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Unearthing the Value of Midas Gold (TSX: MAX) with CEO Stephen Quin

June 17, 2016

Midas Gold (TSX: MAX) (OTC: MDRPF) (website) controls the world-class Stibnite Gold Project, located in the historic Stibnite-Yellow Pine mining district in central Idaho, consolidating ownership of this important past-producing gold district under one owner for the first time in its history. With a multi-million ounce high-grade open-pit gold resource already defined, important antimony credits, and significant room for further growth, Midas Gold's Stibnite Gold Project is one of North America's premier development stories.

 

Gerardo Del Real: This is Gerardo Del Real for Resource Stock Digest. Joining us today is President and CEO of Midas Gold, Stephen Quin. For those of you not familiar with Stephen, he's been CEO and President of Midas Gold since 2011. Prior to that he was President and CEO of Sherwood Copper Corporation, where he financed and built a copper-gold mine in the Yukon. He then became President and COO of Capstone Mining, when the 2 companies merged. He was responsible for the operation and expansion of both the merged company's mine in Yukon and Capstone's mine in Mexico. He was Executive VP for over 18 years at Miramar Mining. Miramar acquired the Hope Bay project in northern Canada for 19.2 million in 1999, and Stephen took resources from 4 million ounces of gold to over 10 million ounces. He then was bought out by Newmont for $1.5 billion in 2007. Stephen, thank you for joining us.

Stephen Quin: Thank you Gerardo, and thank you for the opportunity to talk to you.

Gerardo: We're excited to have you on. Now, Stephen it's been a few months since the last time we chatted, and there's been several important developments at Midas Gold, not to mention a better gold junior market that I'd like to ask you about. Let me start however by asking you how you got involved with Midas Gold and the Stibnite gold project.

Stephen Quin: Certainly, well after 5 years as President and CEO at Sherwood Copper and then Capstone once we merged, I was President and COO for a couple years. It had been a pretty intense 5 years, so I decided to step down and really what I was looking for was, the stage of company I really enjoy starting new companies and taking them through to significant value over time. Capstone had achieved that. I was looking around for the next opportunity. When it was announced that I was leaving Capstone, I got approached with people with a variety of opportunities, trying to get me involved in them and Midas Gold is the one that really appealed to me because of its location in North America and just the scale and potential of this project, which was very much unrecognized at the time.

Gerardo: Excellent. Stephen the Stibnite gold project, in my opinion, is if not the best, one of the best undeveloped gold projects in all of North America. Can you explain when makes the project attractive enough to catch the attention of people like billionaire John Paulson, Franco Nevada, the largest royalty company in the world, Teck, and several of the very influential and long-term shareholders that have supported the company during the last few years?

Stephen Quin: Certainly, essentially what really drives all of those parties interest is the potential for a very large scale, low cost, mining operation. We put out a pre-feasibility study at the end of 2014, which laid out the kind of project that this could be, and where it really stands out is just the scale of it, relative to what's out there in North America. The U.S. Government puts out a list of what's out there in the form of mines and development projects and resources in the United States, and if you benchmark in the pre-feasibility against that information, our project has the 8th largest gold reserve in the United States. If it was in production, today it would be between 4th and 6th largest gold mine in the United States, and would be the 4th highest grade open-pit gold mine in the United States.

All of those benchmarks are, obviously, pretty exceptional on a North American basis, but also when you look at who owns the top 10 largest gold mines in the United States, they're all major companies, none of them are independently owned. When you look at the largest resources in the United States, they're nearly all owned by the major mining companies. It's very rare for investors to have the opportunity to access and participate in a project that has size, scale, grade, good margin and a potential substantial production level that isn't already owned within a major mining company. There's just very few of those investment opportunities out there.

Gerardo: Fantastic, thank you for that Stephen. We mentioned John Paulson, and we'll talk a little bit about how he got involved in the C$55.2 million dollar financing that Midas Gold had recently completed, but before that I want to ask you, can you tell us about the due diligence process and what it's like when a Franco Nevada or a John Paulson decides they may want to be involved with Midas Gold?

Stephen Quin: It's a very rigorous process when those kinds of major investment decisions are made. They take many months to many months and they start out with initial meetings and talking about public disclosure, but then it advances on from there and involves going to the site, a meeting with regulators, community leaders, doing their own independent due diligence. They often hire their own independent consultants on resources, on permitting, on many different aspects of the projects, the economics of it, the engineering of it and so on, and go through a pretty rigorous due diligence process to make sure that the investment they're making stands up to their scrutiny as well as ours. Obviously, we've put out our information to the best of our knowledge, and we've used very top notch third party consultants to do that work and provide the information that we've provided to them, but they then independently go out and verify that. It's a rigorous process of looking through every aspect of the company and the project to make sure that they're making an investment that they believe will provide them the returns they're looking for over a period of time.

Gerardo: Excellent, now Stephen, I'm working off of memory here, but if I remember correctly, when you struck the deal with Franco Nevada, I believe at the time, and this was a few years back, it was one of the few royalties that Franco Nevada had invested into at the stage that the project was at, do I remember that correctly?

Stephen Quin: Yes, that's correct, at the time Franco Nevada was very much focused on taking the gold out of other mines that were producing copper, silver, or something like that, where gold was a secondary medal to the mine. They were primarily focused on operating mines. They then started to move a little bit earlier into mines that were being built and becoming part of the package that helped finance building of a mine. With our project, we were the earliest stage project they'd gone out and done a specific transaction on. It's not to say they didn't have royalties on other early stage projects, because sometimes they acquired a package of royalties where there were early stage projects in that package, but they weren't their focus, they were focused on the larger asset or whatever it happened to be. When we negotiated with Franco Nevada, one of the unusual things about that transaction was that this was only at a preliminary economic assessment stage, we hadn't even gotten the pre-feasibility study done, so again it was reflective of the quality of the project.

Gerardo: Absolutely. Back to the project, the project has reserves of 4.6 million open pitiable gold ounces at a grade of 1.6 grams of ton gold, is that correct?

Stephen Quin: That's correct, yes.

Gerardo: Wonderful, and then there's another 885 thousand ounces in the indicated category, grading 1.77 grams per ton gold?

Stephen Quin: That's correct.

Gerardo: A little over a million in the inferred category, grading 1.32 grams per ton gold as well, is that correct?

Stephen Quin: That's correct, yes.

Gerardo: Perfect. That in itself, obviously, is very impressive, it's world class, but there's also a substantial antimony resource on the property. Can you tell me a little about that and why it's important, not only economically, potentially, but also the the permitting process which Midas will be navigating?

Stephen Quin: Certainly and I think, perhaps, it's worth also mentioning, within that overall gold reserves, the Yellow Pine deposit, which makes up about half of the total reserve has a grade of 2 grams a ton, so Yellow Pine is 2.5 million ounces of 2 grams a ton, so while the overall grade is 1.6 g/t,  the first number of years of mining is 2 grams a ton, which is pretty exceptional for open pit gold grades in the U.S.. The average grade in Nevada, which is the main gold mining center in the U.S. is about half a gram a ton, so this is significantly higher grade than the average open pit.

Turning to the antimony side of things, historically this was primarily an antimony mine with gold as a byproduct, and operated from 1928 to 1952. The antimony was primarily in demand for military purposes. It was relatively small scale in the 20's and 30's, once the 2nd World War, and then, subsequently, the Korean War were underway, there was a substantial amount of military demand for antimony, which is used a combination of munitions, but also as a flame retardant to stop things burning. A simple analogy was a lot of the aircraft carriers, for example, in the 2nd World War had wooden decks and if something crashed onto them, whether friendly or unfriendly, the wood could catch fire. They put antimony-rich paint on the deck so that the wood would not burn.

It's gone well beyond that in the modern era, it's widely used as a flame retardant in plastics, anything synthetic, nylon, foam in chairs, and couches, and mattresses, carpets in industrial buildings where you've got nylon carpets, children's clothing, the insulation around copper wire all have to have antimony in it so it doesn't catch fire and spread fires from say, a light bulb sparking out, down that wire and burn the building down. Very important from an industrial perspective, it still maintains its military aspects, but obviously very widely used in both the military and energy sectors and household side of things. It adds a twist to this project.

Economically, there's about 100 million pounds of antimony reserves to be mined in the deposit, there's almost certainly quite a bit more. There's more in resources, there's other high grade antimony areas that have been drilled but are not part of the resource, but it adds a twist to the project, that it's not just a simple gold project, it's a project that has a strategic metal that is very important. Part of the reason why it becomes strategic is because essentially China dominates the world supply of antimony, it produces about 90% of the world's supply of refined antimony, and antimony products used for flame retardants, if you flip back to my earlier comment and consider that one of the major uses is military, does the United States want to be dependent on China for critical minerals that have strategic importance for military purposes? There's a significant amount of interest in seeing the antimony side developed in the United States so there's a domestic supply for antimony for strategic purposes. It has a strategic overtone to it and critical minerals overtone to it that definitely catches people's attention.

Economically it's important, it's about 5% of the cash flow, but it's not the overriding aspect of the project; this is a gold driven project, but the antimony reduces the cash costs by about $50 an ounce because of byproduct credit. It's a nice addition, but it's much more the strategic critical minerals implications of the project that could have an influence, both on the presenting side of the equation and on the development of the project from an economic perspective.

Gerardo: Wonderful. You mentioned permitting, the one question that I always received from clients when I discussed the company, centered around the restoration that is necessary to put the project back into production. For those that are new to the Midas story, the area has been actively explored and mined for over 100 years. Prior operators didn't exactly pick up after themselves, and one of the concerns that I've heard voiced, is that the legacy impacts might impact your ability to secure the necessary permits to put the project back into production. I've always felt that the mess left behind would actually be beneficial to the Midas cause because bottom line is, if you don't clean it, who will? Can you tell us a little bit about what you've done to address the restoration issue, and the reception that's received from the local community?

Stephen Quin: It's ironic because what some people consider the negative is actually likely the biggest positive.

Gerardo: Right.

Stephen Quin: If this was a greenfield site, if it had been untouched, I think it would be very problematic to permit to mine here.

Gerardo: Correct.

Stephen Quin: The opportunity here is to restore the site in conjunction with redeveloping the mine- deal with 100 years of legacy activities and as you mentioned a lot of this disturbance. I mentioned that a lot of that disturbance took place during the 2nd World War and Korean War and it wasn't done with environmental perspective in mind, obviously because in those days that wasn't a high priority anyway, but you over layer on top of that the war effort demand, it just overrode everything. There's a substantial footprint of disturbance there with old open pits, waste dumps, tailings, metals leaching into the ground, etc, etc, that have caused a significant amount of degradation in the local environment.

What we've said from Day 1 and is very clear in our pre-feasibility study and all of our public disclosure, is that we're going to restore the site in conjunction with redeveloping the mine. The historic disturbance is one of our big assets, you might call it, in the sense that, that provides the opportunity to go in there and appeal to individuals and groups that might otherwise be very opposed to any activity in the site, saying "we aren't particularly in favor of mining, don't particularly like where this project is located, but given the problems at the site and we're willing to see the site redeveloped if they take care of all those historic problems".

The poster child or the most significant or highest profile aspect of that historic disturbance is that there is a former open pit, which was the primary one for the 2nd World War and Korean War, that cuts right across a branch of the Salmon River, and has cut off salmon migration. Since 1938, there has been no salmon migration to the head waters of this branch of the Salmon River because they just can't get through the pit and out the other side. We're going to fix that. We're going to fix it temporarily during operations to allow salmon around the pit and then during closure and reclamation to create a permanent channel which will allow salmon upstream for the first time since the 1930s. That's a very visible and obvious improvement to the site versus where it is today. That is what appeals to a much broader base in the community as compared to this being a greenfield site.

There are obviously people in the community who are interested in jobs and employment and economic benefits and so on, but there are also people who are much more focused on the environment and protection of the environment, but we can appeal across a broader spectrum because we can appeal to both of those groups. That definitely changes the perspective of the project, and definitely has resulted in a warm reception from the local community.

Gerardo: That's great. Stephen, walk me through the permitting time line and what shareholders can expect from Midas Gold in the next 12 months.

Stephen Quin: The next step is to file what's called a plan of operations, which is the document we file with the federal regulators that says this is what we want to do on site. That documents incorporates all the mine redevelopments, but it also incorporates the restoration of the legacy historical disturbance on site. What we're going to do about it, how we're going to reclaim the site afterwards, how we're going to get fish back upstream, all of those types of things. That's a pretty comprehensive document that is at a very advanced stage and we anticipate that will be filed in the relatively near term, this year.

What we're doing in the interim, or at the present time, is reviewing drafts of that document with various stakeholders so that we make sure that their concerns and points and input are addressed ahead of filing the document. That document has gone through many iterations and will probably go through several more before we actually file the document. We're trying to get as much input and participation from a pretty broad spectrum of groups before we file the documents.

The consequence of filing that document is the federal regulators then look at it and say how much disturbance is there in acres, because it then passes you in 1 of 2 directions. A very small project, tiny project would go in one direction, and a larger project gets pushed into the path where you have to do an environmental impact statement, commonly called an EIS.

Gerardo: Right.

Stephen Quin: In order to prepare that EIS, the regulators require a substantial amount of information on the environmental baseline. What's there today? How much disturbance has there been? Quantify it, qualify it, define it, map it out, sample it, measure it, etc. that work has been going on for over 3 years, in some cases for 5 years on the project, because the project has been significantly disturbed, so there's a lot more baseline evaluation required. The subsequent step to filing the plan of operation is the regulators will trigger an environmental impact statement, EIS. They will take all of that baseline data that we'll provide them and assess it and evaluate it and determine the best option for development of the site.

Obviously we believe we've put the best option forward, but that's the regulators decision. We provide a number of different alternatives for different aspects of the project since our preferred option is X, but they look at Y and Z as well and say okay, we agree with X or we prefer Y. That process is an ongoing process with a variety of federal and state regulators with input from the public community groups, NGOs, a whole variety of different people have a number of opportunities to participate in that process. Those are the 2 big steps that are coming up. One is filing the plan of operations and the 2nd is to commence the EIS that moves you through the review process.

Gerardo: Excellent. We mentioned John Paulson earlier, and the most recently financing, can you explain the benefits of having someone like John Paulson on board and how the financing helped Midas Gold move forward?

Stephen Quin: As we just talked about, the permitting process is about to get underway. That is a multi-year process. Our guidance says that an EIS process, if you look at typical projects in the United States, takes about 3 years, so it's not just a process where you can say, oh I've got a few million dollars in the bank and I'll start it and hopefully raise the balance of the money later to keep going through that process; the regulators don't like that, and we wouldn't like it if times got tough and you weren't able to see yourself to the finish line after spending a lot of money on a process. One of the key things that we talked about with our existing share holders is we want the certainty of funding to ensure that we can go through that regulatory process and not have to be concerned about funding during that process, and the regulators want to see that as well.

The key was to look for that strategic investor who was prepared to back stop us through that process, and to do it in conjunction with our existing shareholders who'd put money in already into the company. Essentially the financing we did was a combination of Paulson putting in substantial amounts of the money, but our existing shareholders coming alongside and putting additional money in as well. What it does is give you the certainty that you can move through the regulatory process, through the plan of operations review, and EIS process, to come out with a permitted project at the end of the day. That's really the short term key benefit, it takes the uncertainty away we're not going to be coming back to market looking for money every year to get out way through the process, etc., etc..

The other and second aspect, which I think is more nebulous, but I think equally important is one of the questions you mention, the common question is about the permitting side, I think the other question is how can you build to this scale given your market capitalization? I think bringing Paulson to the table changes the perspective of that discussion, because now you have someone that is a major investor in the company who has the financial capacity, and has demonstrated recently in Detour Gold, where they put over 400 million dollars to build a billion dollar mine. They were the lead financing party that got the package put together. We've definitely seen in discussions with shareholders, "well, I'm not going to invest because I'm not sure (even if you were successful in permitting), you can build the mine," to "now I can see the path to funding and production." That's a very different perspective for an investor, that there is somebody with the financial capacity to come alongside us and advance that project all the way to production. I think that changes investors perspective.

Gerardo: Absolutely. It certainly provides a much clearer path towards production and probably leverage in potential negotiations in the future, I imagine. Lastly, Stephen, few things get me as excited as exploration upside in a world class asset with a management team that actually knows how to advance it, and one that has monetized assets in the past the way you have. Are there any plans to do any further exploration drilling while the permitting process plays out?

Stephen Quin: That's certainly one of the things we are currently evaluating. What we've done over the last couple of years is to really work out, what are the keys to why the best grade gold is where it is in this overall project and property package that we own. We've done that, not just by ourselves, using our own very knowledgeable and experienced exploration people, but we've also teamed up with the U.S. Geologic Survey and the Idaho Geologic Survey who have been conducting a very intensive and extensive work program on the site to really understand the geology and the drivers of mineralization on this property. That's definitely revealed a lot of interesting conclusions that we're able to lever off. That then compliments the existing data we have which identifies over 20 different prospects on the property which we believed (prior to doing that work) had merit, but you then add on and layer that additional understanding and you're able to prioritize the best of those targets that have the best opportunity to add a significant additional number of ounces. Our immediate priority, when we get back into drilling, is not just on adding ounces but adding high value ounces.

If you look at our project, it's already got a 12 year life, if you look at the inferred resources we talked about, that could push you out to 15 year life. Adding something at the end of the mine life really doesn't have much impact on the value of the company because, by the time you discount it today, it's a relatively modest impact. What really could drive value though, is if you could find something better than what we currently have in the mine plan. It's better margin, better grade material that could displace some of the current production out into the future because it has better economics. That's really where our nearer term efforts will focus.

The 3 areas we would highlight is within the pits there is firstly, currently inferred resources, which you are not allowed to use in a pre-feasibility study, it's just regulatory requirement, well those are a pretty quick win if you're successful in converting them from inferred to indicated, now they've become part of the reserve. We already know where they are, we know what their grade is, they're already within the economic pit, they're currently treat as waste, flip them to reserves, that makes a profit, that is a very quick win.

Our second area is on the northeast end of the Yellow Pine pit, where, in the drilling programs we did in 2014, we intersected some very high grade material up in the northeast corner that had some grades that got up into the 4 and 5 grams a ton range, which is more double the grades that we have in our reserve. It's shallow mineralization, if that turned into any size, that would have a significant financial impact on the deposit and the economics of the project.

The third is that within the pit again, there are some historical drill-holes which are not part of the reserve calculation that had some very good grade material, but they were excluded because they're old data and therefore, are they reliable or not? It's not easy to prove that, but by going into that area and re-drilling, if we're able to confirm and repeat those very good grades that were obtained historically, they could have a significant impact on the economics because they will be mined very early in the mine life and therefore will have a significant kick to the economics of the project. Boosting the returns early in the mine life.

That's the focus, not just looking at ounces. There's no doubt there will be a lot more ounces on this project. The question is can we drive the economics and the return of the project up, early in the life. That has a much bigger impact and benefit to shareholders than just adding more ounces over a long period of time.

Gerardo: It sounds like that's something that you're looking at Stephen. I can tell you that on this side of it, it's very exciting and we'll definitely be waiting to see how that plays out. Is there anything you'd like to add Stephen?

Stephen Quin: I think that the conclusion is that what really drives the Midas story is that this is  a very high quality project, with very good grades, very good margins, located in the United States, but in addition to that, it provides the opportunity to do something good for the environment by cleaning up what's been a historically disturbed site for over 100 years, get fish back upstream, and so it's a win-win, it's not just a profitable opportunity, it's something that can benefit the environment as well, which is not a very common statement you can make in the mining industry. You're going to have net positive benefit, from an environmental perspective by building a mine. We see that as a win-win that could be a significant opportunity, not just for our shareholders, but for the environment as well.

Gerardo: Excellent. Stephen, thank you very very much for joining us. I'll actually be visiting the project next month and I'm looking forward to sharing the visit with everybody. Thank you in advance Stephen for having me out and we look forward to bringing that to everybody here in the next month.

Stephen Quin: Great Gerardo, I'm looking forward to showing you what we have out there.

Gerardo: Thank you Stephen.

Midas Gold has a world-class asset with approximately 6.5 million ounces of gold across all categories, world-class exploration potential and a management team that know how to monetize assets to the benefit of its shareholders. They have a core group of long-term shareholders and the recent financing, which included billionaire John Paulson's Paulson and Co., allows Midas Gold the financial flexibility to move through the permitting process. 

The Stibnite gold project provides the kind of scale and leverage to a rising gold price that major gold producers look for and in a new gold bull market, Midas Gold has to be considered a top takeout target. Whether or not the company is bought out, the risk-reward proposition is a compelling one. When the likes of Pierre Lassonde of Franco-Nevada and John Paulson invest it's worth paying attention. 

I'm looking forward to bringing you an on-site update next month. For more information on Midas Gold you can go its website by clicking http://www.midasgoldcorp.com/s/home.asp 

 

 

 

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