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Wes Roberts: Experience Matters
Source: Anne Evers, Editor of The Gold Report (9/10/10)
Wes Roberts, vice president of Toronto-based HB Global Advisors, has seen just about every type of mineral deposit on the planet. There is no substitute for that kind of experience. In this exclusive interview with The Gold Report, Wes shares some of that knowledge with you to help guide your investment decisions. He even talks about a couple of gold explorers that have interesting prospects.
Wes Roberts: I am vice president of HB Global Advisors Corp.'s mining group. HB Global Advisors is a consulting group and an affiliate company of Heenan Blaikie LLP. HB Global consists of a team of business professionals, industry specialists and government leaders that the firm can draw on for support in technical matters and other issues. We also help support the firm by generating more legal work and by giving our clients better advice.
Because I am not a lawyer—I am an engineer—I can only give engineering advice. They formed HB Global for people like myself, although lawyers do work within HB Global.
TGR: What do you do there?
WR: I provide technical support for various types of mining agreements, such as joint-venture agreements, concentrate/or off-take agreements and mineral royalty agreements. When these come up, there may be some technical issues that need to be addressed to make these agreements stronger in order to protect our clients' interests. For instance, I will make sure that an escalating parameter in a royalty agreement is reasonable and won't become an issue down the road.
I will also look at technical reports to see if they're compliant with NI-43101 regulations. I find ways to improve the report content and presentation so that when they go to the Toronto Stock Exchange (TSX), they will have the best chance of being cleared.
The more fun things are on the business development side where I review various mineral property opportunities that come to Heenan Blaikie LLP through clients and industry contacts. These may be properties with very little exploration history or properties at the feasibility stage in a variety of commodities and geographic locations. If I like what I see on paper, then I contact lawyers in the Heenan Blaikie Mining Group and ask, "Is there a fit for this project with a client you have?" If there is, then I will come back to the vendor and see what kind of a deal they're seeking. If things still look positive, I organize a due-diligence team and do a site visit and do all the technical and legal audits that are required to move a deal forward.
TGR: That's fascinating. You said you evaluate mineral deposits to determine whether or not they are economic. In layman's terms, outline your methodology for evaluating the mineral deposits.
WR: Well, every project is at a different stage and under a different set of conditions. I have found that since coming to Heenan Blaikie that I am exposed to a much wider variety of commodities. I spent perhaps the first 25 years of my life working in gold and base metals, and suddenly I am exposed to metallurgical coal, iron ore, diamonds, synthetic rutile and even iodine. I have to work quickly, obviously because people lose interest and the opportunity may disappear very quickly. One of the first things I do in my methodology now is I think about whom I worked with in the past, maybe someone who has experience with this particular commodity or the type of geology or metallurgy or mining method or area of the world, and I often contact them.
TGR: But for people who don't have the kind of connections that you do, what are some things that investors can look for in drill results and other things like that that can help guide their investment decisions?
WR: Well, you're certainly going to have to do a lot of your own research, and you're going to have to have time to do that.
You mentioned drill results. The drill results that come with press releases are very difficult to interpret because companies don't often disclose where those drill holes are in a three-dimensional space. I like to see good, clear disclosure and then I can plot those results and get a sense of just how big the structure they're trying to define is. Is it a million tons? Is it 100 million tons?
I look for things like is it a true thickness that they're defining when they say they have a certain length of core with a certain grade, or are they playing tricks? Have they drilled down the structure instead of perpendicularly across the structure? Sometimes people need to have a good hole so they repeat one of their already good holes or historical holes. I am always looking for those kinds of tricks.
For my purposes, I look at these results to get an idea of whether or not I want to approach this company for some kind of financing or corporate transaction. I would never make an investment decision based on a drill hole press release; I would be digging much deeper into it and going to the site.
TGR: Is there a resource out there that you could point investors to that might help them decide which equity is a better investment?
WR: For people who are not as familiar with the mining industry, one of the things that I use to help me speed to the bottom of an evaluation is a book called the Hard Rock Miner's Handbook. It was written by a brilliant mining engineer named Jack de la Verne. I worked with him many years ago back in Thompson, Manitoba, while I was with Inco. He assembled all the known rules of thumb and basic engineering rules that various mining engineers have developed over time. An example is a quote from a fellow named Larry Smith, who also worked at Inco. He once said "total cash flow for a mining project must be sufficient to repeat the capital costs at least twice." Another fellow, Allan Provost, stated that the "operating cost should not exceed half the market value of the minerals recovered." These are kind of rough rules of thumb that are out there.
TGR: I realize that drill results are only part of the picture, but I think that a lot of our readers rely pretty heavily on those bits of information. Are there some red flags when it comes to drill results?
WR: Well, it goes back to what I just said. When I find confusion in the results, I try to plot it up and ask if they make sense. Sometimes it may be a mistake or maybe it's just information conveniently presented that way to confuse the reader.
TGR: Do you literally take a piece of paper and draw it out?
WR: Yes, I do. For example, a few years ago there was such excitement in a new exploration camp in northern Ontario for the nickel potential there. I was working for an intermediate producer and we wanted to understand what was going on. So I took those drill results and started plotting them to get a sense of whether or not we were talking about a 1 million ton deposit or a 100 million ton deposit. Often it is not that easy to plot it up, and you have to sort of read between the lines. If a company really has something good, they should want all the world to know and understand it perfectly. If you're not doing that, then the deposit must be not that great.
TGR: And what did you determine with this deposit? Was it worth looking at, or did you recommend that your company stay on the sidelines?
WR: I didn't understand the drill results. I had difficulty plotting it up. This is one of those areas where we have to be careful. I wouldn't really want to name names, but I had difficulty interpreting what the tonnage was. That was enough for me.
TGR: You stated in a recent article that "the economic relationship between deposit tonnage and grade boils down to three things: deposit location, commodity type and cost structure." Again, in simple terms, how do these things relate and how can investors tell whether a deposit is economic or not?
WR: What I'm saying is that location is very important; it defines how accessible a project is to infrastructure and things like electric power transmission. Just getting fuel to a site to power a generator is very expensive. The availability of fresh water is crucial. There are places in Chile where water is gold. Location also determines accessibility to a good labor force, transportation supplies and the shipping infrastructure for a finished product. If I'm producing diamonds or gold, well, those items are not very difficult to ship; I can fly those out. But the cost of shipping bulky commodities such as coal or iron ore or base metal concentrates can be a major barrier to production. For example, I've been to two very large multibillion dollar iron ore deposits, but you need 1,000 kilometers of rail through a jungle to bring them to production. That means that only a select few clients can really take a look at those opportunities.
Cost structure is also very important in terms of labor costs. If you are operating in the Sudbury Basin, Val d'Or, Québec or other major mining camps in Canada, mining will be very expensive. It would be quite a bit cheaper if you were working in Chile or Brazil or China and for a similar deposit.
TGR: Moving onto the commodity aspect, are you mostly recommending gold projects, silver projects and lithium projects?
WR: I will recommend anything that has a good business case, good management, a good deposit and if I like the location, the logistics and these kinds of things. But certainly metallurgical coal is very strong now. You don't need that big of a deposit; if it's open-pittable, it can be a real winner. And iron ore is very strong now. It comes in waves. This is about the third time in the last couple of years that we're getting a lot of interest in iron ore.
Manganese is getting really popular now; there just aren't that many manganese deposits out there, certainly not at an advanced stage.
Lithium, of course, is very popular, but it's a difficult industry for people to understand. There are only a few producers, and they can really turn the spigot on when they want. So you have to be very careful with those projects. You have to be very cost competitive to have a really good lithium project.
And with gold at these prices, even low-grade, near-surface deposits can make a lot of money.
The only projects that I am always a little bit leery of are things like lead zinc projects. You have to be very careful with them because the smelters have so much power over you that you really only receive a small portion of the contained metal that you ship to them as a concentrate.
We like copper projects; again, they're very capital intensive. Copper is not easy to find and expensive to purchase, but there are some successful projects out there and you luck into them every now and then.
TGR: What back-of-the-napkin calculation will give investors a rough idea of a project's net asset value so they can judge that value versus the share price?
WR: I think that investors have to look at who is behind the project and who the management is. When it comes to early-stage projects, you have to be a skilled geologist to really understand the nature of the geology and the model that they're proposing for the deposit.
Unless there's already a resource, it is very difficult for the common guy to understand the geologic theory. But if there is a resource and you're given some dimensions, you can understand the competency of the ore or its lack of competency. You need a lot of information to do a proper evaluation on a property, and I get this information by using SEDAR.
Any company that's listed on the TSX must post all of its technical reports, management and discussions and analysis, financial reports and press releases on SEDAR. I really recommend that everyone go right to the technical reports and read them.
TGR: Where do you get your commodity prices when you're making your calculations?
WR: I like to use the Mining Analysts Consensus Forecast, but most people should find some sources online and divide by the number of sources to get your own set. But don't go too far out on a limb. I usually use a range of commodity prices to show management just how sensitive a project is to commodity price swings.
I would never suggest where prices are going. I always laugh when I hear people giving predictions on prices on commodities because I really think it's like predicting who's going to win the Super Bowl during preseason. There's just so much noise in the economy and unknown risks that are waiting to jump us from behind. It really comes down to the view of the board of directors on a commodity. If they're bullish on copper, then you don't care what the consensus price is because that's the way they feel about it.
One of the rules of thumb on metals price forecasts is that the long-term average price that you're using in your model should be about 1.5 times the average cost of production worldwide. In other words, if the average mine out there is producing copper for $2, you should probably have a $3 price in your model.
TGR: Wes, these days a lot of companies are looking at fast-producing properties because of higher commodity prices and the general expense of exploration. One area that is increasingly being looked at is Nevada because of its prolific gold-mining history. Are there some projects in that neck of the woods that you believe are noteworthy?
WR: Well, I am not doing too much in Nevada, but there are a couple of companies that I'm involved with that have projects there. One is Sparton Resources Inc. (TSX.V:SRI); I'm on the board of directors of Sparton and they have a project in Nevada.
There is another a company called La Quinta Resources Inc. (TSX.V:LAQ), and Heenan Blaikie LLP has been retained as legal counsel for La Quinta. La Quinta is a small-cap explorer with a gold project. It has announced a new drilling program at their recently acquired Easter Project, and you can go on SEDAR and see SRK's technical report on the property. In the report, they declared an indicated resource, which is a pretty good category, of 101,000 ounces of gold and a little over a million ounces of silver contained in about 2.6 million tons.
I can't really comment on the company's exploration projects, but I can give my opinion on what I think La Quinta's geological team needs to do to achieve what I think they should achieve in exploration.
The resource right now is greater than one gram per ton, and this indicates to me that it would have to be a heap-leach operation. This is a pretty good grade for heap-leaching, especially with gold at $1,260 an ounce right now. There are several operations out there that can make money at half this grade, but they require low stripping ratios and decent economies of scale.
At a grade of about a gram, you could support a stripping ratio of 2-1 or 3-1, which I think probably is the case, given the geology of the current indicated resource at the Easter property. The minimum production rate for a heap-leach operation is about 30,000 ounces of gold a year, and that would mean that the Easter resource would support only two to three years at best. So you would like to see that resource double or tripled from its current base.
The capital required to get a small, 30,000-ounce operation going would be about $5 million in Nevada. But I think if management's exit strategy is to be taken over at some point down the road once the operation is up and running, they would need to operate at somewhere between 60,000 ounces of recovered gold to really get noticed by other parties that want to grow.
TGR: Could the 100,000 ounces already outlined provide some cash flow to do further exploration?
WR: That's exactly right, but I think that you would want to know that there's the double or triple the current resource there before you actually went into operation. I think you nail down what you have, chip away and expand the resource. They need to find about half a million ounces to really be a takeover candidate. That should be their goal.
TGR: Are there any other gold projects that you see as having potential?
WR: I mentioned Sparton; they've got an interesting project near Atikokan, Ontario in Canada. It's neighboring Brett Resources' Hammond Reef gold deposit, which has a resource of at least 6 million ounces (Brett was taken out by Osisko Mining Corp. (TSX:OSK). Sparton has an early-stage project near that deposit. We're quite excited about it, but it's going to take some time to understand the geology.
TGR: Do you have any thoughts on mineral exploration and evaluating mineral deposits for our investors?
WR: I have spent all of my career working in the minerals industry, and I've given projects the "thumbs down" based on technical analysis but the stock still went up. There are occasions like that. You never know how things are going to turn out. There are people out there who have a knack for picking stocks and others that really shouldn't be in it.
It's a risky business to invest in; you have to be well diversified. If you are picking junior mining stocks, you need to have a portfolio of them. Do your homework. Take profits. And the trend is your friend. But be prepared to take your losses.
TGR: Wes, this has been great. Thanks for your time.
Vice president of HB Global Advisors' Mining group, Wes Roberts is a professional engineer specializing in the economic evaluation and development of mineral deposits. He has more than 25 years of experience in mineral exploration, mining operations, project engineering and management, as well as diverse mining engineering experience that includes precious and base metals and industrial minerals. Previously, Mr. Roberts held numerous positions in mining operations as well as in mining engineering consulting services with Derry, Michener, Booth & Wahl, Davy International (Aker Kvaerner mining & metals) and BLM Bharti Engineering. Following completion of business school, he worked as project evaluation consultant to Inco Limited and also engaged in assignments for the EuroZinc Mining Corporation, SRK Consulting and Griffiths McBurney & Partners. Most recently, Mr. Roberts was vice president of corporate development at Breakwater Resources Ltd.
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1) Anne Evers of The Gold Report conducted this interview. She personally and/or her 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: La Quinta.
3) Wes Roberts: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.