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TICKERS: AUG

Auryn's Management Finds Success in the Prudent, Measured Approach
Management Q&A

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After Agnico Eagle Mines gobbled up Cayden Resources in a mostly share-based deal worth CA$205 million, Shawn Wallace and Ivan Bebek are back with another gold exploration story: Auryn Resources. The successful tandem—with Wallace as CEO and Bebek as chairman—have a following among junior gold investors and hope to grow the Committee Bay gold project in Nunavut into a district-scale project worthy of a suitor's interest. If that's not enough, the company has plans to acquire a low-cost, high-quality gold asset to add to its project portfolio. In this interview with The Gold Report, Wallace shares his perspective on the junior market and his lofty goals for Auryn.

The Gold Report: Please give us an overview of Auryn Resources and its genesis.

Shawn Wallace: Auryn Resources Inc. (AUG:TSX.V) is the third company that Auryn chairman Ivan Bebek and I have started. Previously we founded Keegan Resources and later Cayden Resources. Keegan became Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX; ) and it merged with its neighbor, PMI Gold. While working with Asanko in Ghana, we met Auryn COO Michael Henrichsen, a brilliant structural geologist with Newmont Mining Corp. (NEM:NYSE).

After Cayden was bought by Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), our team began a global search for an asset with three key attributes: it had to be a district-scale opportunity, which means a land package where multiple deposits could be developed in the same geological setting; it had to be situated in a stable jurisdiction where people get mining permits in a reasonable timeframe; and it had to be high grade because it's only in times like these when you can economically acquire high-grade assets. We searched in a bunch of countries but Committee Bay ticked off all the boxes.

"The key to our success is that we're a disciplined group with skilled people."

Auryn has people from Cayden and Keegan on the board, which has made the integration of a new company into the group almost seamless. We had about $9 million ($9M) in cash at the start of this year but it is about $7M now because we have started spending money on Committee Bay. And a lot of that money came from us. We invest in our company.

TGR: Why has your group had so much success, even in difficult markets?

SW: The key to our success is that we're a disciplined group with skilled people. We know what we're good at and what we want to achieve. Ivan and I get a lot of the pats on the back, but frankly, it's our technical people—the geologists and geoscientists who go into the field and create value for our shareholders. I was with the Hunter Dickinson Group for 15 years before Ivan and I formed this group about 10 years ago. That is where I learned how to do things.

Our ability to adapt and be flexible to changing times and not getting too hung up on the things that we can't control and trying to mitigate the risk of the things we can control has helped us in these difficult markets. We're not going to issue shares just to keep the lights on. Many companies have fallen into that trap. We're not going to let that happen.

TGR: What are some examples of how you have mitigated risk?

SW: It's about picking where and how we spend our capital. For example, with Keegan in 2008 when the markets crashed and our share price went from about $4 to $0.50, we had about $7M in the treasury when Ivan and I sat down and said, "We have to stop drilling in order to preserve our capital," whereas a lot of companies continued to drill. Why would you drill holes and put results into a market that could not care less? But because we ceased drilling we didn't have to raise money until the markets had recovered. That sort of prudence kept dilution to a minimum. If a company has too much cheap stock, it usually can't recover.

TGR: What are some ways that you are creating value with less money?

SW: Right now we are preserving value, rather than creating it, by being prudent. But we are also in acquisition mode. We're creating value by purchasing or getting involved with high-quality assets that would not be available in a better market. The Committee Bay Joint Venture is one example. We will spend $6M over 18 months to earn a 51% stake in Committee Bay. We have a top technical team that will make its decisions using a precise, science-based approach to exploration. We're not drilling for the market.

The best way to add value is to either acquire gold through transactions or discover more gold. We'd rather spend more time exploring the land package because, frankly, that's what we do. Cayden is an excellent example. Agnico is going to build it and carry on but because of the share rollover, if people want to continue to have exposure to the El Barqueño asset that we were developing in Cayden, they can remain Agnico shareholders and get paid a dividend along the way.

TGR: Pitch me on Committee Bay.

SW: It's really simple. It's a 300-kilometer (300km) greenstone belt where $100M was spent on exploration over the last 20 years. The Three Bluffs deposit has a 1.1 million ounce gold resource with a grade of over 8 grams per ton (8 g/t) gold. The deposit holds together beautifully and we're going to make it even bigger. But the even bigger opportunity is the potential of the belt. Every stepout hole that has been drilled has met with success, but then it wasn't followed up. That's very exciting.

"Right now we are preserving value, rather than creating it, by being prudent."

I mentioned that we wanted a project in a good jurisdiction. Well, this is a good jurisdiction. You can permit mines in Nunavut. Agnico is there. Privately held TMAC Resources Inc. is there. This part of Canada is challenging because it's remote but you can permit and finance projects there and, frankly, the price was right. This is an asset that's had $100M spent on it and probably three-quarters of that is scientific data that we can use to strategically explore this asset.

TGR: Are you the operator?

SW: We are the operator right now and when it turns into a joint venture we'll still be the operator. North Country Gold Corp. (NCG:TSX.V) has been working there for 20 years so we're leveraging its experience. There are five drills turning at Committee Bay. The company did a fantastic job making discoveries from outcrops, and there are not many mineralized outcrops. It speaks to the endowment of this particular mineral belt. Without using induced-polarization surveys and other forms of geophysics, it's difficult to find targets on this type of belt.

TGR: Cayden was working on the Guerrero Gold Belt in Mexico. Your team is certainly familiar with that type of geological setting.

SW: When we went out to make acquisitions with the Hunter Dickinson Group, they always had to be significant. With Auryn we did not want a postage stamp somewhere that would produce 45,000 ounces (45 Koz) a year. That's not for us. We're going for large scale. It's all about getting that critical mass because that's the only way we're going to get a major mining company interested in making a transaction.

TGR: What are your biggest challenges with Committee Bay?

SW: Certainly the remote location is a challenge but it's not as remote as it is perceived to be. One of our challenges is properly communicating to people that we can mitigate those costs and risks through proper planning and execution. There is an old Italian tailor's adage that says measure twice, cut once. We're going to measure three times here because if you get it wrong, it's expensive. Good execution is really important.

TGR: How far away is Agnico Eagle Mines' Meadowbank open-pit mine in Nunavut?

SW: From the southern part of our project, the West Plains target, where we have 15 g/t gold over 10 meters (10m) in some drill holes, Agnico-Eagle is only 60km away. In that part of the word that's next door. It's exciting that the company is there and having success but it shouldn't imply anything just because Agnico bought Cayden. This is almost coincidental. We both happen to like these types of jurisdictions. Agnico brings a lot of credibility to the idea that the Arctic is a good place to be.

TGR: What are your near- and long-term goals with Auryn?

SW: The near-term goal is to execute on an exploration program this summer at Committee Bay. Our team of geoscientists has reprocessed older drilling and exploration data and will head to Committee Bay to do some more geophysics and mapping. We're going to bring in a rotary air blast drill in July and drill 3,000–5,000m. These drills only go down about 100m, but we don't think prospecting with diamond drills is capital efficient. We won't be able to drill 500m deep holes, but we're trying to make new discoveries. If we can't get the imprint of a new discovery in the top 100m, then it's probably not going to be something that we want to pursue. We're pretty excited about what's coming this summer.

The other near-term goal is to acquire additional assets. You can expect that; it can take months or even years to make an acquisition. It's not important how long it takes. It's important that we get the right deal on the right asset.

"We want to be the people making the wave, not the people riding it."

Our long-term goal is to develop a company that is full of high-grade, high-quality gold assets because that's where we can create the most value. We want to use our currency that we have with our shares, with our ability to raise capital thanks to recent successes, and make these acquisitions at a time when others are financially challenged.

TGR: Are you looking at properties in the vicinity of Committee Bay or are you looking in different jurisdictions?

SW: It would be good for us to get something farther south but Canada is definitely a good theme. But it's all about the right asset. We could easily see us doing something in Nevada or Ontario or even Mexico again.

TGR: Is there a risk of spreading your resources too thin?

SW: No. We won't do that. The Committee Bay project is fully staffed. We brought in the team from our joint-venture partner, so we're not stretched. From a cash perspective, however, we would certainly need to raise additional capital if we found what we believed was an accretive transaction.

TGR: You and other members of your management team have made considerable money in previous deals. Why not just walk away?

SW: If it were about money I could have stopped doing this 20 years ago. It's not been about the money for a long time. Money is the trophy but we're a pretty young group. I'm only 45 years old. Ivan is 37. We just spent 20 years getting good at it and we continue to improve. There's no way we're going to stop now. We want to be the people making the wave, not the people riding it.

TGR: Your team has a following among investors. How does that change how you do business?

SW: We do have a following. I've lacked the perspective of what it's like not to have a following. That's not to say that we haven't had our lean times. That just comes with being in this business. We are very respectful of our following and we don't take it for granted. Capital is fickle. The most important thing is that we continue to take a science-based approach to exploration and properly communicate what we are doing to the market. Everybody knows that the odds of crossing the goal line the way we did with Cayden are not high, but there are ways you can increase your odds. We make every effort to make that happen.

TGR: How much capital will you end the year with?

SW: Over the next four months we're going to spend about $4M as part of our earn-in agreement. Our current budget has us coming to the end of 2015 with about $2.5M and then spending some cash on general and administrative (G&A) expenses. We've kept our G&A down. We're in a B-class building off the beaten path in Vancouver. We ran Keegan and Cayden from here. Capital efficiency is a big theme for us.

TGR: Roughly what percentage of Auryn does management own?

SW: About 30–35%, with another 35% owned by people close to us—even family members are in Auryn.

TGR: Does that concentration of ownership pose liquidity issues?

SW: Auryn is certainly not the most liquid stock. We have to weigh that against how tightly held the stock is. I'd rather be tightly held and have some liquidity issues as opposed to be being very sloppy. We try to strike a balance. One of the reasons that Ivan and I are successful business partners is that we share certain principles and one of them is to be antidilutive.

TGR: When will you have to go back to the market?

SW: We will probably do that sometime between now and the end of the year. We'll wait for a window. We have some things that we want to get out to the market before we would contemplate a financing. We recently returned from a marketing trip in Toronto and New York. Our story was very well received. I think you're going to see some analysts initiate coverage.

TGR: Auryn is not a well-known name in the junior mining space. What are three or four things that you believe are going to change that?

SW: There are very few others in the space competing for attention. Three things would be continuing to make accretive acquisitions, having some exploration success and spending money prudently on marketing efforts. That's important. We have an adage here: If you're spending money on the ground, you need to be spending money on marketing. Those are things that are going to help us be better known.

TGR: What are some things that this market has taught you that perhaps a bull market would not?

SW: I've been through a few of these so this one isn't anything special. But I'm glad it's here because now we can buy things in a rational manner. Patience is probably the most important skill that anyone who tries to do what we do needs to have because people tend to make more impetuous decisions in a bull market, both technical and financial. Now those people have to live with those decisions. To be patient and measured in everything you do is important.

TGR: You now have merger and acquisition (M&A) experience. What are some specific project attributes that make them more likely to be takeover targets than others?

SW: One type of project that is going to trigger more M&A would be district-scale projects. Major gold producers want assets significant enough to impact their balance sheets. That means a potential takeover target has to be something where a major could get in and produce a significant amount of metal at a proper margin for years and years. That's why we were so adamant that we wanted a project with district-scale potential. If a project has good grade in a significant land package in the right jurisdiction, it is only a matter of time before suitors take notice.

TGR: Please tell our readers some things they can look forward to before the end of 2015.

SW: People can look forward to seeing Auryn continue to make accretive acquisitions for the company, and we will launch our first exploration program at Committee Bay. We should generate a fair bit of excitement with the kind of results that we're expecting. This is an exciting time in the markets. I'm looking forward to the next three to five years.

TGR: Thank you for talking with us today, Shawn.

Shawn Wallace Shawn Wallace is president, CEO and director of Auryn Resources. He has been involved in all aspects of the mining industry, from mineral exploration and project management, to financing, mergers and acquisitions, and corporate development. For more than two decades Wallace has been instrumental in building numerous high-quality mineral exploration, development and production stage companies. He also serves as a director of Asanko Gold (formerly Keegan Resources) and a director of Stratton Resources, and was chairman and a director of Cayden Resources prior to its acquisition by Agnico Eagle in September 2014.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) Auryn Resources Inc. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Shawn Wallace had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Shawn Wallace and not of Streetwise Reports or its officers.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.




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