Business Lessons from Bieber

Issue 168, September 2016

“It's not the best quote,” says Ian Ball, president of Abitibi Royalties, “because it comes from Justin Bieber, but he does say, the grass isn't greener on the other side, it's greener where you water it.”

The Canadian pop singer is one of several eclectic sources drawn on by Ball, from billionaire Warren Buffett to David Harquail at Franco-Nevada, as Abitibi maps out its distinctive strategy in the gold mining industry.

Abitibi owns three royalties over the Malartic mine in Quebec, currently Canada's largest gold mine. Two are going into production, as the mine expands, whilst the other covers Odyssey, a hotspot for exploration within the Malartic mining camp. Agnico Eagle and Yamana Gold, who co-own the mine, have ramped-up investment at Odyssey, with nine drill rigs turning, leading to new discoveries with each operating update.

“They talk about there being two blow-out zones of mineralisation,” Ball says. “I don't know if it's the largest, but it's certainly one of the largest exploration programmes in Canada right now.”

Royalty Package

Abitibi is the smallest player in the royalty sector, but the market is beginning to ascribe value to its royalty package, Ball says, nudging its C$80m ($61m) market cap above its cash position of C$51m ($39m). “Two years ago we were too small to consider... We still are the smallest, but we're on the map now.”

Ball has spent the last year running a “Royalty Search”, an online form, where small companies can apply for a deal. Rather than drop properties, miners can ask Abitibi to pick-up their claim fees, in exchange for a royalty.

Ball's buying criteria were low: licenses had to be near an existing mine (within 50 kilometres), with “evidence of mineralization”. Due diligence is “VERY fast”, the form says. But Ball is happy with what he bought, reviewing 95 submissions, closing 12 deals.

The best, he says, is a royalty over the Menderes property, surrounding a gold mine in Turkey owned by Eldorado Gold. “Eldorado has drilled right up to the property boundary,” Ball says. “We paid $65,000 for a 3 per cent royalty.” He has left the Royalty Search open, but with gold up, submissions are down. Companies are “finding other ways to raise capital.”

Perplexing

Ball's business plan for Abitibi is so simple, it's almost perplexing. Don't expect equity issuance. “Just because the floodgates are now open for capital raising, doesn't mean you should do it.” Nor does Ball sound too keen on merging with a larger rival. “When I look at our performance, whether it's the last three years, the last year, you name it, we've outperformed every royalty company not by a little bit, by a lot.”

Venturing into the market to bid-up royalty deals is also out of the question: “If you're the one that wins the auction, you probably lost.” Instead, Ball plans to use Abitibi's cash position to keep buying back the company's stock.

When he was parachuted into Abitibi in August 2014, it had nearly 12 million shares. Today, it has 11.3 million. Ball wants the figure below 10 million. “We might be the worst industry in the world for the issuance of equity,” he says. “Most of the large cap gold producers in Canada, they all have a billion shares outstanding and they trade for below $10 a share.”

Ball also uses his monthly salary to buy stock. He and gold investor Rob McEwen, who is Ball's mentor, now own roughly 13 per cent of Abitibi Royalties between them. If buybacks continue, they will be the last two remaining investors, some time around 2026.

“We have to earn the trust of the market and show them that we're not going to be like every other mining company,” Ball says. “Our overriding goal is share price: what's going to be best for the share price, not the size of the company. We think Odyssey is going to be the big thrust for us. If you'd ask me at the beginning of the year whether they would have nine drills on the property, I would have said, 'No way.'”

“It’s certainly one of the largest exploration programmes in Canada right now... we’re on the map now.”

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