How to Invest Like a Merchant Bank in High-Risk Resources: Rick Winters


Rick Winters It is difficult for retail investors to sift the wheat from the chaff in the junior miner sector. In this interview with The Gold Report, Rick Winters reveals how RMB Resources, a resource merchant bank, figures out what projects to invest in and those to pass over and talks about some of the companies that made the cut.

The Gold Report: Rick, RMB Resources invests in resource companies throughout the world. Why is RMB flocking to resource companies when most investors seem to be running in the opposite direction?

Rick Winters: RMB Resources is the resource merchant banking division of the FirstRand Group, one of South Africa's major financial institutions. We've been in the business of providing finance to the junior resource sector for 18 years. We look at junior resource opportunities everywhere in the world outside South Africa.

As resource investors, we're always in the game, even when the market doesn't seem to care. Our product mix may change with market conditions, but we stay in the market and are always active.

TGR: With the risk-off sentiment that's prevalent in the market right now, are you making changes to your overall strategy?

RW: As a merchant banking operation, we look at junior resource finance and focus on relatively higher-risk, higher-return opportunities. In times like this, when junior resource equities and mining equities aren't in favor, we look more toward quasi-equity and quasi-debt investments as a way of providing finance to companies. We do this when we have confidence in their projects, using their projects as security for a debt structure. This saves companies from dilution in a time of very low share prices.

TGR: Can you talk more about quasi-debt and quasi-equity investments?

RW: We invest all along the spectrum, from pre-initial public offering seed capital through to corporate debt and project finance. When we talk about quasi-equity and quasi-debt, it's a reflection of the stage that a project or a company is at. Quasi-equity tends to be higher risk.

"We focus first on people and identifying good management that we've done business with in the past and that currently has good opportunities."

One example of such a transaction is Bullfrog Gold Corp. (BFGC:OTCBB). We have funded Bullfrog Gold as a quasi-equity opportunity because it has a very attractive project that's had a significant amount of work done on it in the past—a feasibility study, initial permitting and the like. But now, it needs funding to confirm what was done in the past and to expand the project. The transaction uses the project as security for the facility. We have a significant warrant package associated with that facility that represents the return we need for the risk profile.

An example of a quasi-debt transaction would be Solitario Exploration & Royalty Corp. (SLR:TSX). It has a project in Nevada, a gold heap-leap project, Mt. Hamilton. That project completed a final feasibility study in 2012, so the project is well defined. Solitario continues to optimize that feasibility study. Once again, the project is used as security for a debt facility but because the project is well defined it has a lower risk profile and our required warrant exposure is consequentially lower than a quasi-equity opportunity. That facility is to provide working capital to complete the permitting process so that the company can go forward with obtaining project financing and put the project into production.

TGR: What is the total amount of your investments in resource companies, both in 2011 and in 2012?

RW: We have a lot of movement in and out of our portfolio but, generally speaking, we have a portfolio of about $100 million (M)in equity and around $200M in debt.

TGR: Do you expect those levels to increase in 2013?

RW: Not necessarily. But we'll probably see our debt portfolio grow in 2013 because of the nature of the market.

TGR: With all the companies knocking on your door, how do you decide which ones you're going to invest in and which ones you're not?

RW: We really stay with the fundamentals. In a buoyant equity time, the spectrum of the projects that we look at is much broader and we do look at exploration and very early-stage projects and seed capital. But we're doing much less of that these days.

We're focused now on projects where we can assess the project and the opportunity technically. We assess the tradeoff between what we believe will be the fundamental value and the opportunity for the project to actually become a cash-flow generator. In other words, we're looking at the feasibility stage and above.

TGR: What are some investment themes that you expect will govern most of your investment decisions in 2013?

RW: The last year and a half has been an unprecedented period for the industry. We expect 2013 to be the same. We seek to patiently invest. We continue to have a minimum three-to-five year investment horizon.

"Retail investors need to look behind the retail promotion and see where serious money is getting invested."

We focus first on people and identifying good management that we've done business with in the past and that currently has good opportunities. We focus on projects and make sure there's sufficient asset value to justify the risk-return profile. We also focus on our companies' abilities to promote and raise capital because the mining business is very capital intensive.

TGR: Are your investments geared toward rising commodity prices or are you looking for specific situations that merit your expertise and your cash?

RW: We're happy to participate in the equity upside that comes along with rising metal prices, but we have more of a banking mindset than an equity investor mindset. We're always looking for the recognition of fundamental value at rational metal prices, which are often lower than the current price. In other words, we focus on project fundamentals.

TGR: Where do you see metals prices, particularly precious metals prices, in 2013?

RW: Prices will be relatively stable. There will be volatility within the metal prices, precious metals in particular. We're in an environment where fiat currencies and the major economies in the world are in trouble. The debt situation has to be dealt with, and is not going to go away for at least a few years. That's why I don't see a precious metal environment that's much different than what we've seen over the last couple of years.

TGR: RMB Resources is an investor in Sutter Gold Mining Inc. (SGM:TSX.V; OTCQX:SGMNF) and you are a director of that firm. Is it common for RMB to have a position on the board of a company that you're investing in?

RW: No, it's not typical for us. One of our most treasured mantras is not to become involved at the board or management level. We believe that if we can't have confidence in the boards and managements of the companies we invest in, we probably shouldn't invest in the first place.

"When this market turns, it will come back with a vengeance."

We became involved in Sutter when the former largest shareholder decided it didn't want to be in the gold business anymore. We purchased half the company from that shareholder and then sought to move the company and the project in California forward. When we started, we had 49% of a junior public company and had to build a management team and a new board from the ground up.

TGR: Sutter just poured gold, its first doré, at the Lincoln project in northeastern California. Will this news move the share price?

RW: Sutter's price graph shows that it's one of the better-performing junior stocks and has been over the last year. With the mine being built and coming into production, the value of the company has more than doubled over the last 12 months.

TGR: But the share price has been roughly the same since March.

RW: Now that the company poured the first gold in the Mother Lode in 54 years, the market is waiting to see the mine start to generate cash flow. The first six months of 2013 will be the ramp-up phase and the mine should be in full production by midyear. Then we'll see what value the market assesses for the Lincoln-Comet project.

That initial project is based on a five-year resource of about 180,000 ounces (180 Koz). What the market will come to appreciate is the immediate upside for Sutter. There is a second project, the Keystone project, which lies immediately north of the current mining resource. That's about a 400 Koz resource. The mill has been designed and built so its capacity can be doubled at a cost of about $700,000–750,000.

TGR: Has Sutter provided any production guidance for the first year?

RW: Not yet. It will going forward, but that will be a function of how the ramp-up goes. Once the Lincoln-Comet project is in full production, about 23 Koz/year is anticipated. There will be less than that in 2013 given the ramp-up for half the year.

TGR: Has any of that gold been forward sold?

RW: It has—RMB Resources provided a prepaid gold facility. To fund the project and get the mill built, we sold forward half the production of the current mine plan at a price of $942/oz. Sutter got—this was at a time when gold was around $1,540/oz—$20M in finance to sell 54 Koz forward for which it will receive $942/oz. In effect, it got a price of about $1,320/oz, selling forward in July 2011.

TGR: Do you know its cost per ounce?

RW: It should be around $700–725/ounce.

TGR: What are some other junior mining companies that RMB helped finance?

RW: Another recent one was Bullfrog Gold. It's a relatively new company and has a current market cap of about $11M. It has an advanced exploration project in Arizona called the Newsboy project.

In the 1990s, an Australian company did quite a bit of work and actually defined a resource of about 5 million tons (Mt) at about 1.5 grams/ton (g/t) gold. It completed a feasibility study and started all its permitting work in Arizona, so the state regulators are aware of the project. It then fell by the wayside in the mid-1990s. A Canadian company had it for a period of time, did a bit of work and then dropped the project in the late 1990s. In the early 2000s, a private group restaked it, and Bullfrog optioned the property from that private group.

Bullfrog is now working hard on it and is doing a lot of drilling to confirm the historic resources. It's gone a long way in doing that. It started to expand the deposit beyond the limits that were known in the 1990s. We think there is likely a deposit there that will be around 7 Mt at 1.5 g/t. Our facility, which is $4.2M, is to fund work at the project for the next 18 months. The work is intended to do the additional drilling and resource evaluation to complete the initial resource re-estimations and to begin, if not complete, feasibility and get the final permitting under way. It's a new opportunity that the market hasn't known about because it was in private hands, but we think it will become a mine.

TGR: Do you think that the management at Bullfrog has what it takes to go beyond what previous operators could do?

RW: Yes. The management is led by a gentleman named Dave Beling, who is a very experienced mining engineer. He's been involved with several different junior companies and has done lots of consulting work. We see eye to eye with Mr. Beling on what work needs to be done to bring a project to a development decision. Right now, it's a very lean and mean management team, but that's by design. At this point, the focus needs to be on the geology of the project area in the drilling and the resource estimation. But Mr. Beling also has all the experience to bring a development team together when the time comes.

TGR: Sounds like a lot of what your job is in this business is not to see what a project is but what it could become. What could the Newsboy gold-silver project in Arizona become?

RW: If it develops as we think it should, it will be a project that should be producing around 35–40 Koz/year and probably generating annual earnings before interest, taxes, depreciation and amortization of about $25M. On paper at $1,700/oz gold, it preliminarily has a net present value (NPV) at a 5% discount of around $90M in comparison to a market cap of around $11M.

It's a good example of how we try to assess fundamental value. It's also what allows us to have patience in our investing because with most of the companies that we're involved in we're looking at the opportunity for a four or five time increase in value.

TGR: What are some other companies you're invested in?

RW: Along the same theme is Solitario, which I mentioned earlier. It has a current market cap of about $50M, but its Mt. Hamilton project at $1,700/oz gold has an NPV of $260M. That's another deep value discount situation.

We recently became involved with Mercator Minerals Ltd. (ML:TSX) out of Vancouver. It has an interest in an operating copper-molybdenum mine in Arizona, the Mineral Park mine, as well as advanced development-stage assets in Mexico. We were a part of an overall balance sheet restructuring of the company. It had to restructure the debt associated with Mineral Park. Mercator just completed a major expansion at that mine to 50,000 tons per day. It's a large-tonnage, low-grade mine that produces around 40 million pounds (Mlb)/year copper and about 10 Mlb/year molybdenum.

Mercator is currently trading at about $0.58/share, down from over $4/share two years ago. It's a situation where the market has lost confidence in that company's ability to service its debt, so it needed to restructure its debt more in line with the long-life nature of the Mineral Park asset.

We refinanced a $30M facility that it had with a group of Canadian investors for its El Pilar project in Mexico, which is a large, low-grade, heap-leach opportunity in northern Sonora, just across the U.S. border. That project, which is where our security lies, has a final feasibility study completed. It's fully permitted to go into production. It only needs to obtain project finance to move the project forward.

The El Pilar asset really is one of significant value. That project has an after-tax, all-equity NPV8 of $460M at an average copper price of $2.82 per pound over the life of the project in comparison to a current spot price of $3.67 per pound. It's in a very good location with very good infrastructure, so it has a relatively low $280M capital expenditure requirement to put it into production. But with that sort of NPV after tax and with the current market cap of the company at about $180M, the value of El Pilar is over 2.5 times the current market cap without giving any credit to cash flow from its mine in Arizona or its other projects. That's another example of the type of things we look at.

TGR: Is El Pilar close to any larger producing companies in Mexico?

RW: Yes, it's about 45 kilometers northwest of the Cananea mine, the largest copper mine in Mexico. It's also about 50 miles southeast of some of the large Arizona copper mines, such as Sierrita/Twin Buttes. It's a unique deposit, but it's in a very good address for copper mining.

TGR: Another investment you made?

RW: Another one that we put some real equity into is a unique story, Highland Copper Company Inc. (HI:TSX.V). It's a Vancouver junior that has an interest in copper in the Upper Peninsula of Michigan. Most people don't remember that the Upper Peninsula was one of the greatest copper belts in the U.S. for some time. It produced over 5 Mt of copper.

Highland Copper did a joint venture with a Houston group, BRP LLC, which holds interest to about 13 million acres of mineral claims in the U.S. It purchased the mineral claims in the Upper Peninsula in a bankruptcy in the late 1990s and really didn't know what to do with them. To Highland's credit, it did a joint venture with BRP to earn a 65% interest in the Upper Peninsula mineral holdings by spending $11.5M and producing a feasibility study.

The problem came with the markets over the last 18 months and the company's inability to finance itself and move forward on the earn-in conditions of the joint venture. We became aware of it when a notable mining entrepreneur, David Fennell, learned of this opportunity and discussed it with us.

It was a restructuring exercise to take this Canadian company, which last May had a market cap of about CA$2M. At that time, Fennell brought in new investors including RMB Resources, new money ($16.5M), new management and renegotiated the earn-in option appropriately to allow it to go forward. We now own about 10% of the company.

The company has, since July, drilled 160 holes and over 24,000 meters. It is focusing on the chalcocite part of the belt. Unlike the native copper, chalcocite as a mineral is much more friendly from a metallurgical standpoint and produces a very high-quality, clean copper concentrate. No one had really focused on the chalcocite part of the belt in the old days.

We would expect that sometime in Q1/13, Highland Copper will come out with its initial resource estimate, and it will probably be on the order of 6–7 Mt initially of 2.2–2.5% copper, most of it open pitable, which is quite significant these days where the average grade of a copper deposit is more like 0.5%.

There was a joint venture by Inco and Homestake Mining Co. in the later 1970s and early 1980s, and they defined three deposits, conducted preliminary evaluations and produced resource and reserve estimates. Highland got an inventory of around 2 billion pounds of historic chalcocite and native copper resource, which needs to be prioritized and confirmed.

Bottom line, Highland has a high-grade deposit near the surface in an area that has a copper mining tradition. It is fully funded to meet its obligations under the joint venture earn-in. It has also been producing fantastic results, but people haven't really noticed. That said, it currently has a market cap of about $24M, up from $2M, with about $14M in cash and a lot of work going on to get an initial mine going and really explore and evaluate the 13,000 acres of holdings that it has in the Keweenaw project in the Upper Peninsula of Michigan.

TGR: What about permitting in a place like Michigan, which hasn't seen a lot of mining over the last 30 years or so?

RW: Michigan seems to have quite favorable attitudes toward mining and mining regulations. Most of the project is on private land, so the federal part of the permitting equation is less of an issue. The Keweenaw part of the Upper Peninsula is economically depressed. There is still a history and heritage of mining there, so in general people are very supportive. But time will tell. The permitting anywhere in the world these days is every bit as important as any other part of the job. That work is currently being initiated by Highland Copper.

TGR: Are there any other companies you want to comment on?

RW: Trevali Mining Corp. (TV:TSX; TREVF:OTCQX) is one of the better stories in the marketplace and we are working on it right now. We've been mandated to arrange $60M of finance for its mines and its development opportunities in New Brunswick as well as in Peru.

It's a complicated task because Trevali has a lot going on simultaneously, including three mines and two mills. For investors who like zinc, it's definitely one to pay attention to. It also has quite an ability to raise capital. But it is at that cusp where quite a bit of money is needed, and we're one of the groups working on that. We have confidence it will go forward.

TGR: Its biggest project is the Santander base metals project in Peru. That has bounced around from company to company for years. Why does that project make economic sense now?

RW: It makes economic sense for two fundamental reasons. One is that there is already a tremendous amount of capital invested there. There is already a mill at Santander. There is housing at Santander and a complete mining camp. The other factor is that it has good zinc and silver grades in a well-established mining resource.

But it's a big project. The challenge is getting all the final mine plans in order and properly developing the underground deposit. Santander should start producing metal in 2013. What makes these types of projects successful is that some management groups bring a focus and a commitment to it. That's what's happened at Santander. Glencore International Plc (GLEN:LSE; 0805:SEHK) has a major interest there along with Trevali. But it's Trevali, and the confidence that Glencore has in Trevali to put the mine into production, that will bring it to fruition.

TGR: The junior mining space used to be predominantly the domain of retail investors. Is there still room for retail investors in the sector? Would they be well served to follow the investments made by large companies, such as those made by RMB?

RW: There is always room for retail investors. One of my attractions of getting into the junior sector when I became an analyst many years ago at Robertson Stephens & Co. was the realization of the mining industry in general, but the junior sector in particular, that it's really a very small sector. There are lots and lots of companies; in Canada, there are around 1,500 listed junior companies.

But if you take the total value of those companies, or even the entire mining sector, it's not very significant. Apple is probably bigger than the entire global mining sector. So when investor interest flows into the sector, it doesn't take much for all the boats to rise, and do so rapidly. But when the interest leaves the sector, the inverse is true. The tide goes out, and all the boats fall quickly.

For people who think about fundamental investing, and not trading, there is a lot of opportunity in the junior sector because of this complete disconnect between the current valuations for companies and value of the metal in the ground and even cash flow given the current and expected prices for the commodities that these companies are producing.

I think for a lot of retail investors, it's very difficult to know who's who in the zoo. Just because a company is a very good promoter doesn't mean that it has very good assets. People with a view like ours, which is a bit longer-term, fundamental resource-oriented view, would be well served by looking at what some of the other successful major resource investors do in trying to cull the number of opportunities and focus on those things that provide the best risk-reward. Institutional investors, as a group, typically do not seek market returns. We are looking at higher-risk, higher-reward opportunities. Retail investors need to look behind the retail promotion and see where serious money is getting invested.

When this market turns, it will come back with a vengeance. Everybody will be very happy. The people who will be most happy will be the people who were already invested.

TGR: That sounds like sage advice.

Rick Winters has been president of RMB Resources, the resource merchant banking division of the FirstRand Group, since August 2005. During the previous five years, he served as vice-president of RMB Resources. Prior to his time at RMB, Winters also had stints at Golden Star Resources Ltd., Robertson Stephens & Co., Phelps Dodge and the Colorado School of Mines, where he holds a master's degree in mineral economics.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Bullfrog Gold Corp and Sutter Gold Mining Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Rick Winters: I personally and/or my family own shares of the following companies mentioned in this interview: Highland Copper Company Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

Get Our Streetwise Reports Resources Report Newsletter Free

A valid email address is required to subscribe