Warren Irwin | Discerning Mining Stock Scams from Bre-X until Today: Top Hedge Fund Manager Shares Insights [PDAC 2018]

At PDAC 2018, top-performing natural resource hedge fund manager Warren Irwin (Rosseau Asset Management Ltd.) shared his insights with Mining Stock Education regarding mining stock scams from Bre-X until today. In this interview, Warren shares his first-hand experience of the Bre-X Minerals fraud of the 1990’s. Warren turned $250,000 of his own money into $5,600,000 as Bre-X’s share price rose. Fortuitously, as he explains in the interview, he sold his stock near Bre-X’s stock price peak. Warren then immediately began shorting the stock and holds the rare distinction of being one of the only people to profit from both Bre-X’s share price rise and fall.

Over his more than three decades of natural resource investing, Warren has seen all types of mining stock scams. In this 40-minute interview, he shares regarding some of the most-frequent types of mining scams that occur today and what the mining stock investor should be aware of. For the serious resource investor, this is a “must-listen” interview.

Warren Irwin’s G-10 Special Situations Fund (US) LP earned the top position in 2016 among the 4,099 hedge funds tracked by BarclayHedge with a 156.32% annual return. Other Rosseau funds also took the second and sixth spots with returns of 155.94% and 128.89% , respectively.

0:05 Introduction of topic and guest

1:29 Warren Irwin’s background and fund information

2:50 Warren describes his first-hand experience with and investment in Bre-X Minerals

13:59 In which category of mining company (exploration, development or producer) do we most-often see scams and why?

15:05 What does a mining producer scam look like?

16:30 Where do you most frequently see dishonesty in official regulatory filings?

20:16 Are there certain commodities that are easier to perpetuate a mining scam with and why?

22:23 What is your experience with niche metal scams?

24:25 What type of mining scam works most effectively today compared to what scams worked well twenty years ago?

25:51 Can you speak regarding any current-day mining scams?

27:05 If you knew a company was a scam, would you still buy its stock if you knew you could profit from trading it?

29:50 What are your thoughts regarding Pretium Resources and Novo Resources?

34:19 Are there any mining jurisdictions where you see high potential reward, yet also substantial risk but you are still willing to take a bet on that jurisdiction?

BEGIN TRANSCRIPT (edited for readability and clarity)

Bill: Welcome back to another expert interview. This is Bill Powers. I’m your host with MiningStockEducation.com, and I’m reporting from PDAC 2018. And it’s my pleasure to be joined by Warren Irwin, top performing fund manager. Warren, I appreciate you taking the time to sit down with me.

Warren: Well, thanks, Bill. I’m happy to do it.

Bill: And I asked Warren to join us to share his insights regarding mining scams, what to look out for, and his experience specifically from the Bre-X scam of the 1990s. Warren was intimately acquainted with that scam. So, Warren, could you begin by sharing a little bit about yourself, what you do with your fund, and also your experience with Bre-X in the ’90s.

Warren: Yeah, a little bit about myself. I run a hedge fund called Rosseau LP. It’s based here in Toronto, and we’ve been running the fund; we’re in our 20th year. We have one of the top performing funds in the country, possibly the top performing fund. So we’ve worked very hard over the last couple decades to make as much money as possible. The bulk of that money has been made in mining; specifically in gold and secondarily oil and base metals. I’ve been around a long time, and prior to that, I worked at Deutsche Bank in their proprietary trading group. And I’ve been in the business since 1986 so roughly 32 years grinding away on Bay Street.

What’s interesting, I first touched on Bre-X when I was working at Deutsche Bank. I worked there for three years prior to starting Rosseau. And what was exciting to me about it is I just heard about it. And I’d been just starting to tweak my interest in gold stocks, and what was also interesting for me is in 1991 when I graduated from MBA school, I’d spent some time in Indonesia. And I learned that it was a fascinating country. I had a professor who lived there who is really good to me, and he was able to show me around the country, gave me his car and driver, and I learned a ton about Indonesia. And what really occurred to me was there’s a lot of money to be made there and a very fascinating place.

So when I combined my interest in gold with Indonesia, I was all over the story and very exciting at the time. I pretty much took all my savings at the time, which is about a quarter of a million dollars. I’d saved up initially about $80,000 to buy a house, but then I managed to triple that money in a real estate investment. Then I took the $250,000 and put it into Bre-X at around the $18/share level. So as it grew, I realized very quickly I had a lot of money at stake. At one point, I had a position of $5.6 million worth.

Bill: Wow, that’s a lot of money.

Warren: Yeah, especially over 20 years ago, it was a lot of money. And for a guy who is in his early 30s, it was quite a bit of money. So I really needed to follow the story closer than anybody else. And given I’ve been to Indonesia and has some good contacts there, I thought it was really important for me to jump on a plane and get down there.

So I followed as best as I could here in Toronto, but I jumped on a plane, went down to Indonesia, established a lot of contacts with the media, with other investors in Jakarta. And I managed to talk my way on to one of the first site visits, which was really good. And I went to site, looked around. I was pretty new to the business. So I saw a number of things which I had some questions about, but in general, things were good.

One of the things that really freaked me out a little bit was I was having beers one night with the head of the local assay lab, and he was quite nervous. And I asked him. I said, “John, there’s gold there, isn’t there?” Frankly, he almost jumped right out of his skin. So it didn’t exactly make me feel too great. But some of the other factors that were positive were…

Bill: Can I ask you; at that point, what was your position size in Bre-X at the time you got that response from him?

Warren: At about 5.6 million, probably almost my peak position. And the other things that I looked for when I was on site, I looked for are the locals fooled? And obviously, I had a level of skepticism going in anyways. But the locals were building homes around the site, so they were obviously sinking their life savings into it. So they were believers. There were a number of people working their rigs, bunch of Australian rig workers. They seemed to be fooled.

Upon my return to Canada, I found actually a former Bre-X geologist who worked in the fly camps there. And he was completely fooled. So there were a lot of people even intimately involved with Bre-X, really close to the source, that were completely fooled by what was going on there. And part of the reason for it was the gold was not visible gold. They were claiming it was just quite a bit of disseminated gold. So it wasn’t visible in the core.

So upon my return, I thought the trip went reasonably well. Some of the questions I asked were pretty pointed. For instance, I remember asking Felderhof when he was gonna twin the holes, I guess giving an indication of the level of skepticism I had, and he said in the fall. So when I came back to Toronto and the fall came, I went and there were no twinning of holes. It didn’t make me feel super great.

But the biggest turning point in my skepticism of the mining business is when I returned from my trip. By chance, I ran to this crusty old man in my elevator in my condo where I was reading the front page of the Financial Post, and it was talking about Bre-X. And we just started chatting about Bre-X in the elevator right down to the ground floor. And I’d mentioned to him I had just been back from the site, and it turned out it was Dale Hendrick, who was former head of exploration of Kerr Addison Mines, a very seasoned and very skeptical mining guy who’d spent his career in the mining business. And he said, “Listen, we gotta get together. Let’s sit down for lunch one day.” So I agreed, and we sat down for lunch, and he told me his 20 reasons why the Bre-X was a complete scam.

Bill: And had you sold any of your shares at that point?

Warren: No, not at all, no. He told me that reason, told me 20 reasons. But what was interesting for me is there were 20 logical counter points in all of these points, like, why didn’t he keep half the core? “Well, you know, you need a large sample size, so they kept the skeleton core instead.” “Why did they do this?” Well, there was always a reason why Dale’s point was wrong.

But what occurred to me was he really did have a lot of points. But there were a lot of counter points. So it got me thinking a little bit more skeptical. So what I did is with my contacts in Jakarta, I gave him the heads up. I said, “Listen, there’s a guy here thinking this is a fraud. Can you guys just keep an eye out for me?” And sure enough, fortunately for me, one of the best things that ever happened to me I was building my Bre-X house and my builder phoned me up and said, “Warren, I need some money.” So I sold about half of my position. I took myself off. The small amount of margin I had actually may not have been small. I had a million dollars borrowed on margin. So had I wrote it to the end, I would have been pretty bad shape financially. So, I sold enough to pay my taxes, to get myself off margin and to pay for the remainder of my house. So that put me in good stead.

Bill: But you had not concluded it was a fraud yet?

Warren: No, not at all, no. No, that was total…that’s totally luck, and it was really, really close to the top of something like $280 a share.

Bill: And you bought at $18/share, you said?

Warren: $18/share, yeah, and I put quarter million bucks in at $18/share then I used some leverage on the way up. It was a quite high octane. Those are heady days on Bay Street. Lots of people were making lots of money. And part of the reason Bre-X scam was able to happen in the first place was there was a lot of money created, $4 to $5 billion with Voisey’s Bay discovery just before this. So there was lots of money, speculative money sloshing around Bay Street. Anyways, I just kept asking all the questions. I was reasonably skeptical, but I kept about half of my position. And then my contact one day phones me up and said, “Warren…” in the middle of the night phones and say, “Warren, I think you’re right. They’ve just killed de Guzman.” And I go, “Oh, boy.” And I just…

Bill: Did you get that before the public knew?

Warren: Yeah, absolutely. I got that in the middle of the night. So I’m ready to hit the bid first as soon as the stock opens. Well, sure enough, the stock was halted, it halted all day. And they said Mike de Guzman died. He fell off the helicopter which, of course, you know, that was their story. I phoned up the office in Jakarta or somewhere, one of their offices, “Well, where did he fall out,” because I’d been on that exact helicopter. And they claimed he fell off between Samarinda and the site. And what concerned me about that is I knew the pre-flight inspection, and they were very, very stringent to make sure your seatbelt was on, that the doors were shut and the doors were locked. That was total impossibility that he accidentally fell out of the helicopter like was being portrayed by the company. So I knew there was something up. So at that point, I just sold all my shares into the market as soon as it happened. And I went short it.

Bill: Immediately short?

Warren: Yeah. Yeah, immediately short. And then what’s really funny is a couple days later, I’m just going, “Man, oh man, am I crazy? What am I thinking? This is a multibillion dollar company and I’m thinking it’s a fraud.” You start getting this self-doubt again. And what do I know? Remember, it was 20 plus years ago, so my knowledge base wasn’t what I have today. We were at the stage where Freeport wanted it. Barrick wanted it. Placer Dome wanted it. Teck wanted it. All these major mining companies wanted to buy it. And they were all over everybody…all over the Indonesian government to become the most favorite company to buy it. And here I am a little inexperienced analyst calling it a fraud. So it’s one of those things.

And what was interesting is I put on a large put position for the bank I worked for, Deutsche Bank. And it was pretty funny because I bought a whole bunch of put options and then I got cold feet. I said, “You know, how could it be a fraud?” So I just tried to unwind the position, but the traders were giving me lousy prices. So I said, “Screw you guys. I’ll hold the position until they expire.” And sure enough, we made a lot of money on those put options because we were able to…I think the stock was around 9 cents by the time we…

Bill: Oh, wow, from you said two hundred and…

Warren: Well, yeah. What happened is it went to…I think the all-time high was around $280 a share and then there was 10 for 1 split and then eventually it went down to zero. So it was quite a ride, that’s for sure. But what’s interesting here is you may have noticed I wrote that one article recently about Mike de Guzman.

Bill: Yes.

Warren: In my opinion, absolutely, 100%, Mike de Guzman is alive and well living in the Philippines.

Bill: Even today?

Warren: Absolutely. I’ve had friends, not in the last two years, but I’ve had friends see him at restaurants in the Philippines, and I’ve had friends who have friends that have had meetings with him.

Bill: To this day, would you say in the mining investment community, how many still accept the official narrative regarding de Guzman and how many see it the way you see it now?
Warren: Oh, I would think probably 90% think de Guzman is dead. I don’t think my views are widely known. I think if people knew what I knew, as in, have enough friends who have seen him or know people who know him, they’d share that view. There are enough people in the mining community, they go in and out of the Philippines and they know de Guzman’s around. So it’s not a big deal. He faked his death in my opinion.

Bill: Do you know anybody other than yourself that made money on the way up and the way down on Bre-X?

Warren: No, generally, I don’t know of anybody both ways. Generally, what happened is the people I know who made the money on the way up were generally believers through and through and they stuck it out. And many of them ended up with zeros. Some people, I had a friend who worked at Deutsche Bank with me. He was smart enough to sell out. He moved to a tax haven, good for him. I had a friend of mine who was largest individual investor in Bre-X and he had $80 million personally at one point. I encouraged him like crazy to take some money off the table for whatever reason, like, there was also a risk the Indonesian government could expropriate the property, lots of reasons to sell your stock or take something off the table. He did not. And unfortunately, I heard he took his life recently as a result of some of the financial losses he took on that. That was a tragic story also. There’s a lot of tragedy in the story of people who were believers in it and paid the ultimate price having to take their lives or lost their lives on it. It’s part of the reason I’m out here sharing my stories with investors that if you’re new to the business, don’t believe everything you hear in the mining business and certainly don’t bet the farm. It could cause a lot of hurt to you and your family if you let it all ride on some of these names that are out there.

Bill: And the Bre-X scandal and fraud, then provoked the regulatory bodies to come up with a more standardized and hopefully strict and honest system to reinstitute and reinstall faith in investors. So that kind of brings us to today, what mining investors should look for in terms of discerning scams or dishonesty in mining companies, how they’re promoted, mining company management. And my first question in that regard would be in what category of mining company, whether it’s an exploration company, development company, or producer, do you most often see scams today and why? And if you could share any examples, please.

Warren: Yeah, the place we see most of them is in the exploration side. And that’s oftentimes where the novice speculators start playing. They’re the ones that are the most overhyped. They’re the ones that have the most baloney floating around about them and a lot of arm waving and a lot of hype and a lot of promotion. That’s the most dangerous part of the junior market.

Bill: What about producers? What would a scam in regards to a producer look like?

Warren: Yeah, producer scams are a little tougher. The thing I’ve noticed with respect to producers are, for instance, I’ll take case and point, Colossus Minerals. I was in Brazil where they basically actually built the mill, built the ramp down to the ore body and then nothing really ever happened. It never got into production, never produced. The other one is Rubicon. Again, they built the mill. They never got into production. Those are the biggest scams or basically management has BS’d the market enough that they actually suckered them into giving them money to build the mill and build the ramp and build the shafts, but there’s really no ore body there. There’s a lot of examples of that where mines actually never ever really ever get into production.

But as far as mines that are actually in production, have run for several years, those are tougher to see scams with. Areas I find that is you’ll get management playing games a little bit with those where they’ll basically, if they’re having a rough quarter, they’ll take some high-grade; run it through the mill. They’ll make up their numbers, and then, things like that. But that’s generally on the fringe. In the terms of the mining business, that’s where the smallest amount of scams take place, but they can indeed play with the production numbers by playing around with grade a bit.

Bill: Where do you most frequently see dishonesty when it comes to official regulatory filings? You have the PEA, the pre-feasibility, feasibility, the resource estimates. What documents do you most frequently see dishonesty in?

Warren: I think the consultants take the resource as estimate reasonably seriously. And I’ve not been able to see outright fraud in those at all based on my experience. I’ve run parallel resource estimates myself using our own techniques. And I’ve generally found that when we’ve done that, they’ve come reasonably close to what the estimates are out there. Oftentimes, the consultants will actually be a little bit conservative on it. But I don’t see that’s really where the issue is. And when you get into pre-feasibility and feasibility, the level of rigor that goes into those is considerably higher than the PEA. The area I find the biggest amount of dishonesty is with the PEAs. I can’t frankly believe it that some of these consultants will sign off on some of these PEAs.

Bill: So they’re almost useless. It’s more just a promotional item?

Warren: I imagine there are some PEAs that are useful, but for instance with the junior market, I’ll give you example. I know of one very well-known mining stock promoter. And I went, visited all his properties, and I asked him what the IRR was on their project. He said, “Well, after-tax IRR if, you know, 15%, 18%,” which is not great, not terribly bad. So they’re hanging that on their…hanging that up to tell everybody what their after-tax IRR is. But when you look at their PEA, you realize that well, the commodity price they used is 50% to 75% higher in the PEA. I found that completely disgusting to see that, but that happens all the time. There’s another example, too, where, of course, the biggest one you have to look for is look in the appendix of the PEA and find out the commodity price assumptions. They love to use long-term commodity price assumptions rather than spot. And this one instance it’s just absolutely hilarious, not only did they juice the number on the commodity price they used, which is completely ridiculous. But the reality is the mine will under no circumstances in my opinion ever get built, period, end of story.

So instead of the PEA basically saying where any competent consultant would basically say, “Come on, kids, this mine will never get built due to environmental challenges and a host of other issues,” which are pretty obvious. And I don’t wanna get into the specifics of it because it would actually tip my hand as to what the company is.  But it’s out there today trading with a big market cap and everybody thinks it’s gonna be a mine someday and it’ll never be a mine someday. And it’s absolutely ridiculous that the PEAs out there and leading novice investors to actually think this might get built someday, and it won’t get built someday. That’s where I find the PEA is really the weakest part of the whole process put in place following Bre-X.

Bill: So there’s the least accountability with that document?

Warren: Oh, yeah, absolutely. If you look at some of them and you look at the capex numbers to build mills or whatever, they are laughable some of them. It really is a joke. And I talked to mining engineers and I run the PEAs by them.  They go, “Oh, wow, they must have really been under a lot of pressure by management to crank down those capital numbers to make the numbers work.” And that’s the issue. So, yeah, watch out for PEAs. There’s a lot of fantasy PEAs out there. That’s for sure.

Bill: Are there certain commodities, gold, copper, uranium, etc., that are easier to perpetuate a mining scam with and why?

Warren: It’s an interesting question. I’m just wondering if there’s one that might be the easiest. Like, if I was a scammer, which one would I scam. I’d probably go with gold. The reason I would go with gold is it’s the one the most hyped up, like, people don’t get super hyped up and excited about uranium or copper. It just doesn’t seem to instill the amount of excitement and greed factor in the novice investor whereas gold, gold has been salted basically tampering with the samples. What I mean by salted for those of you not familiar with the term is basically putting gold in the sample bags going to the lab and hence inferring that that gold actually came from the drill core and then hence inferring that into some sort of resource. I think gold is probably the best one to pull a scam on.

The other one you have to watch to with respect to scams is where you got metallurgical issues, like, you basically…you know, where a junior picks up a property, everybody knows is a massive deposit, let’s say, one that has often has metallurgical issues: zinc. They’ll pick up this mass of zinc project and get everybody all excited about it. The zinc mark is hot today, but the reality is it’ll never be a mine because the issues are just too great with respect to the impurities and the metallurgy just doesn’t work. Like, right now you’re looking at…we’re seeing hype in the lithium space, and there are some lithium projects out there that you have to watch the impurities on.

Bill: Cobalt.

Warren: Yeah, cobalt. Yeah, that’s a flavor of the day. You have to watch this flavor of the days. People would jump all over and then look at tire them and they’ll just leave you in the dust. I’m not a flavor of the day kind of commodity kind of person. I find that they’re great for the short term but long term, you don’t wanna play it because they just get overhyped in the short term, runs up, gets overly priced, and then collapses. And you probably wanna buy after the collapse rather than…

Bill: Have you seen scams with niche metals, the smaller markets, the vanadium, tungsten markets like that. Have you noticed any mining scams in those lesser-followed metals?

Warren: Yeah, for sure. For sure. I’ve seen it all because there’s always new and innovative scams that they produce. I remember going to visit a graphite deposit. These guys, they picked up in the latest trends in graphite. And they’re saying, “Well, we have a very special type of graphite, very uniquely made, very uniquely aimed towards the graphene market blah, blah, blah, blah, blah, blah.” And then they start working out other numbers and say, “We’ll, look how much cash we’re gonna generate.” The numbers were off the charts. “We’re gonna make hundreds of millions of dollars a year.” It was just almost a layup until I got back to my desk and just looked at the size of the market for graphene, and they were gonna sell…they were anticipating selling like 10 times the entire market of graphene in a given year. So that was not gonna happen. So they were full of baloney. A lot of people were buying into it. They were just running up the stock and I don’t know where the stock is today, but that was an example.

The other ones, the niche metals are probably the most dangerous to play in and I generally stay away from those. The reason the niche metals are bad is because you often need an industrial buyer to buy that specific type. A lot of these industrial metals do not trade on exchanges. You don’t know the price of it. Some of these industrial metals you cannot get the pure form in the metal. So you have to actually have a buyer for the specific type of metal with the specific impurities you have in yours. And then it takes, you know, probably takes, in some instances, it could take two to three years for an industrial user to take your product, try it out in their system, make sure it doesn’t screw up their process, and then start buying from you. That’s the problem with all these industrial metals, is that you need a commercial buyer and that commercial buyer needs to feel comfortable with your product, and it takes years to develop that relationship. So I generally try and stay away from that.

Bill: When it comes to today, what type of mining scam do you think works most effectively compared to a scam that might have worked 20 years ago?

Warren: Yeah, the type that will work today is the one that’ll work within the regulatory framework. So they basically…That’s it. They’ll lie and they’ll cheat and they’ll steal within the bounds of regulation. Occasionally, you do get a geologist going off a bit and just actually changing numbers in a spreadsheet and stuff like that. That happened with Southwestern Gold in their Chinese deposit where basically they had a guy just fudging their numbers, their assay numbers. That’s becoming rarer and rarer. Where they try and fudge it and where they try and scam people is they’ll buy a project and everybody knows will never be in production.

Bill: Just recycle it.

Warren: Recycle it, overhype it, and it’s been there a thousand times before and they’ll just overhype it, run it up, get off their stock and then…well, what do you know? There’s a metallurgical problem. But people for the last 50 years knew there was a metallurgical problem with that project or there’s a problem with the host of other issues. That can be the problem.

Bill: Can you speak to any mining scams you see currently going on right now?

Warren: Well, it’s interesting. I guess the question is define mining scam.

Bill: Could you define it and then speak to it?

Warren: Yeah, that’s the question. Do I think it’s a scam if management knows it’ll never be put into production yet they’re going through the whole PEA process? They’re telling everybody it’s gonna be put into production. They’re raising money. They’re going through the actions. Yeah, that’s happening all the time here. That obviously happened with Colossus and Rubicon. Those are two and historically that I could talk about that happened, too. But I can assure you. They exist today and there are investors today who put their hard-earned money into these stupid stocks, and these stocks aren’t going in the long term absolutely nowhere. Near term, they think they’re winners. It could be up 20%, tomorrow who cares, but at the end of the day, they’ll never be mines, their big fat zeros. They’re just cash pigs. They’re just using up cash like crazy. Management’s yanking as much money out of it as they can, it’s lifestyle companies. That’s what you really have to watch for is that type of company.

Bill: With your knowledge, experience, and analytical ability, when you discern what you just described and you know it’s a scam, would you buy its shares knowing that you could probably still profit off of trading those shares of that particular company?

Warren: Yeah. For me, I just don’t do it because life’s too short. I kind of like buying a stock and holding it for multiple years. So that doesn’t suit my trading style. I know a lot of people that do that. In fact, Dale Hendrick, the guy who alerted me to Bre-X, one of the questions I asked him is I said, “Hey, Dale, are you short Bre-X?” He goes, “No, no, I’m long it.” And I said, “Why are you long it if you think it’s a scam?” He goes, “It’s going way higher. That’s why.” So he’s was a very pragmatic guy. Unfortunately, he passed away very recently here. But that’s definitely one approach.

And I imagine there’s a number of people in the mining business and in the investment business that knows stocks are scams, but they know that generally scams have a really good promotion behind them and they like to ramp them up. Yeah, it brings to the point, too. There’s been recently a number of these fake takeover bids, too, which are hilarious because one thing with a scam is you gotta get off your paper. You have to get off a lot of paper. So the best way to do that is to create a fake takeover bid from some buyer nobody’s ever heard of before with a big bid and then you’re able to blow your paper into the risk arbitrage guys. So that’s been going on probably about three or four times in the last few years. That’s a good way for a lot of people that are behind a scam to get off the paper and then, of course, that buyer you’ll find out the buyer didn’t have the money or didn’t exist or often they’re from a foreign country with dubious sources of funds and you spend two seconds thinking about it. And two seconds looking into it, you’ll find out that…

Bill: So the average retail investor just using the internet should be able to discern something like that?

Warren: You need a couple ounces of common sense, too. Right? They always try and make it as legitimate as they possibly can. Back in the tech days, in the early 2000s, we were also doing deals like that. I remember once there’s a company called Whalen [spelling?], and it still exists today in a different format. But Whalen announced then a billion plus dollar contract, and with this firm out of Texas. Well, fortunately, I knew some former CIAs in Texas. I phoned them up, said, ” Can you just do a little bit of background check on these guys.” Sure enough, they went by their offices and they were paying $800 a month for the rental in this little industrial complex. They had no means whatsoever to buy a billion three worth of their products. It was never gonna happen, but the stock ran on that. That type of nonsense goes on today also in the mining business, too.

Bill: A friend of mine asked me to ask you this question: what are your thoughts towards Pretium Resources and Novo Resources?

Warren: Yeah, Pretium. I took a look at Pretium in the early days. Strathcona walked from the property and basically said…(You know, I’ll leave it up to you guys to dig up what they exactly said because I don’t wanna misquote them.) They’re no longer involved in the project and they had some serious questions about it. I looked into it myself to try and determine whether I could have a view on it or not. I met with Snowden at an investor’s seminar that Pretium put on tried to clear up all the issues that were raised by Strathcona. And I met with Snowden, I talked to Snowden, and I wasn’t getting the answers I liked. I think they were trying to show me with a bunch of technical information that…and I didn’t believe much what they were telling me. And my undergraduate degree is in mathematics. So I understand probably a lot more than most people would with respect to the mathematics behind an ore body, especially one as nuggety as that one. And I didn’t really think they were giving me the straight goods. So I just said I’m gonna stay away from this one. Because there will be…I got a sense that it would probably be a mine someday, but I think the variability of grade would be way, way higher than they’re trying to promote it to be. And when you’re dealing with nuggety gold, the reality is nobody knows what’s there. It’s tough to drill ahead and have drill reconciliation between what you actually mined and what the drill holes tell you you have there. It’s very, very difficult to do. And the worst thing you could fall into is trying to extrapolate what you’ve found in a small area over larger areas. And that’s the issue with Pretium. In fact, that’s…

Bill: That’s the issue with the Novo also.

Warren: That’s the issue with Novo also, yeah. So again Novo super-hyped stock. I was down there in Colorado when they did the infamous video. They chipped up all the little nuggets and all that sort of stuff, which was just…and then, of course, they had a perfectly timed where they did the video and then they had a big buyer just jump into the market right after that to ramp the stock up. So I don’t really like that kind of nonsense. I’ve had some experience with Quinton Hennigh who runs that company. It wasn’t a good one back in Wyoming in the last cycle. So I wasn’t a super huge fan of Quinton. But I was open-minded. I went down to Novo and checked out the property. And again, it was clearly an issue of you just can’t take samples from a small area and interpolate it’s gonna go over these vast massive square miles. It’s not to say it doesn’t go over these massive square miles, but in order to prove that so that people actually will believe you have it, it’s gonna take a lot of drilling. So it’ll be a multiple year project for them. And there will be a ton of hiccups along the way. So did I think it was worth like $1.6 billion or whatever it got to? Absolutely not. I came back and there’s no way I was gonna buy that stock at all.

Bill: Do you have a buy target now with where they’re at?

Warren: No. I have zero interest in Novo frankly. I don’t think it’s stock I’d ever invest in and same with Pretium. I don’t wanna be trying to second-guess what Mother Nature has left Pretium under the ground there. It’s difficult to do. It’s difficult to know what you really have. People just have to realize it, but unfortunately, I think people are trying to think that it’s more predictable than it really is. It’s really not predictable. And Novo, I don’t think you’ll ever know what you have in Novo until you start mining it. Who knows what you’ve got and whether it’s economic or not? And I don’t know, and I’ll just let them prove it out over the next number of years and see what they come up with. The problem you’ve got is those are both examples of nuggety gold prospects. Those are really, really tricky, especially for the novice investor to get involved in. And it’s tough enough for me. I find those to be too risky for me. So for the novice investor to go in there and somehow think they know what lies under many hundreds of square miles of sand in northern Australia, they’re braver than I am to make those prognostications.

Bill: Warren, you’ve traveled the world looking at different mining projects, so you have firsthand, not just book knowledge regarding the various jurisdictions throughout the world. Are there any mining jurisdictions where you see a high potential reward yet there might be substantial risk, but you’re still willing to take a bet on that jurisdiction?

Warren: Oh, wow, that’s an interesting question. Why don’t we just speak in generalities about mining jurisdictions? Generally, this is how it works, and you’re seeing it play out around the world. A number of places around the world they’re in different stages of this process.

The process is, let’s start with a mining company makes a discovery. Then the government wants a huge chunk of it, creates a terrible environment. Let’s be more specific. Let’s talk about Ecuador. We went into Ecuador kind of the mid-’90s I guess with Aurelian and I was about a 5%, 6% shareholder in Aurelian. We went, we found Fruta Del Norte which is one of the world’s biggest gold discoveries at the time. It was found by a guy named Steve Leary, and he was grinding away in the jungle with…and they came up with this massive gold discovery. Well, as soon as we found it, the government’s all over us for a whole host of reasons. And fortunately, we were able to sell it to a major mining company because we knew that we’d have no clout to battle the government if they wanted more of it. And sure enough, the government didn’t stop, and they just made conditions almost impossible for Kinross to move forward with it.

And then the project sat dormant for like 10 years. Then they realized, the government realized, “Well, maybe we were a little heavy-handed with some of these…you know, some of the taxation issues, some of the things we’re trying to get out of the mining company.” Now they’re back being a little bit more reasonable about it. And Lukas Lundin has stepped up with Lundin Gold, bought the project from Kinross, and they’re in the process of putting that into production.

Bill: And Ecuador is an advertiser here at PDAC. I’ve seen their sign.

Warren: Yeah, yeah. Well, I’m invested in Ecuador again, but what happens when you have to watch is these countries go through these cycles where they have no mining, so they want mining. They create a good and positive environment for mining. The companies come in. They actually find something, and then the government gets greedy then they crank up the tax rates making it unattractive for mining. Then mining now leaves the country. It’s a cycle, and it happens. Looking at Congo right now where…and there have been a number of big copper discoveries made recently, especially Robert Friedland with his…

Bill: Ivanhoe.

Warren: Yeah, with Ivanhoe. I believe it’s Kakula, and it’s right next to his previous Kamoa discovery. But he’s found a lot of copper there. There’s rumblings. Of course, they want more of it. And the same thing happened not that many years ago with Zambia. So it happens. They want to encourage mining, mining comes in, and then they just start cranking up the tax rates on mining companies. And then mining companies leave, and then they find out that there’s not enough revenue. There’s not enough exploration. Then they make terms a little bit more favorable to mining companies. They’ll go in. Once they see the mining companies making too much money, they’ll try and tax the heck out of them. It’s a cycle, and it happens especially in the lesser developed countries.

In Ecuador’s case, they put on a something called a windfall tax, which was…I think it’s one of the only examples in the world of a windfall tax. It’s the only one I know of, although I imagine there’s one or two other examples, but windfall tax is not something you put on mining companies and expect them to wanna spend money in your country. So Ecuador is wisely talking about removing that. They may have already done so. But I believe they’re heading in the direction to remove the windfall tax and just make things…like, is not rocket science here.

The world has mining in a lot of developed countries like Chile and Canada and US. Mining is very well established there. The rules are well-established. They don’t change, and that’s the best thing for mining companies because when you take a look, you need to basically take about eight years to develop a mine, and during that time, you don’t wanna be changing your fiscal regime. What’s interesting too is how even lovely Ontario here in Canada. When De Beers finished building the Victor Mine just going the production, the Ontario government thought it’d be great idea to crank up the tax rates on it.

Bill: So it’s not just the third-world that does this.

Warren: No. But you know, I forget what happened to them. I’m sure they backtracked a little bit. The most important thing for…if I was to give any advice to a country that wanted to attract good solid long-term mining investment is just have a level of stability with respect to your mining laws and the way you treat mining companies. Mining companies have to make long-term investments in these countries, and they put a lot of capital to work. It takes them forever to get their capital back. It’s not a hugely lucrative business in my opinion. So they have to have a stable framework in order to do this. And if you’re changing the ground rules and just as soon as they were about to make profits or cranking up the tax rates, you’re not gonna have a good mining business. It’s better to keep things reasonably stable. There’s enough presences out there as to what works in the world. You don’t need to create your own mining law with your own little windfall taxes or whatever else you wanna do. There’s lots of precedents of good mining law, whether it be in Quebec, whether it be in Chile, and just stick with it and keep your promises to mining companies over multiple decades, and you’ll have a good healthy strong and vibrant mining industry.

Bill: Well, Warren, this has been an extremely insightful conversation where you’ve been able to share wisdom with myself and the listeners. I mean, there’s a lot of insights here that we can gain that can really help us not to make a lot of the mistakes that cause people to lose a lot of money in this very volatile sector. As we conclude, is there anything you’d like to share in conclusion with the listeners?

Warren: Probably the biggest thing is for any novice investor, and I’ve been doing it for 32 years. So if you’ve done it for less than 10 years, you’re novice, whether you think it or not. You think you might know everything, but the mining sector is a very risky sector. It can take your money very, very quickly. Don’t fall in love with stocks and don’t be overly confident and just do your work as best you can. Do your very best but don’t fall in love and don’t get too overly confident because that’s a recipe for disaster.

Bill: Well said. Warren, thank you for joining me today.

Warren: All right. Thank you, Bill. Cheers.

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