Solution for Investors - Barkerville and Klondike Gold Camps
My New Canadian Mining Company
Written By: James West, Midas Letter
December 12, 2014
On the 15th anniversary of the S&P TSX Venture Composite Index (INDEXTSI:JX), here’s some radical thinking.
I’m starting a new mining company. This company will be called Ethical Mining Corporation. The shares will be owned by investors, and no senior management will receive more than a living allowance until they put a mine into production. There will be no options issued to the senior management. All their upside will be derived from profit at the mine. Their share of the profit will be be substantial, which, while yes diminishing long term returns on an annual basis, will nonetheless be a superior structure for investors because the interests of the investors will be perfectly aligned with those of management. The Average Weighted Cost of Capital over time will be a fraction of what it is in the traditionally funded Canadian mining company, because management and their bankers will not be able to blow stock into the faces of retail investors to support a life ‘style’.
There will be no warrants issued on any financings, which will all occur at the 20 day weighted average closing price of the last thirty days. Unless that prices is deemed to be ‘anomalous’ or ‘irregular’ by an external committee comprised exclusively of non-insider shareholders. The government of Canada Sovereign Development Fund (This is a fund that I will start and the government of Canada will be invited to participate in, but I’m not holding my breath. When I die, I will bequeath this fund to the government of Canada on the condition that it only invests in enterprises that benefit Canada and Canadians directly.) will provide the initial $2 million, and will be prevented from selling its shares until the mine has produced a profit of at least 10%. No taxes shall be owed to the government until it has divested itself entirely of its shareholding, which can only occur as to 20% each six months.
In the event of commodity price bear markets, the fund will support the company’s payroll on a ‘care and maintenance’ basis, until the prices of the commodity being developed is deemed acceptable.
Management will be barred by corporate charter from accepting any financing that dilutes or subordinates current shareholders without the approval of the above-mentioned committee. Foreign ownership will be restricted to 25% of any mine in Canada, and up to 80% outside of Canada. Flow-through financings will not be permitted, as they provide unfair advantage to Canadian residents at the expense to foreign investors.
Environmental contamination from mining will be acknowledged and its remediation will be determined, as much as is possible ahead of time, and the funds for the remediation of the site will be payable to the Canada Sovereign Development Fund, who will be liable for the cleanup.
The municipality in which the mine is located will be entitled to 25% of after tax profits for life of mine. No matter where the mine is. Hiring from within the community where the mine is located must be prioritized over importing workers.
Mining is fraught with risk – nobody can doubt that. The reason the Canadian mining market is in such a shambles is not due entirely to the profligate spending habits of management, and the investment bankers would have us believe. It is the usurious and abusive financing structure that currently characterizes the typical private placement that provides discounted wholesale pricing to investment bankers at the expense of retail investors that contributes at least half of the disadvantage that retail investors face in mining companies. The risk needs to be aligned with the reward. Retail investors have been the exit strategy for investment banks from the get-go, and that more than anything else, is why the mining market can’t catch a bid right now. Who, as a retail investor, wants to put up a bid when you know the fill is going to come from the banker who got a volume discount four months ago, and can afford to blow out the share at a loss cause he’s in the high volume stock churning business, not in the investment business.
I’ve outlined this idea to people in the mining business and in the financial industry. They assure me that this will never get financed, and if by some miracle it does, will never attract a talented mining team and result in a profitable mine. None of the reasons they offer have the ring of sincerity or are in the least bit founded on logic or experience. The model, is, yes, a ‘social’ model. But not a socialist one, as it has been painted by some. This model accurately places risk and reward within the context of the public interest above the interests of bankers and management.
Does this seem protectionist? Well thats good, because it is intended as such. Our government has failed to support the industry upon which Canada’s standard of living has been substantially derived. They furthermore continue to fail to grasp how predatory the United States’ foisting of fabricated-from-thin-air U.S. dollars is on the industries that Canada depends on, and the commodities that are its product.
The Canadian Sovereign Development Fund will not focus strictly on commodities. It will support, in equal measure, the growth of industries founded on intellectual property, such as technologies and life sciences.It will take a leadership role in the commercialization of low to zero emission fuels for baseline grid power and motor transportation.
The fund is designed to offset the Harper government’s misguided pursuit of chaining Canada to the Petro-state model, which is short-sighted and ultimately, unsustainable. What’s happening right now in Canada is not going to abate any time soon, and the damage that is being done to the long-term prospects of our economy is not widely perceived at this point. But it the oil price has in fact become the U.S.’s principle weapon against its foes, as is certainly the case, then Canada is in the process of becoming an unintended casualty.
Our failure to support industry in a profound financial way, as the U.S. has done since the financial crisis through their process of capital and credit fabrication, is partially to blame for the damage now unfolding in our economy. When the longer term nature of oil price weakness sparks the collapse in home prices that will likely result from prolonged weak energy and metal prices, thats when the smug bankers proud of their conservative approach to financial stimulus will begin to understand that their pride was misplaced in the face of agressive U.S. fiscal and monetary policy, and is really just ignorance and complacency, which the U.S. exploits the nth degree to its advantage.
Go Canada! Vive le Canada!