different opportunities and have found two that we’ve acquired and we’ve got few other ones in the pipeline that we’re looking at.
Matthew Gordon: So how much have you spent on that to date and what do you think it’s worth?
Geoff Hampson: Acquisition cost, the rehabilitation of the mill, the permitting work, about $12M US in Colombia.
Matthew Gordon: And how much more to go?
Geoff Hampson: It really doesn’t need that much more. If it needs more it would be in the hundreds of thousands of dollars, but it’s fully funded and it’s cash flow break even from operations today. Most of the cap ex has been invested, so we’re sort of ready to go as we ramp up the production from these other mines.
Matthew Gordon: What are you hoping for in terms of production amount?
Geoff Hampson: In 2020, we should be somewhere around 8,000 to 9,000 ounces, but in 2021 that will go up to around 15,000 to 20,000 ounces. It’s very grade dependent.
Matthew Gordon: And it’s a reasonable grade as well, from what I can read. So the hope is what there, that will be a cash generative business to do what? Explore further or is it to create cash for other parts of your business? What’s the thinking behind El Limon?
Geoff Hampson: The mine site is fully permitted to 400 tonnes per day, so we have expansion opportunities there, but in 2020 when we’re producing, we will start an exploration programme on this vein. It’s called the 02 vein. It’s about 12km long. It’s a series of parallel veins at average grade. On a fully deluded basis it’s around seven grams per tonne. Some parts of it are higher grade, but as we start to drill that out we would expect that we would be able to build a sizeable resource. So we have a target of about a million ounces to be discovered in the next couple of years, at which point we think that we can justify increasing the capacity of the mill to 400 tonnes or more per day, and at that point generating $20M-$25M a year worth of cash flow.
So we also think – and this is more of a macro discussion – that as the cycle for the Gold mining industry changes, and I can talk about what I think are those indicators, the majors who have not been replacing their reserves that they’ve been mining over the last five years, will be looking to buy reserves because it’s cheaper to buy Gold in the ground than it is to actually go out and explore…
Matthew Gordon: It’s going to take a lot more ounces than 1Moz for them to come knocking at the door, isn’t it? That’s why I ask, what’s the hope? What’s the blue sky for El Limon?
Geoff Hampson: I think there is potential for more than 1Moz. The cost of producing Gold there is relatively low. It’s about $725 an ounce and with a capital cost of $12M, pay back is a year and a half. As we increase the size of the reserves and we increase the size of the mill, that’s going to grow. So it’s going to be a very nice cash flow business, but I think that there’s several tiers in the Gold mining business. There’s the juniors, there’s the mid-tier and then there’s the majors.
You’re absolutely right. The majors aren’t going to come knocking for 1Moz, but the mid-tiers will.
Matthew Gordon: But this is why I ask you about strategy and why I’m always interested to understand the conversations that the Board or the management team have. It’s a nice cash generating business. If you think it’s got potential to be a 5-7Moz Resource, that’s fantastic. You’ll get a lot of people knocking at the door, but if it’s producing a lot of cash, maybe – and I know you’re going to talk about Gold Road in a minute – it helps with another target.
Where you’re positioning is you think it’s a nice, small standalone business which may be able to grow. Or do you think it’s part of a bigger story that you’re trying to tell?
Geoff Hampson: We particularly like South America and Latin America. Our team has a lot of experience there and we see this as sort of a platform. We will use the cash flow to look at other acquisitions. We’ve got other things that we’re looking at Colombia, but also in Ecuador and in Peru. So we see this as a sort of first step to building a mid-tier producer in the region.
Matthew Gordon: So are those conversations ongoing at the moment?
Geoff Hampson: Yes they are.
Matthew Gordon: They are! Obviously there’s a few people trying to do the same thing, so it’s a competitive environment. You’ve got quite a few locals working for you?
Geoff Hampson: That’s right. And we’ve got a number of people… Randy Martin who is on the Board of Directors and the COO, has been very successful on Latin and South America, and building out Gold mines. He’s built some, sold some and has very deep contacts with government and agencies. We see a regular stream of opportunities, but we’re pretty picky and so they have to meet the criteria that we’ve established and we have to be able to buy them well.
You’re right, there's a bit of competition, but typically the opportunities that we’re finding at not being widely marketed, and so it’s really more based on relationships and being able to go in and talk to the owners and work out a deal. So very few of these companies that we’re looking at have actually hired an investment banker or have any process to try and sell the asset. So it’s really showing up and saying, “We want to buy it and working out the terms.”
Matthew Gordon: But how do you do that? Again, I do hear that story a lot and what I’m trying to get at is the point of differentiation for you guys. I know you’ve got a finance background, a very successful man. Have you got ready access to cash? I know one of the shareholders of your business. Have you got ready access to cash to be able to have those conversations, to turn things round quickly, because that’s what it takes?
Geoff Hampson: And the answer is yes, and I think that we’ve demonstrated that by the fact that the insiders, myself and particularly Glenn and Randy, we have put the majority of the money that has gone into this company. We’re now between the three of us about $30M deep into the company and we have additional resources that we can deploy quickly if the opportunity comes along.
But there’s also an advantage of having an operating, profitable mine. For instance, our operation in Colombia is unlevered. So next year as we’re starting to produce cash flow, we can use that a base to be able to go out and make other acquisitions.
Matthew Gordon: That’s what I’m trying to understand. How do you build this? Otherwise the danger of it being the same story, lots of $35M companies in the same position. What do you have that others don’t? You’ve got your own cash and access to further cash from yourselves, but also the ability to go to market with the right story.
Geoff Hampson: I think that is the differentiator, plus I think the experience of the team in knowing how to make these operations work. Narrow vein, underground mines are a bit tricky and so you need to have expertise and people who know how to make them work. Lots and lots of examples of projects where they have a PEA or even a feasibility study that says they can make money, but then when they actually get into the ground, they can’t figure it out.
We’ve looked at a number of those opportunities that are essentially destressed plays and some we’ve passed on. Others we’ve looked at and said, “Well, we would do differently and here’s what we would do.” So there is an opportunity there when you’ve got access to capital and you’ve got the expertise and the track record of working in that environment and also working in that kind of mine.
Matthew Gordon: Well, I think the ASIC number is impressive. If you can deliver that, that’s great. Obviously the grades help. Why don’t we get onto Gold Road, and then maybe we might be able to join the conversation up then?
Geoff Hampson: So Gold Road is a bigger operation. It’s a 500 tonnes per day CIL plant, fully functioning. We acquired it end of 2017. We did a PEA which showed that it had an $85 million NPV, that we could produce 35,000 to 40,000oz a year at an all-in cost of about $825 per ounce.
So we bought the asset for $6.1M. So we bought it well. We had an appraisal done on the equipment and it came in at over $20M. So on the liquidation basis, we could have doubled our money if we had chosen to do that.
It fit one criteria which was buy well. There’s a resource in the mine of 215,000oz, so that gives us a 7yrs mine life (LOM) but it’s open at depth and open on strike. It’s got an average grade of around seven grams per tonne. It’s a nice mine. It’s in a great jurisdiction. The Oakman district is a historic Gold mining area. The mine itself is right on Road 66 and so it’s easy access, two and a half hour drive to Las Vegas. So it makes it easy to get to and a mining district, so lots of people, suppliers and so forth. Very, very different than doing business in Colombia where getting people and expertise and suppliers is a real challenge.
So what we’ve done is we’ve rehabilitated the mill. We’ve done a lot of development work underground and we’re essentially a couple of months away from mining right now. We’re just opening up a new area at the 900 level. As soon as we’ve completed the drift to the end of the ore shoot, we’ll put the secondary escape route in and then we can come in and start mining.
That’s probably going to be some time around October or November and we’ll be able to go right to a full production now. We’re actually stockpiling some material now as we’re doing the development work, as some of that development work is in the vein.
The vein in Gold Road is typically around three to eight feet in width, so it’s much wider than what we have in Colombia. The grade is about the same as Colombia, but it’s easier mining and when we did our technical report our consultants indicated that based on some of the drilling that had been done at depth, it wasn’t enough to put the ore into the resource, but indicated that the vein was open at depth. Indicated that they thought we could increase the resource by 700,000 to a million ounces.
And so over the next couple of years we will do that. We’ve already started drilling, but this mine is very, very good shape. We’ve fixed some of the problems that were in the under ground that were causing the previous owner to have some problems. Just some fairly simple changes to the mining method – just things like straightening out the decline and so forth. We’ve done quite a lot of work there and it’s really looking good right now.
Matthew Gordon: Tell me about the mill bit, because I just want to understand that and I want to bring this conversation back together. The mill you’ve upgraded has got potential to be upgraded further, presumably?
Geoff Hampson: When we acquired it, it was 500 tonne per day. And so what we’ve done is we’ve gone in and just completely done maintenance, I guess you could really call it, because it was fine before, but we’ve replaced hoses, changed fluids, basically tested it . We’ve tested the whole circuit now. We’ve actually produced Gold, so we know it all works. The recovery is very good, 95% recovery. So the mill is in great shape, the under ground is almost completed in terms of development work and we’re ready to start producing.
Matthew Gordon: How does it go from 500 tonnes to 1,000 tonnes per day? How much does that cost you and when do you make that decision?
Geoff Hampson: It’s fully permitted for 1,000 tonnes per day, so probably about $20M to $25M worth of CapEx required to double the capacity of the mill. Depending on how we build out the resource, we’ll make that decision.
What’s interesting there about the exploration potential is that we’ve also acquired an adjacent property. There’s actually a series of three veins that ran through this area. Gold Road is he northernmost vein, but about a mile and a half away is what’s called the true vein. There were seven historic mines that were built and mined from 1890s through the 1940s and 1.3Moz have been produced out of the true vein.
But what’s interesting there is that the vein widths are quite a bit wider, sort of 13 to 15 ft in width, and the grade is much higher. So the average grade over the history of the mining on that vein has been 23g/t. Because the way that the mining was done back in the old days was there was an outcrop that showed the vein. They started mining and they traced the vein but it’s a continuous vein and it goes for about two and a half, three miles. But it’s never really been properly drilled and so there’s a series of mines along this vein but it’s never been drilled between the mines, and the cut off in those days was 0.5 ounces per tonne. So if they got to a section that was at 0.5 ounces, or lower, they would stop. We know from the historic mining records that there’s an enormous amount of ore that’s still in there. And it’s higher grade than at Gold Road. And because it’s only a mile and a half away on a paved highway from our mill, we’re hoping that we’ll be able to establish some tonnage there and that we’ll be able to mine that higher grade material as well.
So long story to come back to, the mill expansion. If we establish tonnage at a higher grade, we’ll obviously want to mine that and we’ll need more capacity.
And to keep the numbers straight, 7g/t at Gold Road yields 35,000oz per year at the mill, at 500 tonnes per day. But if we’re able to find ore that matches the historic grade – and I will keep the maths easy and say, 21g/t, if it’s three times we’re talking about 125,000oz per year and the average cost, all in cost, goes down to about $500.
So that’s the exploration potential. We don’t know for sure what’s there, but certainly the fact that there has been historic mining there is a good indicator that there’s Gold, and that’s it open…
Matthew Gordon: A bit of work to do between now and then obviously, but lots of optionality. But you’re going to have to also spend a lot of money to do that. That project sounds quite interesting to me, Gold Road, which is why I asked initially about what’s the plan for El Limon - because if that’s producing cash, that does finance your work in Gold Road? And that’s a nice way to make sure there’s no dilution or do you feel that you can structure a deal whereby there’s very little dilution for existing shareholders going forward because you are producing some cash, there’s some leverage to be had?
Geoff Hampson: We’ve invested into Gold Road. The acquisition plus the work that’s been done so far is about $22M-$23M. We’ve probably got another $3-$4M worth of development work to do before we actually start mining. But the way that we’ve designed the development plan and the mine plan, we’ll be able to 500 tonnes per day right away. I mentioned that we’re stockpiling some material, but once we’ve completed the development into the 900 level we’ll open up a number of different stopes which will get us the 500 tonnes per day.
By the end of the year we’ll be producing closet of cash and in 2020 we anticipate in our financial model, which uses $12.50 per ounce for Gold, that we’ll generate somewhere between $18 to $20 million with the free cash flow. So that’s net of sustained FX.
So part of that money – not all of that money, but part of that money will go into an exploration programme to increase the reserves at Gold Road, but also to drill into the true vein.
Matthew Gordon: How much cash are you sitting on today and will you need to do another raise?
Geoff Hampson: We’ve got about $2 million in cash today. As I mentioned we need another $2-$4M to complete the work at Gold Road. We’re either going to go and do another small financing or we’ll do it ourselves, but we’re moving along at pace so we’re not really concerned.
Matthew Gordon: So if it was you, that’s an equity raise. You’re not putting money into the company as a loan or anything?
Geoff Hampson: Right.
Matthew Gordon: How would you put the money in?
Geoff Sampson: Probably in the form of equity, but it might also go in some debt. We haven’t really determined that yet.
Matthew Gordon: It’s quite interesting because management own a lot of this company. You’re committed. You’re in. So your decision making is… you can genuinely say you’re aligned with the market properly. That’s mostly retail, Canadian retail, I would presume. Is it?
Geoff Hampson: There’s a bit of… I wouldn’t necessarily call it institutional, but more sort of family offices that have written bigger cheques. There are obviously some retail investors as well, but we’ve got probably 12 or 15 mostly European family offices who have put in a quarter of a million or dollars or so each in previous financings.
Matthew Gordon: Why European? Where’s that come from?
Geoff Hampson: There’s just been a better appetite for this kind of a deal in Europe than there has been in Canada. It’s not for lack of trying. I’ve done a lot of work to try and raise money in Canada, but I’ve gotten a much better reception in London, Zurich, Munich and strangely Budapest.
Matthew Gordon: Budapest. Okay, that’s a new one.
Geoff Hampson: I think that the Europeans have a little bit more of an affinity to Gold than Americans and Canadians, as I mentioned before have become distracted by marijuana.
Matthew Gordon: Let’s just then focus on those people, because looking at the share price, you’ve had your highs and lows. Highs of $0.21, $0.22. Lows of $0.12. May was a strange month for you. What happened?
Geoff Hampson: Well, there was one seller that decided to move his position and it would have probably been better just generally speaking if he had called me and said “I want to move this position,” but it took us a while to figure out where all the pressure was coming from. Initial contact with him was negative. He said, “No, I’m not a seller,” but anyway it is what it is. This is the joys of being in the public market.
Especially the junior market for sure. I’ve learnt this over the past few years. He could have crossed, it would have been great.
Matthew Gordon: But if I look at where the future is, you talked about M&A, but you’re not in a position at any time soon to look at M&A. You’ve got a lot of moving parts here as it is. Is M&A just a story you’re telling the market or are you going to focus on what you’ve got?
Geoff Hampson: I think that we’re very focused on getting these two assets up and running and generating positive cash but we’re also pretty opportunistic. There are some – and just sort of be careful how I say this – but there are some assets which are really good fits for us, that are available and we’re moving forward on doing a deal with those. But it’s because it creates quite a bit more value, it’s strategic but also financial and so we continue to see a lot of opportunity and our goal is to build out a mid-tier Gold producer within the next three to five years. We think we’ve got a fairly straight line, 200,000, 250,000 ounces per year. It’s not going to be easy, but we think we can do that with the cash flow that we will generate from these existing operations.
Matthew Gordon: That would be great if you could do that. So you’re looking at these small, undervalued producing or near term producing assets, building up a portfolio, looking at different countries or are you back in Colombia and the States? What are you focused on?
Geoff Hampson: There are some places that we would probably not go, but we have an advisor to the company who is a former Minister of Mining in Ecuador, Javier Cordoba. He is assisting us on looking at opportunities in Ecuador and Peru and Chile, where he has very strong relationships with the government. That is helping us to be able to shortlist opportunities.
As I mentioned, we’re really focused on getting the existing assets, cash flow and stabilised, but that’s fairly near term for us. By the end of this year both of these operations will be in full production and producing Gold. All of our models have been based on $1250 an ounce Gold, so in this environment where Gold is trading higher, our projections of cash flow are probably on the conservative side – which is fine, but I think that there is going to be ample opportunity for us to look at new acquisitions or expansions of existing assets.
Matthew Gordon: For investors, getting into production and making money are two different things. Creating value is yet again something different. So in terms of those components, you’re saying that you can get into production quite soon. Positive cash flow, that’s a little bit further out, and I guess for some of these acquisitions you may see some value being created for shareholders. Is that the way you see the future?
Geoff Hampson: I think that like every public company, CEO, I think our stock is undervalued. Our market cap is essentially 1X projected 2020 cash flow. And so our shareholders, I wouldn’t say have been long suffering, but you’re absolutely right. Our share price has stayed in a fairly narrow band between $0.12 and $0.25 for the last three years. And so I think that we’re in a ‘show me’ stage. I’m expecting that as we go into 2020 and we start showing quarter over quarter improvements and positive cash and, we believe, profits, that the market will say, “Okay, this is a real deal,” and that we’ll see some appreciation in the stock price
I could be wrong there because I don’t pretend to understand the public markets or the sentiment of the public markets, but I think that if we’re generating positive cash, people will take notice.
Matthew Gordon: I think they will, and as you say, do what you say you’re going to do consistently.
Geoff Hampson: And we haven’t really done anything in terms of promotion. We’ve felt that it would be better to wait until we’re closer to achieving our goals and then start telling the story rather than be telling the story and having people have to wait. So this interview – with some of the things that we’re starting to do are in anticipation of actually getting out there and telling the story.
Matthew Gordon: Well, I’ve enjoyed listening to it today, Geoff. Nice first pass. Let’s stay in touch. Let’s maybe in the next few months see how you get on, and as you get closer to some of these catalyst moments. Appreciate your time.
Geoff Hampson: Thank you very much for your time.
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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.