Specialization, Strategy and the Science of Win-Win

Skeena Resources
Written by Marcus Rummery

When Walter Coles Jr., the CEO of Skeena Resources, discusses the junior mining company’s Chairman of the Board Ron Netolitzky, he speaks in the slightly hushed tones reserved for the legendary. As Gordie Howe and Wayne Gretzky enjoy membership in the Hockey Hall of Fame, Ron earned a similar distinction in the Canadian Mining Hall of Fame when he was inducted in 2015. Mr. Netolitzky has also been honoured with the Prospector of the Year Award from the PDAC (Prospectors and Developers Association of Canada) and Developer of the Year Award from the BC & Yukon Chamber of Mines.
Coles explains, “I worked for an investment bank for a bunch of years; then for a hedge fund, and I left that business to create a company around family farmlands with minerals, and through that endeavour I got to know Ron, and he ended up being on the board of that particular company. Once I fully appreciated his uncanny ability to find precious metals, I approached him and said ‘Why don’t you let me focus on raising money for whatever idea you have for your next company, and you can do what you love: the geology, the rocks.’ That has been our partnership since.”

As a ‘junior’ mining company, Skeena specializes in assessing the prospects that grassroots explorers locate; it specializes further by focusing on the Golden Triangle of British Columbia and again with an emphasis on precious metals like copper, silver and gold.

“The most important benchmark coming up for our next project is the PEA (Preliminary Economic Assessment) on the combined Spectrum DTA project which will be completed soon. We bought it based on Ron’s idea that you often find high-grade minerals right next to the porphyry systems, which refer to a ‘hard igneous rock containing crystals, usually of feldspar, in a fine-grained, typically reddish groundmass.’ The beauty of the Spectrum project is there’s a very low strip ratio of less than one to one (waste to ore). If the ore body is right on the surface, mining it is cheaper, but then you have to consider electricity and roads. If you end up having to build a one hundred kilometre road yourself, it costs a lot more. This all means our Spectrum and GJ projects will be very efficient mines, because of the infrastructure investment that has been made up there. However, first we have to go through a process of doing all that preliminary engineering analysis. Asking the hard questions like ‘How is this going to look?’ Here’s how much profit we’re going to make at $1,300 gold and $2 copper; here’s how much per ton this project will earn. You put it all together, and here’s the internal rate of return (IRR) on this mine, and generally if you have a project that has an IRR north of thirty percent, you’ve got a mine.”

Internal rate of return is a way of expressing in a mathematical ratio the profit versus the investment. For example, if the revenue is $100 and the investment $70, the IRR is thirty percent. Given fluctuating commodity prices, this can prove difficult to calculate, but once Skeena has finished the Preliminary Economic Assessment (PEA), the level of certainty is at the highest echelon of the scale reserves.

“The biggest challenge is what’s going to happen with the price of gold. We are a gold project after all. We could do everything right from an operating standpoint, and the price of gold collapses from its current price of $1,330 to say $800. Then our project is not going to work.” He acknowledges that this carries an element of risk but that, with the fluctuating price of gold, “if the price of gold goes from $1,330 to $1,600, we have tremendous leverage.”

The Net Present Value (NPV refers to the future value of an asset) of that project goes up 100% which gives you much higher torque. If you have a view that in this world of negative interest rates the backdrop is quite positive for gold – and I think the people who invest in our project share that view – our company provides tremendous torque to a rising gold price.”

The challenges that a British Columbia mining company in 2016 faces range from First Nations and environmental concerns to price fluctuations and political strife undermining production. Skeena operates from a fundamentally ‘win-win’ paradigm that is reflected in everything it does.

“We take our First Nations initiatives very seriously. Everything we do is a win-win for the people on the other side of the negotiating table – other stakeholders and employees. We want to make sure we pay well and create incentives for people to perform. Same thing with any interactions with First Nations – we make sure that these are fair partnerships where we win together. Same thing when we do deals with Teck [Teck Resources Ltd.] and Barrick [Barrick Gold Corporation] – our thinking is there shouldn’t be a loser. There are plenty of ways for us to win together.”

“If you’re going to operate in Canada, there are very stringent regulatory requirements governing our impact on the environment. We are a little different than a mining company because we’re only putting two-inch holes into the ground when we do exploration; we’re not removing a mountaintop.”

Both provincial and federal governments are instrumental in creating an environment in which the resource industry can thrive. “For instance our Snip project which we acquired from Barrick in March – two years ago a hydroelectric plant was built seventeen kilometers from there. There’s a road that goes off Highway 37 right to the hydroelectric facility – another example of the wonderful improvements in infrastructure there.”

And British Columbia has advantages beyond infrastructure. “There’s also plenty of water so when you compare us to, say, Chile, where there are water shortages, people have to build desalination plants and sometimes pump the water up a mountain. The cost of electricity is upwards of fifteen cents per kilowatt-hour in Chile, whereas in the Golden Triangle it’s four to five cents per kilowatt-hour. These are both massive cost differentials. Part of the reason BC has a really bright future ahead: cheap power and water.”

Thriving despite the fluctuations in the price of precious metals has long been Ron Netolitzky’s stock and trade in the mining industry. “Our hope is to be very disciplined about knowing when to move on. Ron, throughout his career, has shown a unique talent for not being greedy. When things are going up in value by ten times, he is going to want to say ‘Let’s not try and make it fifteen times. Let’s lock in an incredible return for investors and move on.’”

The company attempts to limit risks by paying little for assets or by looking for deals in which it does not make significant payments unless the project is a success. “With the deal that we did with Teck to acquire GJ we structured that deal as a 4.5 million dollar option payment to be paid over five years. We paid upfront $1.5 million, but we have another four years to make the next three million in payments, so that’s a way to protect our downside. If copper and gold prices implode, we can walk away and not make those payments.”

“We’ve got a price of gold now $1,344 per ounce (from $206 in 1999), and our view is there’s lots of mineralization left, but mining was curtailed when gold fell because it was uneconomic. Today given the lower cost structure and higher gold price, mining it is economic again.”

“We maintain our edge by having people who have been mining in British Columbia for the past forty-five years who are walking encyclopedias of the deposits in the this area. Added to that, we have a philosophy that the one certainty in this sector is cyclicality – commodities are cyclical. So you either embrace that or it destroys you.”



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