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Thread: Mining & Tequila: Brent Cook, Keith Neumeyer, Tommy Humphreys

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    Default Mining & Tequila: Brent Cook, Keith Neumeyer, Tommy Humphreys

    Kitco News brings back one of your favorite segments as ‘At The Bar’ makes a triumphant return, bringing along with it some heavy hitters in the mining sector. First Majestic Silver’s chief executive officer Keith Neumeyer, CEO.ca’s founder Tommy Humphreys as well as the legend and editor of the Exploration Insights newsletter, Brent Cook come together and wax lyrical about the mining sector. Stationed at El Caballito tequila & taco bar, and armed with some fine tequila and Mexican beers, the panel takes a look at a wide range of topics, from how mining companies didn’t maximize profitability during the decade long bull run, to mining jurisdictions and how governments are making it difficult in some favorable destinations. This segment also brings about the launch of a new show called "Mining Picks: The Rough" and these three experts share with investors the mining stock picks that they’ve got their eyes on. Tune in now! Kitco News, March 5, 2015.


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    Default Transcript and Commentary



    Guest(s): Brent Cook (Editor, Exploration Insights)
    Keith Neumeyer, president and CEO First Majestic Silver
    Tommy Humphreys (founder, CEO.ca)
    Interviewer: Alex LeTourneau

    Takeaways

    • The industry average for All In Sustaining Costs for silver is 16 to 18 bucks.
    • Higher grade discoveries get depleted, leaving only lower grade ores to mine. (i.e. same revenue (?), higher costs for lower grade ores)?
    • Mining share prices have been a disappointment to investors.
    • Mining budgets were based on $30 an ounce silver, and then silver dropped to $20 an ounce or less.
    • It takes time to fix the mining companies when lower silver prices happen.
    • Exploration has been decimated, as it was the easiest cost to cut by mining companies.
    • Shareholders are not paying mining companies to explore.
    • Rome wasn't built in a day. Neither are mines.
    • Five years to explore, discover and do feasibility.
    • Then another five years to build the mine.
    • 10 years total to build a mine, at the least.


    Conclusions

    • Low prices will lead to acquisitions and mergers and bankruptcies (Oh my!).
    • Lower grade ores will lead to less ore being mined, unless actively replaced by mining companies.
    • Acquisitions and mergers will lead to consolidations (cuts due to efficiencies and suspensions/closures of lower producing mines)
    • Lower silver supply will result from exploration cuts, lower grade ores, consolidations causing mine suspensions/closures, and bankruptcies.
    • Due to exploration cuts, companies will find themselves producing less ounces in a few years, and with smaller revenues.
    • When prices and demand explode, it may take years for the mining industry to catch up due to exploration cuts.


    Alex LeTourneau: And welcome back to our continued coverage from the PDAC. We are bringing back one of your [our?] favorite segments, at the bar. We are at a bar, this year, not like last year, gentlemen.

    With me, to my left is Keith Neumeyer, president, Chief Executive Officer, of First Majestic [Silver].

    To my right, is Tommy Humphreys, founder, CEO.ca.

    And far right, the legend continues, with Brent Cook.

    Gentlemen, thank you for joining me today.

    So, let's get started, dial back a couple years. Looking at the mining industry, and that huge bull run, that decade long bull run. Profits weren't there for mining companies. Do you think mining companies have learned from those mistakes, moving forward?

    Keith Neumeyer: You mean, profits were there.

    Alex: Not as many profits, as people would have liked.

    Keith: Well, the mining sector was in a difficult position, because the investors were requiring growth. And they put pressure on the executives to grow the business. And this resulted in a big strain on the industry, because the industry wasn't ready to supply that growth. So you had companies like Sand Vick and other industries within the sector that just couldn't supply the equipment. So you had mining companies forced into a corner where they had to go out and pay any price possible just to buy the growth. And so, a good example, one I tend to use, is development costs. Because development costs is one of our largest inputs.

    Brent Cook: All In costs for silver, more or less, has gone up from what it used to be, I think the industry average is 16 to 18 bucks, which is about where the silver price is.

    So, on the whole, it has been a disappointment to most investors, and share prices, while the market costs gone up.

    Share prices have not gone up that much.

    What do you see going forward?

    Are these decreases in input costs and labor costs, and that, are these going to really show up?

    And my take is, and my other issue, the actual quality of the deposits has dropped significantly. We're mining half the grade we used to.

    Keith: Well, you brought up a couple of good points. On the income, or the cost side of things, the one thing investors need to understand is that these are big ships. These mid-tier mining companies, for example, we have almost 5,000, or had almost 5,000 [???] producing mines. And all of a sudden the wool [rug] gets pulled out from underneath you here, and your budgets at $30 an ounce silver. And you're looking at $20 an ounce and lower. And you are having to stop that ship and turn it. It takes time to accomplish that. The problem is that prices were dropping quicker than we could react.

    Alex: A lot of cost cuts came from exploration. It's pretty decimated over the last few years. Tommy, are we at a point where it's already an issue? Or is this something we are going to see, maybe 5 years down the road, or 10 years?

    Tommy Humphreys: I think under-investment in exploration is going to manifest in obviously fewer projects, and fewer discoveries, but more of a concentration of wealth creation. And I think the under-investment in exploration makes it easier to track the sector. I think there will be exploration budgets, but they may not be in the form of house street companies, with secretaries and downtown office space and no drilling. They may be coming from corporates or from mining companies budgets, or maybe even crowd-funding. But the exploration will continue. And the scarcity of quality projects is evident. So the money will come back.

    Alex: Lack of discovery, Brent?

    Brent: Serious issue. Serious issue. That's been my theme for a while, now. And you can see it in the data, the discoveries. If you look at the ounces discovered, over the past twenty years, it's basically just gone down like that [hand declines from right to left]. And it's not getting any better. And I don't think it's going to get any better, no matter how much money we sink back into it. Because, the reality is, most of the near surface easy deposits have been found. So everything we're finding now, it takes more effort, time, cost, just to drill to test it. Let's say a one gram deposit at surface makes money. For every ten one-gram deposit, there's say, one two-gram deposit. Well, you need a two-gram plus deposit at depth. But you're still going to find ten one-gram before you find a two-gram. So you're finding your success rate going down. It's a real issue. It's going to be interesting. What I means is, if someone can find something high grade, high margin, it's going to be extremely valuable. A company is going to pay up for it. Maybe not this year, but in the future as they run out of oil.

    Keith: Yes, I know. It is. But, for our sake, we are not spending a lot on exploration, because the market is not paying us for it. Our exploration budget, all we are doing, is just replacing ounces that we mine. Simple as that. It's all we would care about. There's no point in us blowing our brains out and spending money on drill rigs and punching holes in the ground where the shareholders aren't going to support us.

    Alex: Are you seeing that?

    Tommy: Well, yes. You are seeing no results when discoveries are made, or if they are, they are very subdued. Yes, I think there is a dearth of good exploration work taking place all over the world. Your first question about whether mining companies learned the lessons, I don't think so. They're was a chasing growth in the run up, and in the boom, and now under-investment. So, no, they haven't learned the lessons. And it's just a self-fulfilling prophecy.

    Keith: I think that's the problem.

    I think the industry. I think it's human nature. Look at the high-tech industry. It's human nature. People are trying to make money. And you see it in every industry.

    I don't like to see the mining industry get picked on. Of course, here we are all mining people.

    We look at ourselves …. [???]

    I think the mining sector should pat itself on the back for some of the good achievements we have done.

    Alex: Brent?

    Brent: I think it's a real mistake to base your decision on what the crowd wants at that moment. And that is the mistake that is made. You have the bankers and the brokers. They're all pushing whatever they can sell that day for the commission. Where this is a long term industry, where we make a discovery today, it's five years to drill it up, do the feasibility, another five years to build it. In general. So it's ten years down the road at least before this thing goes into production. And we're worried about what the market is thinking tomorrow. It's illogical.

    Alex: Expanding on that, like you said, it's a very long term industry. Do you think the market understands that? Do you think investors understand that?

    Keith: No absolutely not. I was at the BMO conference just this last week. And the CEO of [???] was in a discussion onstage.

    The problem with the sector is that mining company executives have to look out a decade, and the investors look out a quarter. And you have this disconnect between investors and what mining executives need to change. So, as a mining executive, you need, basically, to be a good timer of the market, because you're requiring equity to build out assets. And these financing windows don't open up that often.

    Tommy: Well, the companies themselves have to think long term. But investors are always going to be short term oriented. And they're going to try to anticipate a run up in the commodity price, or piggy back a discovery. But it's a different philosophy and thinking required for the CEO and for the investor. Until the investor sees a promise, they are going to be on the sidelines.

    [Segment break at 8:10]
    Legal Disclaimer: I am not a doctor, nor do I play one on TV.

    "It's tough to make predictions, especially about the future." -- Yogi Berra
    A variant of this has also been attributed to physicist Niels Bohr, and others.

    "Tis against some men’s principle to pay interest, and seems against others’ interest to pay the principal." -- Benjamin Franklin

    The School of Hard Knocks is where you get the lesson after you fail the test.

    Book title: "The Best Way to Rob a Bank Is to Own One"

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