Bob Quartermain: Acquisitions during a market bottom, 'allowed us to go from 78 cents to $48
Bob Quartermain has been one of the most successful resource sector investors of the last 20 years.
He ran Silver Standard, acquiring silver projects and making discoveries during the precious metals bear markets of the early 90’s and early 2000’s.
Rick Rule was involved in financing the company in 1992 when it was a small company. Its current market cap is around $500 million.
Mr. Quartermain is now the head of Pretivm Resources, one of the largest resource ‘juniors’ in the world, with an advanced-stage exploration project called the Brucejack mine.
Tekoa Da Silva recently sat down with him to ask for his comments on successfully acquiring and developing new mines, and what he believes investors and resource sector leaders need to do in a tough bear market.
Pretivm Resources will be attending this summer’s Sprott-Vancouver Natural Resource Symposium, July 28-31. Click here to reserve tickets at the early-bird price before May 1st.
TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here today with Bob Quartermain, President and CEO of Pretivm Resources. Bob, good to see you.
BQ: Great to be here.
TD: I’m very happy to have you here. I would like to ask you about developments with Pretivm Resources. But before getting into that, for the person watching, if they’re new to resources, new to your story and background as well as Pretivm Resources, could you tell us a little bit about yourself and what you’re working on?
BQ: Yeah, sure. I’ve been in the resource business now for 40 years. I started back in 1976 working in the Northwest Territory. So I spent the first part of my career as an exploration geologist, kind of “boots on the ground.” I joined Teck Corporation in 1980 and worked at one of their mines.
I then drilled off the David Bell gold mine in 1982 to 1984. So I had experience working underground, particularly in gold mines.
In 1985, Teck transferred me to Vancouver to take over a small company called Silver Standard. At that time, it had two employees, a market cap of around $2 million and as we may discuss a little later, we took that to a company well-worth about $2 billion through a silver acquisition strategy we had at the time.
As part of that strategy, in 1999 we merged with New Gold which had the Brucejack project with about 400,000 ounces of gold and 16 million ounces of silver.
So we did a $3 million merger at the time when metal prices were down, merged with Newhawk and were able to get its silver and gold resources. In 2005, when gold prices started to move up, we went back to the Brucejack project and started drilling it as part of Silver Standard. We started hitting not only low-grade material but high-grade material as well. We hit some high-grade material that I thought was quite interesting.
After 25 years with Silver Standard in 2010, I resigned. The board decided they wanted to bring in someone else as we developed it into a mining company with the Pirquitas project.
Later that year, they decided to sell the Snowfield and Brucejack assets. I looked at some of the drill core and saw some of the most spectacular high-grade gold I’ve seen in my career. I agreed to go and we basically launched Canada’s third-largest IPO that year. We raised $283 million and I agreed to buy this asset back for $450 million. Just 10 years earlier we had purchased it for about $3 million. By discovery, we had taken it from a resource of 400,000 ounces of gold to over 45 million ounces of gold. It was low-grade, but hiding within it was the high-grade Pretivm project in the Valley of the Kings. That’s what I’m currently working on.
TD: What were the signs that you and your team saw in the company that held the Brucejack project at that time, which you acquired for about $3 million?
BQ: It came from another individual at Sprott who is very important, Rick Rule. Rick had brought it to my attention and said, “Listen, there are 16 million ounces of silver there.” We had a philosophy at Silver Standard at that time of buying silver ounces in the ground at pennies per ounce.
The company had $2 million in cash. It had 16 million ounces of silver. We paid five cents an ounce for that. So that’s the $3 million that we came up with. We really didn’t pay anything for the gold.
There was large alteration around it and in the Snowfield area. The mineralization at surface looked very similar to some of the gold material that I had worked on at Hemlo. It has got molybdenum and other things. So we started drilling it off and eventually found 34 million ounces of gold, right at surface.
One of the challenging things in the world right now for resource geologists is finding these large deposits at surface in good, safe jurisdictions.
So that alteration led us to the project and when we picked up in Pretivm, it was the high-grade intersections that led us to continually keep drilling. Ultimately it led us to the high-grade project that we have at Brucejack today, which is made up of some 13 million tons containing each 15 grams of gold on average. That’s about 7 million ounces of gold in high-grade material, in the Brucejack area.
TD: Bob, I’ve read a report that suggested that Brucejack is the fifth undeveloped gold deposit on the planet with the highest grade. If that’s correct, could you speak to the quality of the project when you compare it to other deposits around the world? What might be its competitive advantage? What do you think the deposit holds?
BQ: One way to talk about that may be to actually look at the rock and I happened to bring a sample along today to show individuals.
You can actually see gold on here. Wherever this kind of gold color you see is actually gold mineralization. That’s what we find. It’s very rare to find this much high-grade gold material in deposits now. It’s probably some of the highest-grade material I’ve seen in my 40-year career.
You have a high-grade gold and a low-grade halo. It’s the appropriate mixes of those two together, the high grade and low grade, that makes up the 15-gram per tonne reserve that we have identified for the project today. So when you look at it in a global sense, you’re right that we’re one of the highest-grade undeveloped gold projects. We’re moving into hopefully permitting it for production soon.
As for its advantages – one is that it’s located in Canada, and specifically in British Columbia. British Columbia is a province which has lots of minerals. It has lots of operating mines. As a matter of fact, over the last number of years, they have opened up about six new mines or additions and we believe we’re well in the pipeline. Maybe one of the new mines will get opened over the next two years as we continue to evolve the project.
So you’ve got the right location, in the mining-friendly province of British Columbia. You’ve got the right commodity – gold — and you have the right amount of it so that our environmental impact is pretty small.
Our total disturbance at the site will be about eight hectares because this is going to be a high-grade underground mine. We will take the gold out, process it, and return most of the material back underground in the project.
So its location, in an area with previously-permitted mines, having the right commodity, and a small environmental footprint are competitive advantages which have allowed us to take this from the discovery of the Valley of the Kings in 2011 to today, four years later, where we’re now waiting for the permits to start construction and put this in production by 2017.
That’s 5.2 years from discovery to production. That’s pretty quick and it’s because of all these positive aspects of the project.
TD: In terms of the milestones that are left over the next two years — a production decision, permitting and then construction of the actual mine itself — do you expect that those phases will be a bit easier to manage given the market today?
BQ: Yeah, that would be true. Right now, there are certainly other projects in the pipeline, but we can move quickly through the environmental permitting process due to the small environmental footprint and to the fact that it will allow us to employ people in the northern part of the province. So there’s certainly an interest for the governments to move this forward and provide those kinds of jobs.
We’re in an area where there has been unemployment, which allows us to do the training that we need for the 40 or so thousand people that live in Terrace, Smithers or Hazelton, who could be employees that we can capture within that northern area to come work at the site.
Working underground is often operating heavy equipment and blasting. Eskay Creek, which is about 15 kilometers north of us was one of Canada’s highest-grade gold mines and they employed a lot of first nations in the region as well as others. So there are people there who have the skillsets, who may have now gone to the oil patch or elsewhere, who could now come back to areas where they are actually from and be able to work with our project. So there are lots of positive aspects in that regard.
TD: I want to ask you about the market that we’re in right now. To give it a little bit of context, I once asked my boss Rick Rule, “How do you think this current market is affecting some of who I regard to be the great mine builders of the previous generation?” you among others, and he said, “Well, I don’t think Bob Quartermain could care less about what’s happening out there in the market in terms of his focused activities. He’s not stopping for any of that.”
But I would like to ask you to opine if you could on the market as a whole. Do you look at other projects? Do you look at pricing and do you have any thoughts there?
BQ: The resource business is quite cyclical as we know and we’ve seen a lot of volatility in the gold space, which causes some concern amongst investors because we all want to be able to make money.
It’s certainly a concern. I think to Rick’s point, like him I’ve been doing this for 40 years. I’ve been running public companies for 30 years. So I went through the crash of ’87, through the issues we had in the early 90s, the dotcom bubble, late 90s, and the low in the resource cycle. What we’ve always done is kept our focus of what the endgame is going to be, which is basically to create shareholder value in the longer term.
So when you think about the Pretivm story to date, we IPO-ed at $6 a share in 2010 in December which was fairly high. Here we are four years later. We had the gold price run up and come down. We have evolved our project. We’ve issued more stock and yet our share price is still above that price point. We’re still up 20 percent. Last week we were up 30 percent from our IPO. Not a lot of gold equities out there that are trading higher than they were four years ago.
By focusing on the outcome of the project, recognizing we had a good quality gold project, we were enhancing shareholder value through drilling it, adding to the reserve base that we had, and showing there’s still exploration potential.
Then, we stick to a game plan, meet those milestones and finance opportunistically. We have yet to finance below our IPO price, which speaks to the quality of the asset. We’re always aware of our balance sheet to make sure we never get undercapitalized and recognize you need to finance in the market when financing is available, when these windows open and when they close.
Often people have a better idea of what they think their stocks should be worth but the market is pretty good at determining what it actually is. So if you can finance and continue to advance your project in these market conditions, that’s what you need to do.
Often what occurs is that people haven’t been able to keep strong balance sheets, so we start to see a rationalization through mergers, the same way they occurred back in 2000 when we started acquiring projects in Silver Standard. People had the assets but they didn’t have the working capital to continue to take them forward. A merger enabled you to do it. From that point, Silver Standard stock ran from a dollar all the way up to over $40 and people really benefited from that.
So at this time in the cycle when it’s the most difficult is often the time when you look for the people that you want to back. Look for the quality assets that are there and invest in those. That’s where you’re going to make money as we come out of the cycle, which ultimately we will do. We just don’t know exactly when that will happen.
TD: Bob, I’ve read that you took Silver Standard from a starting market capital of a million or two million and retired when it was in the range of about 2 billion.
TD: If we could go back to the formation period of the company, how did that happen? How did you get involved? Who financed it and what was the market like at the time?
BQ: Well, Silver Standard is a great company. It has been around almost 70 years now. It started in 1946. So it has a long history. It worked in projects in British Columbia. Teck Corporation invested in 1969 and became its largest shareholder in 1985. As I mentioned, they asked me to come out and take it over.
So from 1985 through to 1992, we were focusing like many other junior companies in Vancouver, on looking at projects and trying to get some traction. In 1992, Rick Rule and Jim Blanchard came to me and said, “Listen, you’ve got Silver Standard. You’ve got the right name. We like silver. How about we finance you and you go out and look for silver assets in the ground and acquire them now on the hopes that silver prices will go up?”
That was in 1992. We needed a lot of foresight then.
So we did our first financing. We did three million shares at 78 cents and raised $2 million. At that time, the company had a market cap of about $2 million. We did the raise through individuals like Rick Rule and Jim Blanchard. As Rick will say, it was one of the more difficult negotiations we had. It got down to pennies. I wanted 80 cents. He wanted 78 cents and eventually we saw it off.
But it was probably the best decision for Silver Standard shareholders because it allowed us to go out and start acquiring assets in the ground. The first one we acquired was the Bowdens project in Australia and then things like the Newhawk project. We acquired the Candelaria Project. We eventually accumulated almost two billion ounces of silver in the ground, plus we grubstaked Bud Hillemeyer and Perry Durning who were excellent grassroots explorers. We grubstaked them for $20,000 a month and they went down to Mexico and found the Pitarilla project after a few months. So a $40,000 investment discovered us almost 700 million ounces of silver.
It was doing things at the time when other people weren’t doing the grassroots work that allowed us to grow Silver Standard over that 25-year period from $2 million to $2 billion — basically a thousand-fold increase of market cap. The share price went from 78 cents to as high as $48, so almost a fiftyfold increase in share price as well.
What’s satisfying about the industry is focusing on quality assets that ultimately can be developed. We saw that with the Pirquitas Mine. They got it operating. Silver Standard is still a growing concern because of that initial investment that I think Rick and Jim made back then and our ability to find assets that we could still put into production. From that, we’ve now been able to evolve into the Pretivm story.
TD: It’s interesting to hear you talk about discovery and the value that can be created out of it. You did note to me a couple of years back in an interview that, “what I’ve liked throughout my career has been discovery because of the way that value can be created by using the drill bit discovering something in the ground.”
I want to ask you here now, when you look around the world today, what are your thoughts when you see declining discovery rates and over the past decade, larger quantities of money being spent on exploration, and yet less being found compared to the late 80s and early 90s? What are your thoughts there?
BQ: Exploration is a much more challenging industry than when I started perhaps 30 years ago, just to get the social license to go on property and look at it, whether you’re dealing with indigenous populations, First Nations here in Canada or others located in other jurisdictions. One has to take a much more holistic view in that. It also means costs go up.
You have a lot of what are often upfront payments or costs prior to getting access to land to go and explore it. We’ve been exploring mineral resources for the last few millennium, but if you look at more modern techniques over the last say 50 years, a lot of the near-surface deposits have been found, whether the large copper projects in Chile, the large open-pit gold projects in Nevada, the large iron ore projects in Australia, or the large coal projects. As you point out, a lot of the easy-to-find, near-surface projects have been discovered and are now being developed. Finding more of the same will become more challenging.
There are certainly new projects to be found but often they’re in geopolitically challenged areas. One thing we have to focus on in the industry is certainly safety of our people. It’s one thing that we in the industry have to continue to be aware of. Even in parts of Mexico now – with the drug issues going on — you can have people compromise what’s going on. The Middle East area certainly has lots of opportunity for new discoveries.
So our costs have gone up and I think that ‘peak discovery’ may have come. Chuck Jeannes, the President of Gold Corp made a comment earlier in late November, I think at a conference, where he thinks we’ve had peak gold. Some of the major companies are starting to see their production tail off and we’re not finding those large 20, 30, 40 million-ounce deposits at surface that can be brought into production relatively cheaply, rather than the many billions of dollars which are now needed.
At the end of the last century, the average gold deposit graded 10 grams per tonne starting in the 1900s. The average grade now is less than a gram, which makes our own project quite attractive with an average grade of 15 grams. It’s 15 times higher than the average grade, which may mean you can get really good margins from that.
But larger projects need a lot more capital in areas where they can be challenged because of government taxation. It’s tough to get the political license that we need to develop. It means that exploration and finding these large discoveries is more challenging. But it’s what we need to do and I think it’s what Sprott does very well. It continues to fund the junior individuals who can go out and make a discovery. Where you create incredible shareholder value is through that drill bit.
TD: I would like to ask you about the global macro picture for gold. What are your thoughts? You’ve also noted to me in the past that you like visiting your shareholders regularly and Asia is probably now a larger focus of your attention with the investment of Zijin Mining. What are your thoughts there?
BQ: That’s true. I think in the gold space right now, we’re seeing what everyone in the press talks about — it’s quite obvious that there is a transfer of physical gold from the West to the East.
We see it from the fact that China is now the world’s largest gold consumer, taking in well over 2000 tons in gold imports last year. Recently with our new strategic investors Zijin I’ve been traveling through Shanghai and Hong Kong. When I go there, I usually go wandering around the jewelry stores or some of the areas where they’re concentrated. They’re full of individuals buying jewelry. Over there of course, fabrication of the commodity is done relatively inexpensively, whether in India or other places. So it’s sold by the gram and what you will find is just a lot of people buying gold jewelry.
In my last trip just before Christmas, I also flew to the Middle East. So I went to Doha and went into Dubai. When I finished my meetings in the day, I would go to the gold souks at night because I really like gold. I like the commodity and just going there and seeing the sales that are going on and again the shops there were full. So now that we’re down in this $1,200, $1,100 gold price range, we’re seeing a lot of people coming in and buying the physical. It’s the real transfer of the commodity from the West to the East which I think bodes well to keep a floor on what the price will be and then going forward as we talked about earlier.
If peak gold production is behind us, as mine production starts to come down, the only real sources of gold are scrap or gold held in bank vaults. The fact is that we continue to see more demand as China’s GDP grows. China’s GDP ten years ago was maybe a few hundreds of billions of dollars. It’s now estimated that it’s close to $9 trillion. China is still growing at seven or eight percent a year.
When you look at it in absolute terms, that’s $600 billion a year potential growth. That’s a third of what Canada’s GDP is on an annual basis where we’ve got two percent growth here. Key going forward is that the shift of gold into areas where people actually want to own it. That can help offset what goes on in North American circles with the paper trading of gold either in the futures markets or people perhaps buying into an ETF. From my travels, we’re seeing individuals wanting to know real gold and taking it out of the system.
TD: I would like to ask you about the quality of people. It’s one of the things that my boss Rick Rule really emphasizes in conversations. Quite often he will mention your name along with a few others as great examples of quality people.
How have you thought about that aspect of the business throughout your career? Do you come across people of quality and earmark them and say, “Well, I may not have a deal now but maybe at some point in the future, I would really like to work with that person”? What are your thoughts on that topic?
BQ: Yes, I mean the success of any company largely is thanks to its people. A corporation, although it’s defined as an entity, it’s made up of the people that work there and the people that lead it, whether it’s the board level or whether it’s the managing group or the employees.
I’ve been very fortunate because in Silver Standard, when I joined, Linda Sue was the corporate secretary and the only secretary we had and she remained with the company for over 20 years. Over that time period, we were able to grow it, bring in other individuals like Ken McNaughton who I’ve now worked for 25 years, and Max Holtby who works at Pretivm. I’ve been working with him for 30 years. There’s also Joe Ovsenek, who has been there 18 years.
So we’ve been able to find people that have the same values. One of the values we’ve had in Silver Standard and we have with Pretivm is focusing on our shareholders.
So if you’re bringing people who understand that you’re trying to work for the best interest of your shareholders, they have the same values and doing that, then it allows you to grow the company and look for assets.
People often say, “Well, maybe individually we may not be the best in the business but collectively we are because of the success we have.” So it’s a place where the sum of the parts is greater than the individuals that you have. We’ve had over 25 years together now and – well, 30 years since I started with Silver Standard.
I have been very fortunate to find people and our way to grow the business hasn’t been to go out searching for them often. It’s through contacts. Rick may know an individual, or people who work for us know quality individuals they’ve worked with in the past. They want to continue working with them.
When you bring them in, that synergy enables you and helps you to advance and create a company that has a good dynamic group working for it.
TD: Bob, looking outside of the company, are there any opportunities you think are really interesting where if you had to start your career again, you would say, “Oh, well, I would go in this place. I would probably do that”?
BQ: For someone starting out, it might seem to be challenging but I’d say the Middle East, places like Qatar. They sit on top of incredible daily wealth generation. At Abu Dhabi they’re sitting on a trillion dollars. When I’m over there, it’s interesting. There are lots of young professionals like yourself who are there, who may have been from North American cultures and they start their careers there. That career may take them into investing and natural resources like oil and gas or looking at investments in places like Africa.
It’s certainly a great training ground and there’s a certain vibrancy around it. Now, one has to deal with the political aspect of it. As it relates to my own career, my passion for what I do, I enjoy geology and the discovery way to creating value.
For university kids starting out, it’s often a challenging time. But find a company. Work for it. I worked for many years for Teck, first as a mine geologist and then just as an exploration geologist. It may have not been the most financially accommodating job that I had but it’s one that I really had a passion about doing.
Getting out and doing your passion and then achieving success as I have with Silver Standard and subsequently Pretivm is certainly rewarding. For individuals nowadays, just make sure you find a passion that you want to do and then get out there. Sometimes you may have to start as I did as a student, as a dirt bagger, taking soil samples or running geophysics lines because that was all the work that was available. But staying within that has certainly been rewarding and it’s all about finding your passion and then going forward. In the resource business, you can work pretty much anywhere in the world.
TD: Bob, are there a few things that you would advise to a new investor to this space?
BQ: I think the Sprott model, and one that I follow myself, is first of all to invest in the people. Find the people who have had success in the past whether it’s guys like Ross Beaty, Lukas Lundin, or the Hunter Dickinson group. Look at new guys like Mark O’Dea coming up and where they’re investing. Is it a place you’re comfortable with? Are they finding investments or new projects in politically secure areas and ones that you would feel safe in?
They’re very good at going out and finding these because success usually breeds further success. In my case, I decided I would rather come back to British Columbia where you know what the law is and how things are defined. But I do have personal investments in some of those individuals, not so much because of the asset they have but because of the success they’ve had. I think that’s the key message that you get coming from the Sprott organization — it’s investing in individuals and then ensuring that the quality assets they have are ones that are going to ultimately be rewarding in the proper cycle to the clients at Sprott.
TD: Bob, in winding down, is there anything else you think we may have missed?
BQ: No, I think we at Pretivm have been very fortunate in discovering a world-class asset. We’ve moved along quite quickly and hopefully a little over two years from now, we will be pouring gold bricks from it. That will be very satisfying for us.
TD: Bob Quartermain, President and CEO of Pretivm Resources, thanks for sharing your comments with us.
BQ: Great, thank you very much.
Tekoa and Pretivm Resources will be attending the Sprott-Stansberry Vancouver Natural Resource Symposium, July 28-31 2015. Click here to find out more.
For questions or comments regarding this article, or on investing in the precious metals & resource space, you can reach the author, Tekoa Da Silva, by phone 760-444-5262 or email [email protected]