Working with the juniors
Mining is never for the faint hearted, as many junior exploration companies have discovered, but Alan Swaby talks to a company thatÔÇÖs found a good working model to minimise risk.
ThereÔÇÖs no such thing as a junior furniture maker or a junior accountancy practice. ThereÔÇÖs just big or small; established or start-ups. But in mining, thanks to the magical prospect of making untold millions should the mother lode be discovered, junior exploration companies abound.
ÔÇ£ThereÔÇÖs no specific dividing line or definition,ÔÇØ explains Drew Madacsi, general manager of Resource Investment International (RII), ÔÇ£but the junior tag indicates a company with a limited number of assets that have yet to be turned into fully functioning and profitable mining operations. It often indicates speculative ventures.ÔÇØ
ThereÔÇÖs also more than a hint that junior explorers donÔÇÖt always know what they are doingÔÇöwhich has opened up lucrative prospects for RII. Established four years ago in Australia by Dr Peter Fiore, RIIÔÇÖs initial strategy was to take over assets and exploration leases from junior operators who had run out of cash and needed to offload holdings in order to get the balance sheet back in order. Since then, the focus has been on acquiring its own promising assets and then carrying out the minimum evaluation work necessary to establish the viability of the lease.┬á Those that RII judges to be without value are disposed of quickly, while those with potential are sold to multinationals or, more likely, to junior exploration companies.
ÔÇ£During the pre-recession boom,ÔÇØ says Madacsi, ÔÇ£just about any tract of land with exploration rights was being bought up. Many of them were frankly useless but having raised hundreds of millions in capital, exploration companies need something to show their investors. We are in a position to satisfy this need in return for both cash payments and shares in that business.ÔÇØ
RII works to a simple model. Whether working for an overseas-based multinational or an aspiring junior, RII will carry out exploratory work and charge it at cost plus an agreed management fee. ÔÇ£ItÔÇÖs like working with trade prices plus fixed mark-up,ÔÇØ says Madacsi. ÔÇ£We structure our lease agreements so that we can evaluate the potential with the absolute minimum outlay but backed by the guarantee of being able to take up options should it be worthwhile. This way, our outlays are tens of thousands rather than hundreds. When working on behalf of juniors, itÔÇÖs not a short-term killing weÔÇÖre looking for, but rather taking a long-term stake in a viable mining operation.ÔÇØ
Madacsi has a long history of corporate management but not in the mining industry. As such, he brings an air of caution and risk aversion to the business that isnÔÇÖt always associated with mineral hunters. Similarly, much of the money raised by RII comes from the Far East, where investors are prepared to take a longer view on their returns. Consequently, at a strategy meeting held recently, managers were putting the finishing touches to their 20 year plan!
Madacsi knows full well that the 20 year plan will change a thousand times before the period is up, just as it has in the companyÔÇÖs short life; but itÔÇÖs nevertheless indicative of the patience at the heart of the business. ÔÇ£The money weÔÇÖre making at the moment,ÔÇØ he says, ÔÇ£is being ploughed back into assets. Three and a half years ago we had three with a value of $85 million, now we have 48 worth just short of $300 million. By 2011, we expect to own 600.ÔÇØ
Currently, the emphasis is on uranium although RII has both gold and coal assets too. But in a sense, the commodity is almost immaterial as Madacsi sees his role as problem solver or facilitator. If someone wants a coal lease and RII doesnÔÇÖt have one, then he knows a man who does.
RIIÔÇÖs operational model is to work lean, move fast, deal direct and risk the absolute minimum of money. ItÔÇÖs opted to be based in Africa to be near the action but is very choosy about the countries it deals with, avoiding those where corruption is endemic or where governments are shaky. Madacsi quoted a recent venture where ┬ú100 million had been raised from investors by London brokers to put into mining. Dealing through middlemen, a portfolio spread across 14 countries was bought; but only four of those were on his own list of acceptable locations. In fact, he was very sceptical about how many of the millions would ever turn a profit.
ÔÇ£There are lots of companies and investors who want to get into mining,ÔÇØ he says, ÔÇ£but frankly they simply donÔÇÖt know where to start. They have no history or infrastructure. As such, they put themselves at the mercy of middlemen, some of whom are prepared to take advantage by inflating prices or selling dubious leases.ÔÇØ
Africa is a well surveyed country and drilling data by the ream is available to prospectors. Much of it dates back to times when uranium was worth $2 per lb. Now it sells for up to $55 per lb, thereby making many previously uneconomical sites more viable. But itÔÇÖs still necessary to have a very finely tuned ear to the ground and solid relationships with those who make the decisions.
Yet all of this is done with a head office payroll of just 10! Every single activity is subcontracted out with just a lean band of managers overseeing operations. All the donkey work is done through Red Flag International and Maadin, the two prime consultancy companies who then farm the work out for RII.
The interview RII gave this publication is rare. Not one for ostentation or publicity, it works quietly in the background, attracting new partners by word of mouth. But its boutique approach is paying dividendsÔÇöand getting a lot of inexperienced juniors out of a hole in the process.
