Dissecting the Winners in Smallcap Mining: Dave Lotan
“When you see a Glencore guy show up, you should probably buy the stock.”
Dave Lotan spoke at Red Cloud’s Pre-PDAC Mining Showcase in Toronto last week. It’s one of the best talks I’ve seen for small cap mining investors.
Highlights:
“…the equities of the companies that develop and look for the stuff to replace the stuff we need are hyper cyclical and super volatile. And I guess the opportunity for investors is you can't sell high profitably if you don't buy low. And you sure do get that opportunity in this sector. “
“And if you look closely at [the winners], what you'll notice is that most of the ones that did well, were attached to a network. We have many prominent networks or constellations of investors, as I like to call them, in this business.”
“…when networks come together, you can get really special, really special performance in stock prices.”
“There's really nothing that's quite as good as a high grade discovery in an existing mine… So you can see that the multiplier effect of the Swan Zone discovery was truly, truly impactful for this industry.”
“I'm very, very grateful that [Eric Sprott] was here, and I think we all should be. We won't see the likes of a daring entrepreneur like Eric who makes the money at the top and brings it down to the bottom.”
“Bridging off of the network concept. You can often see promotions coming.”
“…my thesis was that the losses that mining companies take when things go wrong are linked to the value that they need to pay to buy junior companies to ensure that those things don't happen.”
Dave Lotan
I often call on mining investor Dave Lotan for feedback on a story or project. His passion, knowledge and generosity is palpable. After a successful career in private credit, Dave brought his capital and talents to venture-stage natural resource companies. He’s found success against odds as a shareholder and company builder. In this presentation you will better understand why and how.
Luc ten Have, the brilliant GoldDiscovery.com founder, helped Dave with his slides. A big takeaway from Dave’s talk is the power of mining networks converging. This collaboration between Dave and Luc is an example of this power.
After a family trip in the UK which is going super, I’ll be back in the saddle shipping more Big Score stories ASAP.
A transcript of Dave’s talk is below. Don’t miss it.
Here’s a link to the keynote on Youtube.
Best,
Tommy H
Keynote Speaker: David Lotan | Red Cloud's Pre-PDAC 2024
David Lotan (00:07):
Thanks so much everyone for coming this morning. This presentation is born out of a conversation that I had with Chad Williams a couple of months ago in the boardroom of our office, which is right next door to Red Cloud. And we are talking about trading junior stocks, which I do a lot of and what it's like to have to look after the needs of an issuer, which I also do. So I'm kind of on both sides of the market. And I guess the question is often asked, can you make money in this market without buying private placements with warrants or getting in on seed rounds and almost all the stock I own in the market I bought in the open market. So that seemed to make this an interesting and apropos conversation as well. So why are we here? Actually, I don't think I need the lectern ammonia is why we're here. Thanks to a couple of crafty German scientists. We can synthesize about 150 million megatons of that per year. And according to some estimates, that allows the earth to carry about 4 billion more people than it would otherwise be able to using agricultural techniques of the organic variety.
(01:23):
But really, why are we here?
(01:26):
Well, the needs of that 8 billion have resulted in a large and deep market for commodities that is cyclical and volatile. And as a second order effect of that, the equities of the companies that produce these things are cyclical and volatile. And as a third order of that, the equities of the companies that develop and look for the stuff to replace the stuff we need are hyper cyclical and super volatile. And I guess the opportunity for investors is you can't sell high profitably if you don't buy low. And you sure do get that opportunity in this sector. But we're going to drill down and we're going to look at the period from 2015 to today and think about what happened in markets during that period, what the opportunities and the risks were. And I like to start all of my discussions of investing with what I think is the most important thing, and that's capital flows.
(02:36):
This made it out to Twitter about a month ago now, and it's a sale of woe for our industry. Probably starting in 2000 investors started to notice that China was buying more and more of all the major bulks. I think by 2010, China was consuming 50% of cement, iron ore copper just go right across the periodic. And if you had linearly extended their demand, you might've seen an exponential move in commodity prices. And this started to emerge from the haze in the middle two thousands. And so you had a lot of money flowing into commodity related plays and the associated equities. And of course that money at the time went into specialist funds, which were the principal financial product that you could expose yourself to commodities through. And there's been a change in the market since then as we've moved to passive investing. But more importantly, as some of the pundits said in 2011, the China story was over and it wasn't that China wasn't going to grow and it wasn't that China wasn't going to be a great world power, it's just that growth leveled off starting in 2011, their demand for copper iron ore and all the bulks actually started to go down.
(03:57):
And for 15 years now, we've seen outflows from those funds that were focused on commodities. As a result, 40 billion out of the specialist UK funds, that's mostly at a BlackRock and JP Morgan and 16 billion out of Canadian funds. For some reason, this BMO slide didn't have US funds or endowments or pension funds, but I think the numbers would be similarly ugly. So how else do we get capital into this industry? Get it from the existing producers from their cash flows. And I'm going to focus on gold today only because if we look at the commodity complex as it is in the last year, everyone really has been wondering about the gold equities. The copper is doing pretty well. Lithium's had an incredible run. Again, no major eruptions in anything, but the gold equities have been strangely dislocated from the gold price. So let's just talk a little bit about what's going on there, or at least my suspicions thereof.
(04:57):
So this was Barrick since 2020, and I like to think that I understand generalists pretty well. I've worked in the asset management business for better than 20 years now, and most of the generalists I know who don't care in particular about gold or oil or stocks or bonds, they just want to buy what's relatively cheap and sell what's relatively expensive. Most of 'em think of gold as being, or gold equities as being a spread trade. So they're short energy and they're long gold when they buy a gold equity. And certainly when you think about covid oil briefly went negative at the beginning of covid. And lockdowns were going to be for an undetermined period of time, which meant that the government would be printing money and sending checks to people to sit at home and produce nothing. And that was actually the recipe for weymar hyperinflation.
(05:51):
All the coal workers and timber workers in the Ruhr Valley refused to work. When France came in and occupied the rule looking for an acceleration of their war reparations. The German government printed money and sent it to their patriotic workers. The velocity of money increases. People got it. They spent it faster and faster. And we all know that that was the greatest destruction of wealth and savings in a developed economy in history. So you could see a generalist looking at history through this nonspecific lens and thinking, COVID, everyone's at home. No one's producing anything, money being printed, the cost of energy is going to be suppressed for a long time by gold equities. And then we got a vaccine in November of 2011, or sorry, 2020 just after Biden got into office. That was years sooner than anyone would've ever thought it possible, given that it generally takes years just for safety testing new medicines, let alone the years required to test for their efficacy. The hedge funds got out of the Gold Trade first and the generalists followed shortly thereafter. And there has been no replacement for that money as I think you can plainly see.
(07:05):
Let's just rub some salt in the wound and show the chart of Pfizer versus Barrick. And then of course, tech Nvidia here, 2 trillion of market cap. The last time I checked four times the market cap of the hundred largest miners on Earth. So we're still not living in a material world, I guess, or hey, maybe it's just costs because as it turns out, the gold price went up $350 since then and all in sustaining costs have done the same. So I guess it could also be stock picking. If you drill down and you look at Lundin Gold or Alamos, they've tripled since 2020. So maybe that was the problem as well. But the smart money continues to allocate to gold. The Lundin family just recapitalize a West African gold story called Montage. West Africa has been a graveyard of gold. So I think that's some interesting news. And
(08:06):
I guess we didn't get the new presentation. I had a corker here, the gold price versus the flows out of the ETFs. And I was going to say, Hey, only 85 million ounces left to go. And of course it hasn't put a dent in the gold price despite the fact that these ETFs are losing tons by the week. And I guess when they're finally empty, maybe Vladimir Putin will call the Federal Reserve in New York and bid them for the last 8,000 that they have. But that would be something Stalin would do. Okay, so another, and I think a really misunderstood way that capital gets into the sector is organically. And so I want to talk about one of the greatest discoveries we saw in gold in the last 20 years, and that's the swan zone at Fosterville in Australia. And Rick Rule likes to say that great gold discoveries finance themselves, and in certain instances they actually finance the entire market.
(09:02):
I have very mixed memories of these days. 2015 was the last year of declines in my portfolio juniors, and it was a pretty awful humiliating year. But new market gold came into existence that year, and it was Doug Forster, Blaine Johnson, the Lundin family, and they took over crocodile mining, which was a ratty old refractory gold mine in Australia that Northgate had mined at one point in time, really well-known asset and just a disaster frankly throughout its modern history. But funny things started to happen. Some really interesting gold intercepts started coming out of Fosterville and high grade and totally clean free gold. Somewhere in that mine, there was this beautiful zone of free milling quartz and it turned into cashflow for Tony Makuch very quickly. And Kirkland, which at the time had become the merger of New Market and Kirkland Lake Gold went from being a small cap to a big cap in the course of a couple of years.
(10:12):
Really, really very unusual in this business. There's really nothing that's quite as good as a high grade discovery in an existing mine. The high grade zone of Red Lake, of course, is a famous version of that. And Wesdome had its own wonderful high grade discovery in an existing mine. Of course, Richmont for Alamos, they're really, really valuable. And more importantly for the room, the gains ended up in the best sort of hands they could be in. Eric Sprott we think made a about a billion dollars out of this. And what we saw in the aftermath of that was capital recycling at an unbelievable, at just a breathtaking rate. Eric took 1,200,000,000 out of the swan zone we'll say, and put 1,400,000,004 back into the market over the next few years, 134 companies. Some of them did really well, some of them haven't done so well, but he went right down to the bottom of the market, the most levered and most dangerous sector.
(11:12):
He's a daring entrepreneur. I don't know that we'll see his likes again. And this was an incredible gift to the market, wasn't just Eric Kirkland Lake bought Detour Gold, they got bought by Agnico Palisades and Cresco I think became prominent as a result of their participation in this discovery. They raised money and put money out to lots of companies and Kirkland Lake itself put money into Novo Resources. Novo put money into newfound gold. They put money into a Osisko Mining, Osikso Mining put money into many companies. So you can see that the multiplier effect of the Swan Zone discovery was truly, truly impactful for this industry.
(11:57):
Now, I guess the melancholy part of this is I think that it's over. Eric is focusing on family now. I think his filings have been dwindling over the years, and they've largely been concentrated on newfound gold, which is where he's laying perhaps his last big gold that who knows, maybe he'll have another return to markets. But I'm very, very grateful that he was here, and I think we all should be. We won't see the likes of a daring entrepreneur like Eric who makes the money at the top and brings it down to the bottom. Again, maybe not, however, don't despair. It wasn't just Eric. There are many valuable networks, many great entrepreneurs, many high net individuals who continue to see opportunities in this sector cycle after cycle with the assistance of Luke ten Have, who's not here today at GoldDiscovery.com. We took a full look at the mining issuers on the TSX and the TSXV starting in 2015, and a third of them went up, two thirds of them went down, 3% of them went up by more than 10 times, 6% of them went up by more than five times.
(13:10):
And if you drill down, the numbers get a little bit more interesting. So this excludes takeovers. This is just all the stocks that went from pennies to dollars from the end of 2015 until today, two years into this terrible market. And if you look closely at these, what you'll notice is that most of the ones that did well, were attached to a network. We have many prominent networks or constellations of investors, as I like to call them in this business. Pierre Lassonde and the Trinity Group would be one of the more famous ones. They've had some stunning successes in this last market. Orla probably is the most impressive. And there are some other companies that maybe aren't part of the Trinity Network like Foran, but certainly Pierre and his fellows have been big investors in and prime mining, a whole bunch of stocks, and probably a bunch that we don't know about because they don't file on everything.
(14:14):
And there are, as I said, many networks that you would know off the top of your head. The Lundine family, Ross Beaty, of course, Frank Giustra, Craig Perry. I didn't see him coming. I thought that money would find its way into Canada from Australia. The gold stocks had already run in Australia, and at some point that capital had to come across the lower valued opportunities. I didn't know Craig, I didn't really appreciate his involvement in NextGen and ISO Energy and chena, but the Inventa group, I think is the story of Australian Capital coming in Canadian Markets Discovery Group. Of course, we all know John and Jim and Great Bear was not in those numbers because it was taken out during that cycle. And that was 1,800,000,000 takeout and then another couple hundred million for Great Bear Royalty. Great story. And these are good guys. Richard Warke, of course started the cycle off selling Ventana and then Augusta and then Arizona mining for a couple billion dollars to set three, two, and I think he took 600 million out of that personally.
(15:16):
I mean really quite amazing. The Pathway Group, Marcel De Groot and Dave De Witt in the nineties, they did Arequipa and Peru Copper, and they seeded Sandstorm and a bunch of other great companies. Lamancha out of Egypt that gives Sui, sold the Rocom cell phone network and then created Endeavor Mining and Evolution. Rob McEwen, of course, one of my favorites, Harry Dobson, he's the big man in Switzerland or in Finland these days, and lots and lots of value created. Some of them started before this cycle, but most of these companies are creatures of the last cycle, next gen 30 cents stock, maybe 50 cents in December of 2015. 4 billion of market cap today. So the cycle was actually pretty good to us. 73 billion of increase in market cap. And all the stocks that we had on that list all multiplied in value. So they weren't just serial diluted, they didn't print a billion shares to gain a billion dollars of market cap.
(16:21):
A couple of case studies here, this is really noisy. Orla is one of my favorite examples of all this. It was a moribund shell called Red Mile Resources. I had a coffee with my good friend Mark pre Fontain in July of 2015. He said, oh, we had dinner with Pierre last night. And he said, what are you guys doing? And since they sold grade, mark had created grade and sold it to Agnico, and Pierre said, oh, we're looking for, we think this is the time to get back into gold. And Mark said, I think it's the same for us. And Pierre said, well, let's get together and not compete with each other. So they took Red Mile, rolled it back. I think five for one created 11 or 20 cents for the remainder of the year, even after they press release, they joined the board, then they took over Perim Co for Sara Cuomo and Panama got to $167 million of market cap.
(17:12):
And then they took over Camino Roho from Gold Corp for stock and a royalty. And you can see they become a billion and a half dollar gold company since then. And all of that was Sarah Cuomo going to zero absolute zero. Nothing in Panama is worth anything anymore. And these guys created market cap off of that, and they took that market cap and they turned it into the acquisition of Camino. And that's what the good guys do. They get something rolling with a property that they like. Maybe they find out they don't like it, but they squeeze value out of it and they pivot, and this is the power of these networks. Nothing stops when they put their mind to it because they have the capital and the expertise and the connections among other things. Another interesting example that I like to cite is G Mining.
(18:01):
And why is this little stock so interesting to me? Well, this is the Gignac family, and they put this together as a cash shell in the middle of the last cycle, and it's a gold development story. And if any of you own gold development stocks right now, you'll know that this is just a horrid, horrid time to own them. There is no capital for development stories now, and the capital that's available for development stories is credit card money. This is why Matt Manson had to sell Marathon to Caliber, supposedly almost all the way through his build. G Mining has a little asset called TZ that they got out of El Dorado. I don't think anyone thought it was great. And yet, look at this incredible ad performance versus the GDXJ. What's going on here? Well, there it is, Lamancha, the Gignac family, the Lundin family, Franco Nevada.
(18:57):
That means Pierre's in there too. So this is the effect that multiple networks can verging on a stock can have. I don't think anything's more impressive to me. Nothing would be more impressive than an anti-gravity machine than a development stock performing like this in the market that we've had really, really quite impressive. So when networks come together, you can get really special, really special performance in stock prices. And so they're all still there. You don't just have to be a macro economist and try to predict the movement of money supplies or try to figure out the supply of zinc or copper and warehouses around Europe. There's all kinds of other ways to make money trading small caps. I have owned almost all of these stocks since 2015, and they all were just value plays frankly. Champion Iron Mines was a stock taken over by Michael O'Keefe, who is a concentrate trader at Glenco.
(20:02):
When you see a Glencore guy show up, you should probably buy the stock. I don't have the Foran mining chart here, but Dan Myerson came to Farran when it was a 20 cent stock. He'd been trading zinc concentrates at Glencore, and Glencore had done a feasibility study on Albena Bay. Dan showed up at 20 cents just by the stock. These Glencore guys are pretty clever. So Michael proceeded Dan, he got the consolidated Thompson assets that Cleveland Cliffs had bought put into bankruptcy. He got them for pennies on the dollar, and he's turned this into a beautiful play on super clean iron ore. And of course, when you're a concentrate trader, like any of these Glencore guys, you know what the smelters will pay for higher quality stuff. And that's been part of the story here. If you just want it to be lazy as it currently exists, I think it's called Probe Metals, actually.
(20:56):
But Probe Mines, Borden Lake was taken over by Gold Corp for $500 million and they spun out Shell with some cash and a few properties. It was about $19 million of assets in the vehicle, and it traded for $12 million for most of its first two years of existence. And so in 2015, you could buy the sink for 35 cents a share quite regularly, and it got as high as two and a half dollars when Dave Palmer and Jamie Sikowski, Dave who'd made the board in Discovery, Jamie, who used to be the CEO of Barrick when they started rolling out properties around Valdo, I mean, why were those guys worth negative $6 million? This seemed like an obvious trade to me,
(21:43):
Bridging off of the network concept. You can often see promotions coming. I thought Northern Dynasty was a dead story. I didn't think the mine would ever get built. I'm still not sure, apologies to anyone who's holding the stock, but in late 2015, Northern Dynasty, which had gone from 20 plus dollars down to 40 cents, merged with Mission Gold, a company that was controlled by Pathway and the Lundine family, and with Canon Point, a company controlled by Frank Giustra. And so there you were multiple networks coming together. Marusa jumped on board and ran a big promotion for it. Donald Trump got into office, it seemed briefly possible. It's an incredible suite of medals, by the way, and from 40 cents to $4. So you can do that too if that's your flavor. Sometimes I just buy listings on the stock exchange. Guerrero Ventures was a great example of that.
(22:40):
I was playing golf with my friend Brandon. Ty mentioned that they thought they might get control of the shell. They had no purpose for it. But over the next years, I bought up about 8% of the company in the stock market, and then Vince Metcalf and Joe De La Plant came over from Cisco and created Nomad Royalty. The stock went up 10 times. And when I buy listings, I think about what it costs to list a company these days. If you want to get a shell to bring something public, the good guys will charge you a million to a million and a half dollars. The legals are about 300,000. So when I see listings trading on the exchange for sub a million and a half dollars, I might buy those. I think I own five or six of them now, maybe five to 9% of those companies.
(23:20):
And who knows, maybe this market will be different, but words not to live by. So cycles are eternal. I think the Nova, Dan guys, Rome on NIO like to say that, or maybe they say cycles are forever. I can't, Mike, you might know. I haven't seen Romeo and Anyo for quite some time. Why is that? Well, sadly, mining is a tough business. Every quarter in the mining business, there's an awful announcement and hundreds of millions, if not billions of dollars of market cap are lost in a single trading session. We've got some really unfortunate examples of that recently with First Quantum having the mine shut down through really populism in Panama. And of course this terrible accident for SSR and my heart goes out to the families there. SS R is not even on here. We didn't get that entry in here, but that's down more than 50% in a couple of days.
(24:18):
Mining's a tough business, and I started keeping track of these unfortunate numbers many years ago because my thesis was that the losses that mining companies take when things go wrong are linked to the value that they need to pay to buy junior companies to ensure that those things don't happen. So 605 million median, there's 37 events here, 1,000,000,002 average skewed by some of the really big bad ones like First Quantum. And then if we look at acquisitions over the same period, 69 billion worth of deals, $744 million, average median value, 229 million, and those numbers aren't too far off from the 600 million to billion dollar range when you think about the value proposition there. So this is it. This is your cyclical nature of business right here. Mining companies don't replace reserves when prices are terrible. They often sell off assets to pay debt, and then when investors demand growth, they demand acquisitions.
[Thumbnail photo credit: Brian Leni]