Mining Turnaround Story vs Retread Story: A Subtle, But Important Difference
If you want to succeed in investing in natural resources, it is important to be able to differentiate between a ‘turnaround story’ and a ‘retread story’.
Mining companies can fail for lots of reasons: Low commodity prices, technical failure, the wrong decisions being made by management, running out of cash and not being able to raise more, the wrong geology, no mineralisation in the ground, not making a discovery, inability to get a permit or licence to continue working, inability to receiver metal due to metallurgy…. the list is long and painful. One seasoned geologist tells us that in Australia, 1 in 2,700 exploration projects make it through to the development stage. And of those, only 1 in 10 gets into production.
In bull markets, when commodity prices are running high, management teams reach down to the bottom of the filing cabinet, pull out some of these long forgotten projects, dust them off and repackage them. Most of these projects could work at high commodity prices. Some won’t be economic at all, but, because thematically they have the right commodity in the ground, a story can be created around it and money can be raised. This is what lures management teams in. Money can be raised to pay salaries, consulting fees and bonus whilst they evaluate the project. Some will work and most will fail. So let’s make sure we can spot the ones most likely to do so before investing.
Mining investment is quite often about timing. Even the best management teams in the world will struggle in a bear market. If commodity prices are low, money tends to be scarce and projects become cash constrained. Companies will not have the money to do what they need to do. We’ve interviewed a number of idled companies in the last year that fall into this category. It’s hard for management teams to get the market excited about a tired old story. There is a whiff of failure about them. But therein lies the opportunity.
With a little love and attention, and more importantly, cash focused on the right things, the project can have a new lease of life. We tend to favour management teams who have been through this scenario before. Who know where to focus efforts and be very efficient about where money is and is not spent.
But then there are retread stories.
Whether talking about failed exploration or failed operating companies, management teams will rebrand and rename the project and then raise money with the stated position that this time things will be different. Management will tell you that data will be reinterpreted. They’ll claim that Artificial Intelligence (AI) will see things that had been missed before and that new technologies will be used to find mineralisation hidden to the previous one, two or three previous exploration teams. They may say that the previous operation had been affected by a ‘one off’ event which will not happen again. Or that the company had been cash constrained by factors outside of its control.
You need to look at the reasons the project failed last time round. What work was done by the management team before rolling the asset into a public vehicle to understand how to solve the problem. And here is the key one, how much of their own money (not how many shares) have they put into the project. How long is the hold period on their shares? How many times has this project been dusted off? It’s very revealing to us that when we discuss certain other projects with management teams, they know which projects are fantasy being peddled to an unsuspecting public. But they don’t say anything.
Relevant Management Teams
Not all management teams will play this game with malicious intent. They may inexperienced or naively believe that they can succeed where others have failed. The numbers suggest otherwise. The road to success is littered with many, many failed attempts. Therefore, it can make decision making that much harder for investors, especially if you don't have the time or energy to commit to thorough due diligence.
If you believe the management team has the experience to do as they say ie: have done it before and made shareholders money, you might choose to believe this to be a ‘turnaround story’.
If however, you doubt the credibility of the management team, this may just be a retread story designed to raise money to pay themselves large salary and incentive packages until the next gig comes along. In these instances, walk away, or at the very least do more diligence. We would want to know how much of their own money the team had invested. In actual dollars terms. Not how much cheap stock they have given themselves. How long of a lock up or hold period they had on selling shares or warrants. How much do they intend to pay themselves and what does their incentives package look like? And what precisely is the plan to change the fortunes of the asset, where others have failed before.
It would be true to say that most junior mining companies fail along the way taking investor’s money down with them. The single biggest factor in the success or failure of a junior mining company lies with its management team. An experienced, honest and, competent management team has the following key qualities:
Relevant experience in the following areas:
- Operated in same mining jurisdiction
- Relevant geology
- Engineering, and
- Connections to potential financiers and partners
Previous success in the following areas:
- Mining industry in project management and funding
- Delivering returns to shareholders
- Transparency with their financial records, and
- Their overall integrity and accountability
- Management team who are also shareholders. The larger the management's stake in the company, the greater the alignment with shareholders. This motivates management to do right by the shareholders.
A Turnaround We Like
To increase production and maximise shareholder value, Superior Gold (TSX-V: SGI) initiated a series of strategic changes in July 2020. These changes included a management team restructure. By July 2021, the company gained high quarterly production and a solid financial position in cash and assets. Additionally, Superior Gold share prices steadily increase every quarter. These improvements reflect the changes in management and leadership strategy.
About Superior Gold
Superior Gold is a Canadian based gold producer with operations in Western Australia. The company started in 2017 and now operates 100% of the Plutonic Gold operations. The operations include the underground mine and central mill, plus numerous open-pit projects.The Plutonic mine has been in production since 1990 and is one of Western Australia's largest historic gold producers.
Superior Gold aims to expand production to yield high returns for shareholders. The 2021 target for Superior Gold is between 65,000 and 75,000 ounces, with the ultimate goal of delivering at least 100,000 ounces of gold every year.
Strategic Management Turnaround Plan
In July 2020, Chris Bradbrook, founder of Superior Gold Inc, stepped down as President, CEO, and Director of the company. In his place, Tamara Brown, already on the board as an Independent Director stepped in as Interim CEO of the company.
Tamara Brown has had experience in leading corporate development and strategic reviews which was crucial to determining how best to increase shareholder value . The company looked at potential joint ventures, mergers and sales, and ideally a permanent CEO based in Perth, Australia.
As interim CEO, Tamara focused her expertise on investing in gold drilling and exploration infrastructure. Also deemed as “putting money in the ground" (7). The aim was to generate enough inventory to support further development phases. One of the biggest challenges facing Superior Gold was the low productivity in the mines.
This resulted from the inaccurate prediction of the movement of gold underground. A miscalculation which meant that only 50% of gold resources came from mines. The company transitioned to using the latest 3D modelling technology to predict the ideal drilling locations in the Plutonic mines. This measure also means improving the mine planning and targeting operations.
But, this shift in focus from share price to on-the-ground fleet and technology investment is not without its challenges. Collecting 30 years’ worth of historical mining data for 3D predictive modelling requires a highly experienced team of geologists. Additionally, doubling the company's production capability to match industry peers also takes considerable investment in human resources.
Finally, the Covid-19 pandemic also influenced the company's decision-making process. Mining professionals now work in their home countries. The decision simply minimised the impact of travel restrictions and quarantine requirements. This meant finding talent already based in Australia who identify with the company's turnaround plan.
In July 2021, Tamara handed over to Chris Jordaan as the President and permanent CEO of Superior Gold (8). He brings over 30 years of the mining industry to the company. As expected, he will continue with his predecessor's vision of increasing the share value. The primary focus will be on mining infrastructure development.
Highlights of Superior Gold’s Recent Results
Here are the key results of Superior Gold Inc turnaround strategy:
- Superior Gold Inc increased its second-quarter gold production by 10% to 19,356 ounces in July 2021.
- The company has expanded its high-grade mining front in the Baltic Gap. This will increase production and improve mining grades and efficiency.
- Superior Gold Inc fully repaid its gold loan to Auramet International LLC in Q2 2021. The step eliminated its debt obligations, improving cash flow.
- Operational improvements have increased cash flow to up to $5 million to improve the company's market position further.
- The company also reported no incidences of COVID-19 for five consecutive quarters as of May 2021.
Junior mining companies are high risk, high reward investment choices. However, investors must ask the right questions and do their due diligence. Superior Gold is one of many junior mining companies that is likely to succeed. The collective experience of the management team and their track record of success make this company worth your while.