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The Calandra Report: Executive salaries and the future of Colombia

Thom Calandra Thom Calandra,
2 Comments| May 21, 2014

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Abitibi Royalties | CMJ's El Dovio & Mercedes | The SYRX Multiple | Colombia Elections

May 20, 2014

VAL D'OR, Quebec -- A small Abitibi Belt joint venture continues to outpace metals equities gainers in the North America stock market. In part, Abitibi Royalties' (TSX:V.RZZ, Stock Forum) month of May gains derives from Canada's largest gold mine, Canadian Malartic.

Dale Houser at Raymond James in Toronto tells me about thick trading of Abitibi parent's shares this Tuesday morning in Canada. That's Golden Valley Mines (TSX:V.GZZ, Stock Forum).

The proposition to followers of The Calandra Report -- and in turn those who receive TCR Blips and after the fact, follow postings at, Stockhouse, and -- is that Glenn Mullan's gold royalty collector almost surely is sitting on Quebec property that must see price acceleration from mining activity in coming months and years.

Abitibi's Malartic-connected concessions already are in the hands of Malartic operator Osisko Mining (TSX:T.OSK, Stock Forum). Events this spring and summer in the publicized Osisko takeover probably will demonstrate the case for a $300 million Abitibi Royalties valuation.

Far fetched? Only in that the shares are challenging to purchase. This is one reason why parent Golden Valley Mines' stock is seeing volume quintuple in recent weeks as its shares also rise smartly.

Abitibi Royalties has one of the many -- at least 16 and perhaps more -- joint ventures that Osisko Mining has fashioned the past five years. The Golden Valley Mines offshoot, Abitibi Royalties, stands a shot at giving shareholders a multi-year return on Malartic properties that are part and parcel of the Osisko land package at Malartic.

I am just off the telephone with both Abitibi and Golden Valley Mine CEO Glenn Mullan, and board member Chad Williams. Glenn is in Quebec and Mr. Williams, a McGill University MBA and serial mining executive and financier, is in Toronto. The background on Osisko, the $2.6 billion Canada takeover battle for the company and its roughly 300,000 gold ounces yearly, is here, via and The Calandra Report.

The thesis remains the same and is gaining traction. Shares of Abitibi Royalties (ATBYF in USA) this month and in April have about tripled in value. There are about 9.5 million shares out. The parent, Golden Valley Mines (GLVMF in USA) owns two-thirds of those shares, with the rest owned by Mr. Mullan, a few board members and three or four Quebec institutions. (I own about 30,000 of ATBYF shares and have for three years.)

Individual Canada and USA shareholders, and prospective shareholders, likely will receive royalty dividends from certain Malartic properties half-owned by Abitibi Royalties and half-owned by Osisko. I have seen the extensions of Malartic, and they appear rich in grade and necessary for the continued excellent ore-delivery performance at Osisko's Malartic.

Mr. WIlliams explains that the net smelter return royalty part of the reward equation is small: perhaps a total of $5 million from a patch called Gouldie. You know the drill, a 2 percent NSR that is paid to Abitibi Royalties when ore from Gouldie is processed at the Malartic smelter and turned into cash-for-gold bars by Osisko, or its new owners -- Agnico-Eagle (TSX:T.AEM, Stock Forum) and Yamana (TSX:T.YRI, Stock Forum).

Then you have what are known as the Barnat and Jeffery zones. More here. Osisko will be mining these by 2016.

It's the valuation projections that are a moose's cacass to contemplate here.

Mr. WIlliams, a former royalty executive and a former CEO of a Nevada gold prospector, points to Abitibi's 30 percent free carried interest on Barnat and Jeffery zones. Thus, these two zones carry no capital costs for Abitibi Royalties to carry.

"We will get 30 percent of the joint venture with no capital costs," says Mr. Williams. He reckons that at an approximate value of $30 million. Please see respective compliant reports from the companies at Malartic.

The third part of all this Abitibi furor is the fresh Odyssey zone. "Osisko n a disclosure gave us rough dimensions of the zone," he says. Mr. Williams says if you consider a conservative gold grade and specific gravity and you agree that the bulk of the zone is on property that is part of the Abitibi Royalties joint venture, you arrive at about 1 million ounces for Abitibi's portion.

Pre-tax on the cash cost profit margin for the sale of those ounces, at a price of $1,300 gold and assuming a $1,000 operating cost, leads us to a figure of $300 million, he says.

"The stock of Abitibi is illiquid, even with its outsized gains this year," Mr. Williams says. He says he owns about 250,000 shares of Abitibi which never has raised money in a financing.

"It is just a question of when we get derivative cash flow from Canada's biggest gold mine," he says.

I think -- and this is TCR talking -- that Abitibi Royalties at $2 a share leaves us with the possibility that individuals will pick off 100 shares here and 100 shares there, then stick them in retirement accounts, as I have. Current fair value before any royalty payments or Osisko disclosures about the activity at the joint venture's Malartic properties is probably $80 million, or about four times the current price of $2 a share. (I intend to hold until 2016, or when RZZ shares get closer to full value based on the Quebec holdings -- in my estimate approximately $10 to $12 a share. Whichever comes first. I expect the $8 level is not far off, given how challenging it is to find shares of RZZ in the first place.)

Let us add some perspective from the Mullan's mouth. Glenn has been at this since 2010 or so. He has been collecting royalties since he was 17 or 18 and is now 56. I likely will see him next week in Quebec.

Mr. Mullan says, "It does not diminish the story that the Operator has not yet confirmed that commercial production has begun, notwithstanding that the permitting was done, mine leases issued, pre-stripping done, and the mining appears to be underway, or otherwise imminent."

He continues. "When do we get the payments? I know what the agreement says, but I also know how to create expectations that cannot be met or maintained. The answer is quarterly after commercial production, but an accountant may determine that the operator has to complete its audited financials first, and that is harder for me to know which tact they will take in the midst of a takeover."

His job, he says, "is to find mines. Read our news releases. They are factual and timely. I challenge anyone to find a better deal than the 30% Free-Carried Interest in this property, or the 2% NSR on the Gouldie Zone. This is a single asset company and it has trumpeted its ownership since the date of incorporation and listing.

"Our intention, stated again and again, is to dividend as much of the proceeds as we can from RZZ to GZZ (who owns 62% of RZZ). The story did not change: this is the same property, the same commodity, the same company with the same share structure. Most of the shareholder bas e is the same, we have not changed the capital structure and we worked with our shareholders to preserve this through conditions which exceeded our budget and expectations by a year, and still we have hung on. We did not ask for more money, we did expect shareholders to be patient through the Osisko developments and (what could be a) market meltdown."

For those who need liquidity, Golden Valley Mines' shares, which I also own, are far easier to purchase than those of RZZ. I can see all of the individuals out there who are looking for a $2 stock to hold for two years, especially those in Canada who take patriotic pride in owning a piece of their largest gold mine, to start picking off 100-share lots any minute now.

Latest on Sysorex Global Holdings (OTO:SYRX, Stock Forum): Please see my posts here -- . These postings include links to two industry reports on value added resellers of computer and software, and the transformation into high-quality operators of cyber security, cloud and mobile computing platforms. Not to mention government services, one of the most steady streams of income for computer systems integrator. I met again with the principals, including Nadir Ali and William Freschi.

Thus: Sysorex Global and the revenue-building sum of its parts: Shoom, Air Patrol, Lilien Systems, Sysorex. For a look at companies in the computer systems integrator industry, see also: Splunk, Mobile Iron, AirWatch, Divide and those referenced in the postings.

I have been adding to my Sysorex stake and am considering adding it to the TCR 8 and dropping one of our Colombia operators -- Segovia and El Marmato operator Gran Colombia Gold (TSX:T.GCM, Stock Forum).

Monologue time: More to come on all that. GCM was an investment choice for our TCR 8 that I made based on social conscience and the good work Gran Colombia Gold was doing in parts of rough and tumble Segovia. As in, helping to alleviate some of (but not all of) the region's MERCURY POISONING, EXTORTION, STEALING, KILLING in that part of ANTIOQUIA, COLOMBIA -- in and around the old El Frontino Gold Mine of yore.

Here is the rant-part: Yet I also should have been looking at executive salaries, at the company's percentage of promises kept regarding financials and on what has become a Gran Colombia Gold GCM rollback that might go down in fiscal infamy as one of Canada's most wealth-destroying ever.

As we know, there are others in that 1-for-umpteen-whatever reverse splon-toon (my word) category, such as Barkerville Gold.

As for the salaries part, and as an aside, please see page 16 of Gran Colombia Gold's management discussion and analysis for the year 2013 to see what Serafino Iacono and his GCM team paid themselves. I know, I know -- everyone milks the company that feeds them; still, getting these proxies in the mail as a shareholder, I am feeling post-mortem disgust with executive greed when it comes to poorly performing companies.

Deferring salary is not enough.

Gran Colombia Gold is not the worst in my personal book in the salary category; I just got Avanti Mining's (TSX:V.AVT, Stock Forum) annual notice to shareholders in the mail; see Page 9 of the compensation table, then ask yourself how former CEO Craig J. Nelsen justified $1.2 million of salary for 2011 to 2013, not counting non-equity compensation. That deserves an exclamation mark!

And to think, I still own AVT. Pitiful. That's what happens when you visit these mines -- in this case the molybdenum project way up there in British Columbia -- and buy stock at some jacked-up price.

Sent earlier to TCR Blips members: This geophysical update just in from Bob Carrington at Colombian Mines (TSX:V.CMJ, Stock Forum). CMJ has two irons in the fire: Mercedes and El Dovio. These are the prospector's flagship exploration projects for gold, copper, silver.

I was not able to see El Dovio this month and will reschedule for July or early August. I am a CMJ shareholder. Bob and Gloria Carrington are based in Medellin and in Reno, Nevada. They say samples for three El Dovio holes -- potentially high-grade gold and silver, with zinc -- will reach the laboratory this week.

The couple's company holds a Colombia portfolio of mineral concessions that ranks as largest among publicly traded prospectors for that nation. The only thing bigger down there is the private (with public offshoots such as Continental Gold, Cordoba Minerals and Solvista Gold) Grupo de Bullet. Solvista Gold (TSX:V.SVV, Stock Forum), sadly, is one of our TCR 8, and the latest there is that its managers, including CEO Miller O'Prey, are continuing to develop the Guadalupe property and are searching for other properties. (Atico Mining (TSX:V.ATY, Stock Forum), yet another Colombia member of the TCR 8, gets the star for making us money as shareholders thus far.)

Elections: Everyone To Run From Street

I have not given up on Colombia, which is in the process of a presidential election that is too close to call. Article here on latest election chatter. The Sunday first round might be the only round if one candidate gets half of the popular vote. Most observers see that as a remote possibility.

I think that former Finance Minister Oscar Ivan Zuluaga will win the top spot, on Sunday or in a run-off. This election is about money, about mining, about 21st century sensibility when it comes to nurturing foreign direct investment and economic growth. For a nice spell under former President Alvaro Uribe eight years ago, Colombia's economy was rocking and foreign direct investment was rolling in.

Now, with economic growth at 4.5 percent or so, Mr. Zuluaga, when he is elected, will have a full plate of pesos to ponder.

This election also is about security and terrorism -- two things that never seem to evaporate in Colombia. (The recently deceased author Gabriel Garcia Marquez found lyrical ways to tell tales of the nation's ceaseless violence in his fiction and non-fiction works.)

These looming elections also are about telling the current administration of Juan Manuel Santos that it is one thing to promise reform on all fronts in this beautiful democratic nation. It is another to implement reform. Mr. Santos's ability to get things done ranks in the lowest percentile. Why former President Alvaro Uribe supported Mr. Santos in the first place is a question for the ages.

Mr. Uribe, the popular line goes, was aghast when his successor started negotiating with guerrillas almost from Day One of the president's administration four years ago.

Mr. Uribe uses Twitter to attack President Santos,. Mostly he twits about the promise he says he had with Mr. Santos: to continue TO WAGE WAR AGAINST FARC and other Colombia terrorists. I believe, hearing from Bogota and Medellin and Cali businessmen and women who regularly meet with the former president at his ranch, that Mr. Uribe is just as aghast at the sloppy bureaucracy that has manhandled many fronts of the economy -- including mining and agriculture -- as he is at the current president's peace talks with guerrillas.

Oh yes, did I tell you this is the first time in 16 years that Colombia has a team in World Cup football -- Brazil in June and July? Go team?

Long live the works of Gabriel Garcia Marquez.

-- Thom Calandra at

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... Also worth noting are the executives on various GCM or Rubiales, or Pacific Coal, etc, payrolls who are rarely found on the premises. -- Thom
May 22, 2014

Let me add -- on the salaries theme -- that financiers are always cutting the best deal for themselves. Or almost always. In the case of Mr. Iacono, his companies have demonstrated a pattern of excessive salaries, and financings that generally put him and his interests ahead of shareholders in the dilution stakes. In addition, he and/or his interests receive fees for bringing in their own cash. Gran Colombia Gold is the best example At this rate, GCM could be renamed Iacono Enterprises. Also wor
May 22, 2014

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