Transcript: American Pacific Mining (USGD) - JV Model with Rio Tinto and Others

April 6 2021, 15:58 GMT+01:00

American Pacific Mining Corp.

  • Shares Outstanding: 65.4M
  • Share price C$0.15 (06.04.2021)
  • Market Cap: C$9.4M

Interview with Warwick Smith, CEO of American Pacific Mining Corp. (CSE:USGD) American Pacific Mining is a gold exploration company focused on precious metal opportunities in the Western United States.

The Company entered into a definitive agreement with Madison Metals to acquire the Madison Copper-Gold Project near Silver Star Montana, USA. The Madison Project is currently under an earn-in, joint venture agreement, whereby Kennecott Exploration Company, part of the Rio Tinto Group (ASX, LON: RIO) may spend $30 million USD to earn up to 70% of the Madison Project. The Gooseberry Gold + Silver Project and the Tuscarora Gold Project are two high-grade prospects located in prime districts of world-renowned Nevada. American Pacific is Eyeing a Gold Discovery amidst gold’s next bull market.

We Discuss: 

  • 1:56 - Company Overview
  • 2:47 - The History: Development of the Business Plan
  • 7:30 - Cash Position & Burn Rate
  • 8:10 - Creating Value via the JV Model: Madison Project & Terms with Rio Tinto
  • 12:22 - Criteria & Profiles of Assets: What do They Look for?
  • 13:46 - Competitive Edge & Differentiation
  • 15:21 - Project Overview: Plans, Progress, & Approach
  • 21:49 - Going Back to Exploration: Debates & Considerations
  • 24:10 - Approach to Growth: What to Expect from American Pacific?

Matthew Gordon: Can you give a 1-minute overview of the business to begin?

Warwick Smith: American Pacific is a company that we took public in March 2018. 3 high-grade assets in the Western US. The foremost asset is called the Madison mine, down in Montana. It’s a joint venture with Rio Tinto where they spend up to USD$30M to earn 70% high-grade, scar at surface, porphyry underneath - incredibly excited about that asset.

The 2 other assets are based in Nevada: Tuscarora -high-grade epithermal system. That's the asset we started the company with. We got that from Nova resources. Then there is Gooseberry, which is about 45-minutes outside of Reno. That's under partnership with a company called GRAC, so a joint venture model focused on the Western US.

Matthew Gordon: Did you start off as that? In fact, when did you start?

Warwick Smith: March of 2018, so a terrible time to start a junior mining company. We were a little bit early into the cycle, but that allowed us to get some good assets. And look, I've been in mining since 1999. I love the people. I love the good people; I should say in it. I love the assets. I have a great team of guys that I work around. It was early but it was the right time with an asset that we really loved.

Matthew Gordon: What was the plan with Tuscarora? Were you going to explore, develop and mine that?

Warwick Smith: That was the game plan. We came into it saying that we were going to mine it. We are exploration guys, so for the most part we will look to develop these things then transact on them. That's really what we look to do. Tuscarora came through Nova Resources, they were spending most of their time down in Australia, they had just drilled this asset just outside of Elko. Quinton Hennigh is the guy who runs Nova, I’m sure a lot of your subscribers will recognise that name. He actually drilled this with Newcrest when he was a young man, he was actually the guy on the drill. They put out great results on it, but the focus was in Australia. We were able to pick it up from them, did a nice deal with them. We drilled it ourselves in 2018. Got some good results and one of the mid-tiers came knocking. Rightfully so, our board said, ‘If you're talking to one, speak to them all.’ So we did, and we ended up transacting on it with Oceana Gold initially. That birthed this joint venture model and then the addition of Madison expanded that when we picked that up because they were already in partnership with Rio.

Matthew Gordon: You talked about it being a nice deal, but did you get to the point where you couldn't raise cash? Did you need to speak to people coming in, or was it welcome bids?  

Warwick Smith: I'll be honest - it was a bit of both. It was difficult to raise money at the time. There is no doubt, especially for juniors, and the shine was on cannabis, Tech and everything else other than junior mining. We had a great asset. We had good high-grade results getting some good volume within the market and there was some excitement but going out raising capital was difficult.

We got approached by one of the mid-tiers, so when we took it to the board, we discussed it. I'm quite familiar with the joint venture model. I helped found a company called Riverside Resources which focuses on the joint venture model, and Ken Cunningham, one of our directors, he founded Miranda Gold, he is focused on the joint venture model as well. We knew how to cut what we thought was a good deal. When that excitement came through, we thought this might be a good way to go. Let's have a discussion on it. We ended up doing it and it morphed into that. 

Matthew Gordon: At what point were you able to take it to, were you able to raise capital?  

Warwick Smith: Yes, we did. We raised USD$3M when we went public. We transacted after that with Oceana, did a couple of raises after that of USD1M-$1.5M. Then when we did the deal on Madison - that one's a little more interesting - we announced a $500,000 financing and then the Casey Research group put out a note to their subscribers that they should look to take part, at 10:00 am on a Monday, and by the end of the day, I had a $5M book, and by the end of the week I had a $7.5M book. So things change really quickly.

We took USD$3M, just trying to keep the structure intact. We've been able to raise capital. That has been a large part of my background. I started in investor relations where I worked at Fortuna Silver from when it was a shell, and had good success there, same with Northland Resources, and focused on the capital-raising side of the business; that really was my bailiwick. I then broke out with Riverside Resources and helped found that and put the pieces together, and on from there.

Matthew Gordon: You have Madison, Tuscarora, Gooseberry and so forth, right? But you're sitting at a USD$9.5M market cap today, so it's small beer at the moment. Have you got cash today?  

Warwick Smith: Yes, we have about USD$1M in cash and about $1M in securities. We burn about $100,000 a month. We don't spend a lot of money, but you're going to see about a USD$5M drill program from Rio this year. Plus you're going to see drilling from GRAC as well on Gooseberry. There's going to be a lot of news, a lot of data without us spending a lot of our own capital. 

Matthew Gordon: Explain how you guys create valued. So much is dependent on how much money has been spent on drilling and your JV partner’s activity and success. But what are the bits that you are in control of? How do you build it? 

Warwick Smith: I like the JV model. It was quite popular in the early 2000s and there were companies that had a great deal of success with it. The way that we look at it is, if you are a retail investor, if you are a small fund or a small institution and you're looking at junior miners, you're ultimately looking to get involved in something that you hope to have that 10x return. Looking at ones that are involved with majors and mid-tiers, in many ways they've done a lot of the due diligence for you. That I can tell you. When a Rio Tinto comes in or an Oceana comes in, they do a hell of a lot of due diligence. You have to have your ducks in a row for them to be able to review the project. They have to look at it and think to themselves: if we're going to invest our capital and take this project over all of the projects that are out there, if we find it, can we build it and can we move this forward? So a lot of that due diligence is done. That's the upside of the joint venture model.

For the issuer, so for American Pacific, our background is in going and finding projects. I'm partnered with Eric Saderholm. He was the former head of exploration of Western US for Newmont. They wanted 3+ Moz. He had seen a lot of things that were 500,000Moz, that didn't fit for Newmont, but fit great for us. Hence, it's our job to go out and find good projects that we think can get bigger and being able to sell that vision forward. If we can do that and we can do that on a cost-effective basis, but then bring in a partner who can come in, spend their money on it, but we retain a percentage - good for shareholders.

The downside is you're giving up a portion of it. In the case of Madison, they can earn 70%, so we retain 30%. 30% of a Rio Tinto-size target at a USD$10M market cap - that can be lucrative. There's the upside/ downside of it.

Matthew Gordon: You don't carry any of these for your portion? 

Warwick Smith: We're fully carried. Rio has 3 opportunities to earn-in: they spend USD$5M, they can earn 55%. They spend $15M, they can earn 60%. They spend $30M, they can earn 70%. They can only earn it once; we know they like the project so we believe they'll spend the full $30M and 70%, until then we don't have to spend anything, at that point, then we have to earn it. So our downside is if we retain a 2% NSR, that's capped at USD$50M. That's the downside.  

Matthew Gordon: You talked about how this model was successful in the 2000s. We went through a period where it wasn't successful; what killed it?

Warwick Smith: We’ve been through a phase where mining has been so out of favour. It's coming back now. This last year, from the issuer standpoint, it's been a world better than it was the years before, as I imagine for you as well. During that phase it was difficult for investors to want to give up that further portion. They wanted to come in, see you drill it, see a big discovery. Great Bear’s a great example: drill it, see it go to $12 or whatever, it started at $0.30c - that's what investors were looking for if they weren't investing in cannabis or something else. I think that took the sheen off of that joint venture model and it became harder to finance them. I like what we're doing. I like the projects that we have. I like our odds based on where our market cap is. So I think it works quite well for us and I’m happy to buck the trend a little bit.

Matthew Gordon: Let's talk about the financing because you talked about USD$1M cash, $1.5M in securities. Your model is: you got out and find deals and you have to evaluate them to say, are they any good? Are they of a certain profiles? What is that certain profile that you're looking for?

Warwick Smith: We've focused on high-grade assets in the Western US. That's our niche. That's what we're looking for. Obviously, we're looking for things that we can get into on a cost-effective basis. That's key for the model, and then being able to transact on those. Is it a project that has a good-sized land package? Does it have good high-grade hits that you can attract the interest of a mid-tier major with - that's really what we're looking for. They are there out there, for example, in a previous iteration Stake Black Mine. I think Calvin advanced the whole team and has done a fantastic job. We staked that. We picked up Deer Trail, which is now in Mag Silver, and they're doing an excellent job with that.

We've been out and got involved in these projects, either by staking them or negotiating what we think are good deals on them and being able to attract other companies that we can work with and use their capital to continue to move them forward.

Matthew Gordon: How do you compete with all those assets? Are you going to be able to pick anything up in what is a pretty high Gold environment, a high Copper environment to be trying to target some of these things that mid-tiers are going to be interested in, so what's your edge?  

Warwick Smith: A large part the edge is Eric: he’s done a fantastic job. And he's been doing this for 36-years, and all credit to him. He's picked up some great assets along the way. I've got a fantastic board. Ken does a great job for us as well. Ken found Gooseberry for us. We staked Gooseberry, so that cost USD$20,000. The cost of capital for us: we need to do more of this over the next while and get out and aggressively tell the story, let people realize: Reservoir minerals is a great example, with that discovery, Neddison bought out their 30% for USD$365M. It was an epithermal system at surface and a porphyry underneath. Can that be Madison? We hope so, and if it is, that's a long way from $9.9M.

The opportunity to succeed with this model is certainly there. You have seen that blueprint and we've been able to pick up great assets in the past and we have great assets in the portfolio today. To answer the question directly, the team around us is our difference maker.  

Matthew Gordon: What's Oceana going to be doing? They have multiple projects; are they focussed? 

Warwick Smith: We brought in Oceana for Tuscarora in late 2018, early 2019. They came in and did great work. They drilled a few blind targets and hit and pulled out. We were very disappointed but obviously, they had issues down in the Philippines and they actually ended up closing their US office and pulled out of all the joint ventures, so those were tough times. They came in at the end of 2019, and they were tough times in American Pacific. Seeing them go was challenging and it hurt the market at the time. Thankfully, we'd been negotiating on Madison, and there's a funny story as to how we got that which I'm happy to tell if you like, but it was a prolonged negotiation. We knew we were into that and we’d be alright, but it certainly hurt. Since then another group came in to take on Tuscarora, but they announced last week that unfortunately their CEO passed away. Bob Baxter, he ran North Limited previously - great guy, he unfortunately passed away. They'd made USD$300,000 in payments and we've ended up getting the project back 100% so we're going to look to joint venture that again. They didn't even get on site before he passed away, unfortunately.

Matthew Gordon: Let's quickly deal with Gooseberry Silver project. What is happening there?

Warwick Smith: We did a deal with a company called GRAC Global. It's a private company. They're going to go public here shortly. They'll drill it a couple months after they go public. We will be the operator. So Eric will sit the drill. We've lined up a 15-hole drill program. 8 holes to start, based on success. on other 7 holes there. High-grade Silver project, last in hard Rock production in 1991, then they shifted over to the tails because it was tough times, and it hasn't been touched since 1994.

Matthew Gordon: Do you have any sense of what they're going to try and raise, or when that money is going to come to you to allow you to actually start some drilling? 

Warwick Smith: They're supposed to go public here in the next 4 weeks. I’ve spoken to the banking team that are behind it. They're doing a good job of raising the money. I don't suspect it's going to be an issue. They're going to raise around USD$3.5M-$4M, and they'll start drilling shortly thereafter. I would suspect it takes 6-8-weeks before drills are turning after they go public. sometime late Q2, I would think it will be drilling.  

Matthew Gordon: I get Madison; we see that that's going to be your flagship, but Tuscarora and Gooseberry: you've got these assets, you like something about them, but you need someone else come on with their capital, GRAC will turn up with their $2M-$5M, whatever the number ends up being. It's not aggressive, but is it okay for you going with smaller companies? Would you not rather have a Rio in there? Would you not rather have an Oceana as well in there?  

Warwick Smith: There are 2 ways to structure these deals, and you asked a very good question. Rio is a first-class tier-1 partner. Fantastic. I love that deal, we fought like hell to get it so I love that deal. Oceana was great: they came in, I think they paid us a very small amount upfront and then they committed to USD$10M worth of work that was going to earn them 60-70%. The deals that we've done with smaller companies comes back to cost of capital. They're quite willing to pay cash up front, a good chunk of equity, so that's putting money into the till for us and allows us to run the company, so we like those transactions as well.

A lot of these good juniors are the ones who go out and make these discoveries. They get out, they push in with the drill, they commit, they focus on that project, and we like that. I think a mix of both actually works quite well for a small company like us. As we grow, as we hope Madison evolves, that's going to become, obviously, the real primary focus.

With these other assets, there was a lot of debate about Gooseberry; if we should drill it ourselves, even under the joint venture model because we think we can have a lot of success there. We decided to do a transaction on it. Tuscarora – we did drill it ourselves initially, but we're happy to bring in a partner to do it. We love all those assets. We think they can become something but taking those deals with juniors works quite well for us.

Matthew Gordon: The JV model is a really interesting one; when it works, it really works. When it doesn't work so well, it just takes a little bit longer, right? Are you not tempted to get back on the saddle and actually start raising capital for yourselves, you are explorers, do some of it yourself now?

Warwick Smith: We're tempted. We're constantly tempted, and we probably talk about it every day. The internal debate is that we strongly, along with Rio, believe in Madison, Rio has told us it's their flagship exploration asset for 2021. That gives us great excitement and hope. We're very intrigued by that. They're doing a significant program this year. It gives us a lot of excitement.  

Matthew Gordon: The point is, I've heard that from other people: ‘It’s my flagship.’ Not about your project, but about their projects.

Warwick Smith: I get it. I'm always hesitant to say it but it's an important project for them. It's a very important project for us. We will go with that.

We are in acquisition mode in that we've reviewed 50-60 assets over the past 12 months. We're constantly reviewing things and we came quite close to something recently that we didn't end up taking on. I like this joint venture model. I think it works well for us. If I found the right asset that I said we can go in and do a bang-up job here and the investment bank that work with likes it as well, and it makes sense, I'm not adverse to that idea by any stretch, that is something that we would certainly consider doing. The point that I want to get across to the market today is how well the company can do based on Madison alone, because that's true and to be self-critical, I haven't done a great job of that yet. I need to get that across. 

Matthew Gordon: What are your plans to push that growth story? Do you find more assets quickly now, in this growth environment where you can raise capital, or are you just biding your time because you think Madison's going to work out, until it doesn't?

Warwick Smith: Fair enough. I think it's a fair question. The one point I will make is that you can't find good assets quickly. That's one thing for sure - you can find assets but finding good assets takes time. We're doing that work. A lot of the day-to-day is reviewing things and seeing if we can make a deal that makes sense. We are reviewing it. We're certainly not against it. One of the things that in 2020 I wanted to accomplish was to close the transaction on Madison and become institutionally owned. We did one of those 2 things and that institutional ownership hasn't come yet. We've spoken to a couple of the good investment banks here in Toronto and one of them took part in our last financing, but we want to grow so we can get more into that jet stream, and that may come via acquisition as well. We're constantly reviewing, but we're picky. We like what we have and we want to get something that's going to take me from here to there in short order, rather than something I'm going to add in a dilution and then it takes me slowly. We're taking the time to find the right assets.

Matthew Gordon: What are these institutions saying to you? Why are they not putting money in now? What are the things you need to deliver?

Warwick Smith: The true issue is: we don't raise a lot of capital, and it's difficult at this market cap to go and say, look, we'll do USD$10M and let's get 4-5 institutions in here. That's a challenge. We were a larger company – mid-last year we were about a USD$45M market cap. It's come down and it’s trading around a $10M market cap now, and that was based on, we'd raised money, it came free trade. The guys were up quite nicely, and then compounding that problem was that we paid 20M shares for the Madison acquisition. It was a $2.4M valuation at the time, which we felt was a good deal based on getting the partnership with Rio and the asset. When those shares came free trading, those shares came into the market, so it's compounded it, and then from there it's traded sideways for a bit and the market hasn't been as good as it was before.

Now that the that stock has come out, now that we're getting out and telling the story a bit more, now that Rio is starting a big program, we're hoping to see that flag move back the other way, and when it does, we're in the discussion with those institutions and some of the analysts who like the asset and I think we're going to get there.

Having Rio on the ground, also having that border open so that we can have analysts come down to site, that's going to make a big difference as well. All those things are coming up here in the next few months.  

Matthew Gordon: Stay in touch and let us know what happens with those numbers and let's see what it does for your share price because I think it's a great model.  

Warwick Smith: It's a great model. We've got great assets. We've got good partners. That partnership with Rio is great. The grades over there are cracker. They've got every reason to create excitement. Let's see what they do.

Matthew Gordon: Remind me what you are going to do with Tuscarora, will you flip that out?

Warwick Smith: We're going to flip it out. The press release went out on Tuesday. We've had interest already, so we'll get a deal done.  

Matthew Gordon: Excellent. Thank you so much for your time today. Have a great weekend and stay in touch. 

Warwick Smith: Thank you very much. Really appreciate being on the show.

To find out more, go to American Pacific Mining.

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