A Brilliant Red Barchetta
I have mentioned before that I get a lot of mail. Lately I seem to have caught up on some of it but so far I'm still about 70 messages behind. The themes run from whats the price going to, buy outs to nickel grades to expected tonnage, to recipes. Yes recipes. It fascinates me the level of depth and breadth some have in their comments and opinions. Then there's the requisite death threats, bullies, no minds, ne'er do wells and did I say recipes ? To be sure a wonderful fruit salad forum. I wanted to talk about the subject that seems to have two distinct camps. That is with respect to a buy out scenario, some for some against some find impossible to comprehend, Allow me to give you my take, not from a proven in ground resource point of view. But from a potential asset point of view and why they (the eventual acquirer) will not wait for 3 summers of drilling to pounce. This very situation transcend's explorations of past, including Voisey Bay history, mine valuations, all of that rot.
Firstly we have to look at the definition of "asset".
Asset: Noun-a useful or valuable thing, person, or quality.
An asset in the sense of an object or possession is valued differently than the person who is an asset. This exploration project is valued as an in ground asset, granted it still has to be drilled like Swiss cheese to come up with a value for that asset. OR does it ? In past yes it did, in present yes it still probably does "to gain ultimate value and valuation of the asset". Just that GGI won't be doing it. Take for example a rare car in frame/body restored only condition. There it sits needing engine, drive train, interior, paint etc etc. Yet sill an asset, albeit an incomplete one, but still an asset. If we were to imagine a spread sheet with the cars details on it. We would calculate that, by doing all the work required the asset value increases, but does it increase it enough to justify all that work being completed, the cost etc. ? An exploration project is essentially the same. Incidentally, I know of some mining exploration people who have purchased property by pictures only, paid a premium and flipped it to a major for a further premium a year later. These seemingly oddball deals happen. NOW before you get the gun and buckshot out, hear me out. I am not suggesting someone buys or invests in this situation from a photo, or someone buys it even because of a few holes. What I am suggesting is that Vale and the industry as a whole, learned volumes from Voisey Bay and the result. I'm also saying that an asset at any stage can be dealt and it all depends on fair market value arrived at by the parties involved. Allow me to explain.
First back to the asset. Nickel Mountain is fast becoming an a very valuable asset to GGi. Let's do a type of reverse speculation, as we will call it. Step one, will GGI ever mine it ? Ever ? No they will not ! Too large and to capital intensive. So knowing and understanding this, we go to reverse step two, one everyone seems to be having the heaves about. The job of the exploration company is to explore. Explore for a potential discovery. Once they locate and make that discovery, it has to be quantified. GGI has now explored and found a potential discovery. Again, seemingly too large for them to ever mine, as in reverse step one, they set about proving asset value. The question here is how much do we spend in cash and potential dilutive share issuance's to prove the assets value ? This brings us to reverse step three, early in building the assets value, computations, spreadsheets, projections, estimation begin to be made by the Vales of the world on that value. Including and not limited to projections on CAPEX, metals pricing, labour etc etc. Like the aforementioned antique car, the talk begins as to relative asset value through each stage of the process including that all important factor of (as above)"expenditures". GGI being a small player, those required expenditures would have to come from share issuance for example or some other source. A JV partner let's say. If a JV partner was engaged, their equity stake would give us a clues as to then current valuation of the asset. Then the question arises "How long before the asset value builds to a crescendo figure (and how much) before they take the asset out ?"
In answer to that, not very long. So lets go back to remark about learning from the Voisey Bay buy out. The industry learned from Voisey that timing is everything, that leverage is everything, that paying too much is not as bad as paying too late or offering too little too early. Put the shotgun down. Furthermore what I am referring too is a bit of creativity here. GGI is in the drivers seat here. My supposition (with understanding the learning's from Voisey) is that some mining hardware entity is already in negotiation with them for 10% "NOW" while its still cheap and will come forward at around $12-$15 ? But how! You ask with out samples or assays. Look back to Voisey for your answer. Then the company will have the funds to continue a spring program should it be required. I say that because "IF" this 10% JV occurs very soon (my hunch)it now gives the asset a new valuation. It allows the company to plan the next phase without hassles. It also raises an interesting variable. The new valuation could attract more interest from others for certain. Then the internal discussion would be on and no doubt the courting of Mr. Sprotts voting block would begin in earnest. Which brings us back to the Voisey Bay lesson and the asset value discussion again.
Here we play mining executive and try to guess what Steve receives, does about it, recommends to the board, and us etc. AGM coming in December what could there be to vote on ? Continuing on, from the incoming companies point of view, there is a fulcrum, a zenith, a point where it gets too expensive to do a take out. In the Voisey lesson it took what 18 months or so ? In the Nickel Mountain example it will take half that. Which when you start at the discovery news release of September 2nd, puts us around May ? Again simply because the asset will get too expensive, too cumbersome for most to take out if left beyond that period. Getting back to present day. We are eagerly awaiting the first of many drill core updates and assays of this ongoing program. We watch as they pour two drills onto a vague and seemingly anomalous (to us) site in the onset of a harsh winter and at elevation, to prove what ? Begs many questions, among which are why now why not wait for when a warmer, safer, simpler situation is upon the area ? We hear rumours of winterization of equipment. Extension of time lines, we see huge investment by known intellectuals of the mining and metals sphere. Why ? Why now ? if its moose pasture why the rush ?. What do they have in their hands that would warrant all this cold weather risk ? Answer ? (put the gun down) They have an asset. An asset so potentially large that someone has flown in for a look see, liked what they saw so much and then most assuredly bought a couple of PP's. "Early and cheap". Maybe not the only someone, just the first someone.
"Okay so the asset is cheap and some famous guy is in on the PP's, whats he big deal ?" The big deal is, the big deal. The big deal is the how big the deal is. The big deal is it makes me the BIG dealer. If I am buying that antique car and someone has already put hundreds of hours and dollars into it, is it better to let them finish and then I pay twenty or thirty times the original value of it ? When maybe ten times the value of the down payment is cheap (remember the 10% investor has set a new base line asset value). They know once complete its value is substantial, they also know that they have the time, expertise and manpower to do it for themselves. Cheaper and more of my control can go into the completion. Again, does this mean I will get it for cheap ? hell no, its a one of a kind antique, only one in the world and all the parts are there, I just have to put it all together AND I am more than willing to pay a premium for it because of that. My time, my talent, my money my return on investment.
So in most probability, we will be made to rethink the Voisey Bay example by the Nickel Mountain story along with past examples of take outs, buy outs, et al. Surely yes they do need drill results of quantity to establish values going forward. But don't confuse the quantity required with overall asset value or numerically with 12,20, 50, even 200 cores. Especially in light of new technologies that can speak volumes now, whereas in yesteryear could not speak very much at all. They don't need that extensive program of yesteryear to quantify the situation. In my opinion garnered through conversation with industry people, preliminary drilling could give them enough data along with historical results to negotiate in good faith. How much preliminary drilling we don't know. But they do. Again otherwise why rush ? Voisey Bay history has told us, get in early. I know I am right.
Then there is that whole 4-5 other anomalies question you can add to any valuation of the asset. Should they prove D and the string of pearls theory. One could then safely assume the 10% offer figures above to be perfectly plausible. Should further hole results assays etc come forward and continue the story then maybe a hurried effort to lock it down ?
Its starting to look like we will be able to drive that antique car to the bank.