Anatomy of a Three-Bagger: The Brett Resources Story
Shareholders were treated to a big win last month when Brett Resources (V.BBR) was bought out by Osisko Mining (T.OSK), giving investors a triple from our initial recommendation. We talked with Brett Chairman Ron Netolitzky to get the story behind how he and his team made Brett a success, along with his thoughts on the junior market and gold. We think so highly of Ron that we've inducted him into our Explorers' League program...
Jeff Clark: Ron, as happy shareholders we thought this was a good time to hear the success story behind the company. Tell us about finding the property and how you and your team were able to develop it into an attractive buyout target.
Ron Netolitzky: As you know, Jeff, it's just another example of instant success for a company that's tried for probably 20 years to be successful. Patience is what we need in this business.
Brett Resources got cobbled together from a company that left Indonesia after the Bre-X fiasco, and joined up with a group that had explored and spent a lot of money on Latin America with some pretty good exploration guys, but hadn't had success. It was about 2005-2006, and we were actually going to become a tin-tungsten focused company. Through our former president and current Director, Carl Hering, and his association with the Kinross people, the project opportunity came over our desk - and I have to thank Ron Stewart, now an analyst with Ned Goodman's group, because he was Sr. VP Exploration at Kinross at the time - and I remembered that I had gone after this property at least 4 or 5 years before with David Bell of Hemlo fame. We basically got turned down by Kinross and Bob Buchan at the time, even though we got right to the point of obtaining the property.
Luckily we didn't get it; it was a little too early for a low-grade bulk mineable deposit in Canada. But when the opportunity hit us in 2006, I looked at it and said, "I liked it before, but I didn't do much due diligence on it." So we jumped at the opportunity. The property had been around since probably the 1930s, and had been in the Falconbridge Gold Group. Kinross got it when they acquired Falconbridge Gold, which they wanted primarily for their Zimbabwe assets, and they got this as a freebee.
Jeff: You're talking, of course, about Hammond Reef.
Ron: Yes. It came from Thayer Lindsley, a famous geologist and founder of what became Falconbridge Gold, Falconbridge Nickel - that whole group. In the '30s these guys recognized there was a trend going through Hammond Reef that looked like a bulk mineable target - low grade, but it had some dimensions to it. They actually identified, in the 1980's and 1990's, between Falconbridge Gold and a junior called Pentland Firth, up to about a 1.8 million ounce resource of not very high grade, like in the gram per tonne range. But there was evidence of widespread gold, and it was open.
Jeff: So what made you feel like, "Hey, this is a property I want to pick up and explore and develop."
Ron: I guess it was because we had looked at it before. Plus, if you get that much gold in an area with a lot of low-grade mineralization around it, it is a very interesting target. It wasn't a classic target because it was hosted in granitic rock, essentially what you call tombstone-type granites. There were other examples of smaller targets like that, that had been successful in Canada and globally. So it was a little different setting, and any time you can get gold in a setting you're not used to, you probably should take a shot at it.
So we had an opportunity with Kinross to essentially spend $5 million over a 4-year period to earn 60%. We ended up spending that money in the first 18 months. They had a back-end right to spend the next $5 million and take their position back to 60%. Immediately after we earned in, we started negotiating to acquire 100% of the property, because being a minority partner in a project where the timetable was not essential for the major was a very unattractive scenario for the future.
Jeff: This was about 2008?
Ron: Yes, I think so. We basically negotiated for about 6 months to acquire 100% of the asset, subject to a 2% net smelter royalty to Kinross. And Kinross accepted a fairly significant position in our stock. They already held some, so after the deal was closed they had about 26% of our stock. Subsequent financings diluted their position to around 16%. So they are a very significant shareholder on this. If you look at it from their perspective, they had an asset on their books valued at zero. So, if you take 16% of our stock and put a value of over $3 a share on it, well, that's not a bad return.
Well, then we had that market meltdown, which made it pretty uncomfortable. So we had one slow year where we were saving our treasury just to stay alive. We told president Patrick Soares, "You don't spend the last 3 or 4 million dollars until the times turn." And when they did turn, we were able to accelerate the programs. This is one of those deposits where the deeper we drilled the bigger it got as the grade and thickness significantly improved.
A couple of other things happened in our industry that had an important effect on the value of the asset. The Osisko people had a pretty interesting success rate in their Malartic project, and I think they gave credibility to this type of low-grade bulk mineable gold deposit in Canada. Prior to that we probably would have had a much harder sell to convince people this was potentially economic. So we started watching what Osisko was doing because they gave us a pretty good target to go after. You know, well over a year ago, they signed a CA [Confidentiality Agreement] with us, and in fact a number of companies have CAs in place.
Jeff: And CAs usually precede takeovers. Obviously you like Osisko.
Ron: One of the things that attracted me to their group was their success at raising money. I think they were one of the first juniors in Canada in a long time that's been able to fund a billion dollars worth of a project without having to lose the project. They were actually very good at acquiring a team of operating people - developers, explorers, producers - with a track record, primarily ex-Cambior people.
Meanwhile, we were very pleased with the progress we were making, especially with the First Nations and the way the project was opening up and the quality of the metallurgy. But early on we got hit with the idea that we had a water problem and would never be able to mine this. It hurt us for quite a while. We have a small lake that will have to be drained, but it has no real viable fish habitat. It's an environmental issue but pretty straight forward. The second part is that the deposit remains open into a manmade reservoir that quite frankly is not a pristine water source.
So we feel that in time we will get all the permits. We are very close to infrastructure and 45 minutes from a very good town called Atikokan, and they need jobs, so it's a very supportive place to work. And the metallurgy was good - no deleterious metals, no fundamental issues that we could not see solutions to.
One of the key things Osisko brings to the picture, which many companies don't have, is that they're going to be in production, at a significant rate, in probably a year. The scoping study on our project showed we were still 4 or 5 years away from production. So this gets us a lot shorter timeframe before we could potentially see benefits from gold. So there are advantages. They already had the permitting team in place, and the development team has been very good at getting their job done.
Jeff: You've got 5.1 million ounces at Hammond Reef. Do you think there's more?
Ron: I think the potential is significant. The deposit is still open and we have a large land package and quite a few other exploration targets, and we're still drilling away. Since the last resource we've done a lot of drilling and it should be upgraded by this summer/fall. I'd be surprised if it doesn't significantly increase.
Jeff: The combined company could be a pretty big producer.
Ron: Yes. When you look at Osisko's reserve base, plus their resources, plus their exploration targets, plus what we have, you could have the next intermediate gold producer with million-ounce production out of a joint operation.
Jeff: That's impressive. And exciting.
Ron: That's the way we look at it. I'm going to be a happy shareholder to have them working for me.
Jeff: You must feel some satisfaction from this, Ron. However you measure it, this is a success story.
Ron: Yes, I think it is. I think it would have been a success story if we continued on our own, but this is another way of getting your success story. Plus Osisko is extremely liquid and trades very well.
Jeff: It must be especially satisfying with the stock doing so well now. However, I remember as a Brett shareholder how it languished; a lot of stocks were recovering from the meltdown last year, but Brett wasn't. Were you ever puzzled or frustrated at the time by the lack of stock movement?
Ron: Yes, I thought we were lagging and part of that I think was due to blogs and rumors, things you cannot stop. I think there was a concept out there that we had issues with permitting in water. I was astounded with the rumors out there. Patrick Soares and I started seriously marketing the company about a year ago, visiting New York, Toronto, Boston, Montreal, Europe. And slowly we were making in-roads and getting people to recognize this was a serious project. But when we came out with a resource, the market just ignored it. But when we announced our scoping study numbers and the economics on it, they finally got it. That got the message across, even though we thought it should have been recognized earlier.
Jeff: Very good. A lot of investors that follow the Explorer's League want to know what Ron Netolitzky is going to do next.
Ron: Well, Ron's got a few projects that have been around almost as long as Brett - some of them maybe a little longer. The other project I'm now fully focused on and spending a lot more time with is Golden Band. It's a different style of story, but it's a story where we think it should be in production this year. We have one last little piece left to do, which is complete a small portion of debt financing and I think that is going reasonably well. I anticipate having that closed shortly, and we've got all the permits in place. I've got the core people in place, we have contractors in place, and I think we will be in production on a small basis by the fourth quarter. It's a Northern Saskatchewan gold play that I've been working on for a long time.
Jeff: I know it's kind of small, but do you have any sense for the production numbers yet?
Ron: Yes. The initial production target is from just one small deposit, because I'm tired of getting diluted by raising money, so we're trying to get it into a cash flow position. We're basically planning to start off with about 45,000 ounces production per year. We're very comfortable with what we've already identified in the belt; we should be able to ramp that up to 70,000 ounces within a couple of years and maybe 100,000 ounces. I think we can support a long mine life at about 100,000 ounces with the resources we have - but we have a lot more work to do on some of these resources.
We're kind of going at it a little backwards, treating this belt like you used to treat traditional gold belts in the '30s. A lot of the deposits we have are narrow high-grade vein systems and they're steeply dipping. It's very hard to get 5 or 6 years reserve or resource ahead of you on any one of these deposits, but if you look at those kind of deposits in the Precambrian Shield a lot of them last up to 50 years plus - but they quite often don't have more than 2 or 3 years of resources ahead of them. So that's the way we're starting it. We're saying "Okay, we're going to keep chasing this... we have numerous exploration targets in the belt and I want to explore them without any further dilution to the shareholders, because I'm a large one and I'm getting tired of being diluted!"
The other route and why I want to continue exploring in Saskatchewan on this belt is it's got a lot of gold in it. We have continually found more small deposits. Now if you look at statistics of some of these mineral deposit belts, it says that you've got a whole bunch of small deposits, and you've got less intermediate deposits, and then you have a few large deposits. Well, so far we've found all the small ones. On a normal statistical basis, there should be a bigger one around there somewhere, but we haven't found it, and after working there since the late 70s, there's a possibility that hidden in that pile of small deposits there's going to be a big one that we just haven't found yet.
I think what a lot of the big companies keep forgetting or keep missing is they always have a target of 2 or even 5 million ounce deposits. Well, sometimes you can recognize a deposit has that potential but a lot of the time you've got to go through a lot of smaller targets before one of them shows up to be that big, and you know that's the part where you depend on luck or the geologist's skills to find that.
Jeff: Any other projects you might be looking at?
Ron: Well, I've played in Africa quite a few different times with a gentleman called Jens Hansen. He runs Melkior and some other companies and he's got a pretty interesting project in Timmins. I'm just a shareholder, but we've worked the Ivory Coast a number of different times, and between him and I we've put together an interesting nickel sulfide target, which has gone into a new capital pool company called Landen (V.LAN). I'm a shareholder and advisor, so sometimes I'm the kind of guy that wants to be an investor and not have to run these things on a day-to-day, and maybe be the guy that helps behind the scenes with putting projects together. You know, I think there is lots of fun in that part of it.
Jeff: Very good. Before I let you go, Ron, how would you assess the junior market right now?
Ron: It's a different market than we've had before. You know the problem seems to be that above a certain level, unless you're working in one of the few areas that becomes hot - like the Yukon - getting a junior exploration company financed so you can actually go and explore I think is extremely tough these days. Maybe we have too many. You go to the big shows...
Jeff: You're saying there's still too many juniors?
Ron: I'm saying I don't know how you could walk into one of these shows and pick good stories out of that. Some of the guys have the patience and they can go up and down those aisles and figure out some of the things and they find some good winners. But everybody is pretty good at advertising and have fancy websites and nice colorful maps. It's tough to find the funds to explore. In Canada because of flow-through funds, you can find those, but hard dollars? You need both.
Jeff: There have been a lot of financings.
Ron: Yes, there has been. But as I've said there are isolated pockets that seem to do very well and there are geographic areas that get popular, but aside from that it's been a tough one.
Jeff: What about gold itself. Do you have any feelings on gold and what it's going to do over the next few years?
Ron: Well, I continue to think it's going to keep going up. It's basically a devaluation of the U.S. Dollar to my way of thinking, the same logic we've been looking at for quite a while.
Jeff: It's not done playing out yet, then, in your view.
Ron: I don't think so. I think we have got more pain to come on the devaluation of the U.S. dollar. You know, somebody's got to pay the piper for all the money that's been borrowed. And I think the easy way that it is being handled is they devalue the currency.
Jeff: And you're still bullish on precious metal stocks?
Ron: Yes, I think so. I know I still like them.
Osisko is a great company - but do we recommend it? Get the answer and all our top speculations in Casey's International Speculator with a risk-free 3-month trial. Learn More.