After poking around private equity groups in mining recently and seeing Coro Mining Corp. (TSX:COP) approaching a takeoff from the golden runway with support of Greenstone Capital, I have been curious where else private equity appears in the exploration business. One of my favourite strategies is funding litigation, as allocating capital to fight a legal battle that others won't touch looks like a blue ocean strategy to me. You know there are sharks in the water around a contentious legal situation and that makes it all the more exciting.
For example, look at Oroco Resource Corp. (TSXV:OCO) who are working to bring to Santo Toms porphyry copper deposit to public markets. The deposit has over 100 diamond drill holes and a pre-feasibility study from 1994, but it's been hidden from public markets for decades since. Oroco is working to change that.
As on their website,
"Oroco’s focus is the assembly of the mineral concessions which make up the Santo Toms porphyry copper project in Sinaloa State, Mexico. To date, Oroco has formally acquired a controlling interest in three mineral properties that abut and surround the concessions which cover the known core of the Santo Toms mineralized structure and is currently in the process of negotiating the acquisition of the entity that has contractually acquired the core concessions."
If you dig further, then you will find a website documenting the lawsuit (https://www.santotomascopper.com) that contains lots of info on the twists and turns of the case. The Oroco team have largely fought the lawsuits for control of Santo Toms with private companies rather than Oroco itself, but recent news flow shows that is changing.
In 2017, Oroco did surface geological mapping and started assembling historical drilling information on the Santo Toms mineral camp (https://ceo.ca/@newswire/oroco-acquires-interest-in-santo-tomas-properties). The project is largely a mystery to markets, but is known to the consultants who worked on it and Oroco itself. They believe it is worthwhile to attempt to bring it back to the public now, particularly with bullish sentiment around copper.
I see Santo Toms as a great example of a special situation where a known deposit was basically held in time capsule and preserved through several market cycles over decades. It has required a long and expensive legal battle to clarify ownership of the asset, which is not something most public companies attempt for good reason.
One reason that this kind of legal battle is better done in private company than a public one has to do with access to capital. It's essential that you don't run out of money when advancing lawsuits like this and it's better to have a small group of committed backers who are prepared for a series of capital calls rather than depending on public markets. Weakness in the secondary market could drive the valuation of the company down to a point where it becomes difficult to raise additional capital. Just imagine a situation where the market deems the company's value to be only $2 million, but the company needs to raise $1 million to continue the lawsuit. Some shareholders may fight 50% dilution and inhibit the company's ability to proceed with the lawsuit. In contrast, private equity allows the group to continue to fund the lawsuit at their own discretion without regard for Mr. Market's opinion.
This kind of activity is sometimes described as legal arbitrage, which sounds just right when you consider that the word "arbitrageur" traces back to the French word for a referee. I always find it funny to think of an arbitrageur as referee or umpire of the markets and pursuing lawsuits like this sounds like a great example of "blowing the whistle" on someone for going offside. Regulators can provide that function in some cases, but I perk right up when I hear about a private company undertaking that sort of quasi-regulatory effort for profit!
Legal arbitrage is a unique area of junior markets that I'm not familiar with. I don't know of many examples of it, but see great potential to create value picking through hidden assets and getting them ready for the public. I have a great respect for the expense and technical challenge of launching such legal battles and am impressed that the people behind Oroco have been privately funding the legal battle for Santo Toms for many years now. Following recent progress in the lawsuits, they have deemed it appropriate for Oroco to start paying new legal fees as we move towards a resolution that brings this deposit back to public markets.
Copper Prices to 1990. Again, Santo Tomas has over 100 diamond drill holes and a pre-feasibility study from 1994 that characterizes a large porphyry at surface. It surely would have generated intense interest during the last +15 years of a copper bull market if not for the legal issues that resulted from a deal executed in 2001, which have now been largely resolved. To think that such an advanced-stage exploration copper project could have been held in a time capsule since the start of that massive run in copper is exciting. Just imagine what the markets will make of it as we move through an era of looming shortfalls in copper, globally.