Mining

Ross Beaty: We’re in The Fifth Inning of a Gold Bull Market That Likely Goes Extra Innings

Mining entrepreneur Ross Beaty believes that we are in the fifth inning of a gold bull market that likely goes into extra innings. In this interview, Ross provides commentary on the recent gold price action and discusses the significance of the silver to gold ratio.  He also talks some about the operations and growth of Pan American Silver Corp. and Equinox Gold Corp. Ross addresses how the COVID-19 crisis has affected mining mergers and acquisitions.  Furthermore, he shares about his investments in Lumina Gold Corp, Luminex Resources and Osino Resources.

Ross Beaty is a geologist and resource entrepreneur with over 45 years of experience in the international minerals and renewable energy industries. He is an internationally recognized leader in both non-renewable and renewable resource development, having founded and divested several companies. In addition to Pan American Silver, Ross is the Chairman of Equinox Gold Corp., a mid-tier gold producer.

0:00 Introduction

1:17 Gold price commentary

3:47 Significance of silver to gold ratio?

8:05 COVID-19 to continue to affect silver supply?

9:09 Status of PAAS world-class Escobal silver mine?

10:21 Equinox Gold’s continued production growth

13:41 How has COVID-19 affected mining M&A?

14:43 Lumina Gold and Luminex Resources investments

19:44 Osino Resources investment

23:07 We’re in the fifth inning of a gold bull market that likely goes extra innings

TRANSCRIPT:

Bill Powers: Thank you for tuning back in to Mining Stock Education. I’m your host, Bill Powers. Well, this has been a great week this past week for the precious metals, gold is nearing an all time high. It even broke through $1900 an ounce. And silver, it’s good to put a perspective that in the last four months, silver has basically doubled in price since that mid March low. We’re actually in somewhat of a parabolic move right now in the precious metals. I invited mining entrepreneur, Ross Beaty, to come back on the show to share his perspective on these dramatic moves in the precious metals, as well as talk about some of the companies that he’s involved in. Ross, thank you for coming back on the show. I really appreciate your time, and as we’re basically at about all time highs again in gold, where do we go from here, in your opinion?

Ross Beaty: Well, Bill, when was it that I last spoke with you? Was it in March?

Bill: I believe it was March, yes.

Ross: Yeah, I mean, it was just the start of this crazy COVID season and quite frankly, I’m not the least bit surprised to see what’s happened to gold and silver. Not at all. In fact, I think they’ll probably remember that I was very bullish in March, and I was bullish in January. I was actually bullish a year ago. Gold and silver had great legs in January, before anybody even heard the word COVID. COVID has poured gasoline on the fire. It has just simply exacerbated an already very bullish, macro outlook.

It’s not a surprise to me that gold is where it is and silver is where it is, and I think it’s just going to keep going. I mean, I don’t know when it’s going to end and how high it’s going to go. Nobody knows that, but it would not be the least bit surprising to me to see it break through $2000 and then just who knows? I think I said in March, that in my whole career, I’ve never seen such powerful macro fundamentals.

Whether it’s just the synchronized pouring of money into the system by every single government, all over the world, whether it’s the … By that process, the debasement of all paper currencies, whether it’s the nil interest rate environment, which means there’s no opportunity cost to hold gold. Whether it’s all of the geopolitical craziness that’s going on in the world, led by dear Mr. Trump and his allies, or the Chinese, or whether it’s the weakness currently in the dollar and potential further weakness in the dollar.

Whether it’s a return of inflation and people think inflation’s going to come back. All of those things are bullish for gold. Then you have supply side issues, which are also bullish for gold in two ways. Both production’s declined a little bit, and also exploration is down. This has been down for years and it takes a lot longer these days to build new gold mines and new silver mines than it used to. Takes 15-20 years now, between discovery and production typically. There’s exceptions. Some take 30 years, some take 5 or 10 years, but on average there’s 15-20 years. 10-15 years ago, it was only say 10 years. All of these are fundamentally bullish for precious metals. That’s why I remain bullish today.

Bill: Ross, regarding silver and the silver to gold ratio, a lot of analysts look to that and say there needs to be a reversion to a historical mean, therefore silver will outperform. But I’ve actually interviewed some analysts for this show who said the silver to gold ratio is meaningless. How do you view the silver to gold ratio and its significance?

Ross: Yeah, I mean, it’s not terribly meaningful. A lot of people used to trade the oil to gas ratio until that fell apart and totally disconnected, and it hasn’t come back. The truth is there isn’t a lot that’s magical between that ratio, but there is something there. I’ll tell you why. Gold and silver are both precious metals. They’re both money. They both respond to the same kind of stimuli. People invest in them as money, alternatives to paper, to stocks and bonds, so in that sense they are connected.

Where they’re disconnected, of course, is that silver is a broader metal. It’s got far more uses than gold. In fact, silver’s the most indispensable of all metals. It’s used in more things than any other metal. Very few people know that. It’s used in everything. You have to look in the silver equation to both the fundamentals for precious metals, i.e. gold, and those are robustly bullish today, but you also have to understand the industrial production of the world.

Because industry uses about half or even more of the silver demanded every day, and so if you have a big change in a powerful, industrial consumer country like China, between building infrastructure which is lots of silver, to building consumer goods and services and that kind of thing, which is less silver, well that’s bearish. If you have the world economic production base or industrial production base collapse like we’ve seen in COVID, that’s bearish for silver. You’re going to see the silver to gold ratio, go up from what traditionally used to be 55 to 1, and it went over 100 to 1, 110 to 1.

That was because industrial production was being crushed and silver got hurt for that, whereas gold didn’t get affected at all. In fact, gold benefited because the fundamentals for gold as money were paramount. It wasn’t the least bit surprising to see the gold:silver ratio change dramatically. As long as that continues, that is to say there’s a good macro environment for precious metals and not such a good macro environment for industrial production, you’re going to see that ratio stay high.

However, if all of this economic easing and liquidity and a binge of debt from every country in the world, if this actually does have a response to return our economy to some semblance of what it used to be, you’re going to see a lot of consumption of silver for industrial purpose. For digital products, for medical products, for … The biggest silver use today is in photovoltaic cells for solar energy. These are big, big markets, so you’re going to see a lot of restocking and that’s what’s going on right now I think, is that people think we’re going to get back to normal and you’re going to have strong industrial production growth, plus a strong macro environment for precious metals.

Both of those are going to drive silver higher, even, proportionally than gold. That’s what’s gone on for the last month or so, and the result of that is the silver to gold ratio goes down, and today, what is it? 80 to 1 or 75 to 1. It’s gone down from 110 or 120 to 1 at its top. That’s what’s going on. What happens this fall is anybody’s guess. If I was betting man, I’d say the economy is not going to respond that much. We are going to still have a year or two before we get back to some semblance of order, and that means that silver should somewhat under-perform gold, but silver should still be a fabulous metal relative to all of the other metals which will be hurt even more. It’s going to be in between. Now, if, as I said, if the economy gets going again and people really start consuming like they used to, you’re going to see silver on steroids. It’s going to do much better than gold. So, that’s kind of a couple of outlooks there for silver.

Bill: On the supply side for silver, your company, Pan American, recently announced the suspension of two mines there in Peru due to the testing positive of a worker with COVID. Do you expect a lot of supply crunch on the silver side potentially this year, related to COVID?

Ross: Yeah, there’s going to be some, Bill. Pan American’s situation, it’s all just kind of immaterial. Pan American produces about 28 million ounces of silver a year. Those two mines together only produce about four million ounces, so they’re sort of our least important silver mines per se. They produce also a lot of other metals. But I mean, Pan American has 11 operations and at the peak of the COVID shut down back in April, we only were running two mines, both of them in Canada. Every mine in Latin America was shut down.

They’ve all come back now and then we had to reclose those two mines in Peru, but that’s a very short term situation. We’ve just isolated everybody because we had some COVID cases and we just wanted to be super careful, but that’s just a rounding error really, for Pan American. Those will be back up and running probably in a couple of weeks.

Bill: A few years ago I was a Tahoe Resources shareholder and your company purchased the Escobal mine in Guatemala, which is just a world class silver mine. Is there any update or any thoughts you might be able to share with the market regarding this project?

Ross: Well, we’re being very, very careful and very thoughtful in how we approach that situation. It was something that we inherited, of course. We’re just trying to do everything we can to do the right thing to get our social license back, to satisfy the court in terms of consultation with the Xinka people, the indigenous group in the area, trying to convince them of both the economic case for reopening the mine and the fact that we aren’t proposing to violate anybody’s rights, or in fact quite the contrary. We’re trying to improve the area’s economic condition.

I think that’s really where we’re going right now. We’re being very methodical and working very closely with the government and with other interested parties to get that situation back in the same kind of good feeling and good order that Pan American has distinguished itself for 20 years in achieving in Latin America. Really working with communities, with workers, for win/win situations, and we’ve been very successful at that.

Bill: At Equinox Gold, do you have a pipeline of projects internally that you’re going to bring online to increase your future production. But when it comes to acquisitions, is it right for investors looking at the company to think perhaps they won’t see as many acquisitions with Equinox, but if there is growth from without, it would be more of a merger of peers like what you did with Leagold?

Ross: You know, Bill, Equinox has grown from mergers and acquisitions. Don’t forget, the company’s only two and a half years old. We started at the very beginning of 2018. We started with a development play that came from merging Trek and New Castle and Anfield, and that’s what started Equinox gold in the first place. Then we bought a mine from New Gold at the end of 2018, a mine in California. We built and now operate another mine in Brazil in 2019. At the end of 2019, we announced the acquisition and merger with Leagold which brought four new mines, one in Mexico, three in Brazil, to us.

We produced 25,000 ounces in 2018, 200,000 ounces in 2019, and we’re on target for producing 600,000 ounces this year, and potentially as much as a million ounces by late 2021. There’s no gold company on the planet with that kind of growth record. It’s spectacular. And we have a lot of internal growth. We have four growth projects. We’re going to finish building a mine in California called Castle Mountain. We’ve been doubling or tripling I should say at that mine, as phase two.

We have a big expansion going on in Mexico right now at Los Filos. We have a new mine we’re going to build in Brazil called Santa Luz, so we’re just full of internal growth to get us to that million ounce a year gold production. We have all the cash we need. We don’t need the finance to do that, and we’re working hard in achieving that outcome. We’ve done one deal a year for the last couple of years, and they’ve both been really good deals. Very synergistic, very creative, and those kind of deals are hard to come by.

We’re looking at lots of stuff and we always will look at lots of stuff, but we are hard pressed to find value today. It’s just one of the things that happens when the gold price runs and you have a bull market like you’ve got now. Investors are rewarding these companies, bidding their value up, and it’s much more difficult to find value, for me at least, in today’s kind of market. Never say never, but we have lots of internal growth. We don’t need any new acquisitions.

I am still trying to build even a bigger company, though, because investors really reward scale these days. They reward liquidity, they reward diversity, they reward de-risking of a company’s sustainability, making it a much bigger, stronger, longer lasting companies with fewer risks. This is where the market rewards companies and increases their multiple, increases their price to earnings, price to net asset value, those sort of metrics.

We could get bigger and if we can see a really good deal, we probably will have a look at it, but definitely we’re not specifically focused on that. It’s just going to be something that if it really looks good, then we’ll maybe make it happen, but if it doesn’t, we’re not going to just buy something for the sake of getting bigger.

Bill: How has the COVID crisis hurt potential M&A and business development in the sector? Could you speak to that, please?

Ross: Yeah, it’s hurt it. Because you can’t really do good due diligence if you can’t visit the site you’re looking at. And that works on both sides. It’s definitely making it more difficult, and that’s why you haven’t seen too many deals done. There’s lots of people looking, lots of data rooms that are open and digital reviews happening, but nothing substitutes for an in person examination of a mine or an opportunity, a development opportunity.

You see things you don’t see in a computer. You see things, you talk to people, you smell what’s the water situation, the social situation, the environmental situation. What are the real risks, and you get that in a site visit that you cannot get on paper. That’s really the biggest difficulty right now in slowing down the deal flow that typically happens out of COVID. That’s the biggest negative from COVID right now.

Bill: Many producers like Equinox and others are nearing and hitting on a day by day basis it seems, multi year highs. But some of the developers are lagging behind. Two developers/explorers that you’re a 20% owner of are Lumina Gold and Luminex Resources who I also work with, and are sponsors of this show. Can you give us an update? What do you expect now that gold is starting to take off? What should investors expect from these companies?

Ross: Well, Bill, I have to say, and this comes … It sounds highly biased, and of course, I wouldn’t be surprised if people smell a big conflict here in me saying this, but really, I don’t know of any other company in the business, in the gold business, development stage company in the gold business, that is as cheap and as fundamentally good value as Lumina Gold. Lumina Gold has just put out a preliminary economic assessment that shows a resource of 17 million ounces of gold in Ecuador, net present value of well over $2 billion. Not even at today’s gold price, but at … I forget if it’s $1600 or $1700 gold. It’s going to produce 350,000 or 370,000 ounces a year for over 20 years.

Those sort of things are rare. Lumina owns it 100%. There’s no royalties on the property. I mean, it’s just crazy. The stock’s trading for $280 million Canadian. It should be double that. It’s just cheap as borsch, and I think it’s a wonderful value proposition that I can tout without any embarrassment. It’s just a great value play and I hope that most of your listeners are owners. If they’re not, they should be.

Luminex is a different story, because Luminex is a spin out from Lumina Gold, and it contains all sorts of exploration properties that have potential value, but not as quantifiable as Lumina Gold. Lumina Gold has this single asset, it’s done a huge amount of work on it, ton of drilling. It’s gotten the resources, it’s been de-risked, and a lot of the economic studies have gone on. Luminex is more of an exploration play. On the other hand, Luminex is much cheaper, so it’s again, a pretty good value proposition because there are not one, or two, or three. But there’s four or five different property positions in Luminex, anyone of which justifies today’s market cap.

And taken together, it’s just a wonderful, speculative value proposition. There’s a gold deposit that the company itself is drilling, called the Camp Zone. It could be a really, really valuable deposit in its own right. It has two joint ventures, one with BHP and another one with Anglo American, which are really interesting copper-gold porphyries that again, could have huge value once the companies get drilling on them and moving against them and testing the ground, that Luminex owns, with some drilling activity. There’s a lot of things going on in Luminex, a lot of things that give it a double or a triple, and yet it’s much more speculative than Lumina Gold, but it’s much cheaper.

Bill: But it still has a five million ounce resource, right?

Ross: It has a five million ounce resource, as well, for sure. Just not as quantifiable in terms of value as say, Lumina Gold. And there’s your value. Both of them are great value propositions. I think they’re both solid, solid bets for speculative investors.

Bill: One more thing before we leave Luminex, Ross. Can you just talk a little bit about what it takes? Because we have two majors with Luminex, Anglo American, and BHP, spending up to US $100 million on those projects. What does it take to convince majors like that to spend that amount of money on your projects?

Ross: Oh, they have to see an opportunity that’s meaningful to them. Today, BHP has … What’s BHP’s market cap? 100 billion dollars? It’s huge. It’s the biggest mining company in the world. Anglo American’s market cap is … I don’t know what it is. $40-50 billion. For that company to have something meaningful in any exploration property in the world, it has to be very large. What they see on our properties is very large opportunities. Now, they’re early stage so they have to go and drill them and they have to test them, but if they’re big enough for Anglo American or big enough for BHP Billiton, believe me, the minority stake that Luminex has will be extremely valuable.

A lot of the high risk exploration is being covered by these large companies. Basically, they’re free options for Luminex shareholders and if you talk to any technical person about the potential in both of those property package, they’ll say just based on the data that’s available to the public, these opportunities are fabulous.

Bill: A year ago when we spoke at the Sprott Natural Resource Symposium, you were about a 20% shareholder of Osino Resources, and you shared your initial thoughts towards this project, before the company released some great drill results. I think the share price was about Canadian 35 cents at that time. We’ve seen it hit recently $1.40 Canadian. Can you share your updated thoughts regarding Osino Resources at this point?

Ross: Sure, Bill. I mean, for me, when I invest in companies it’s often because I really like the jockey. I like the person at the helm, and Osino was an absolutely classic case of that. I met Heye Daun, the CEO, and founder, I met Heye in Ecuador when we were combining Lumina Gold and another company he was CEO of. I really liked him. I think he’s honest, he’s smart, he’s competent, he’s got his feet in the ground. He’s just a really good guy.

He said, “Ross, I’m going to start a new company based on a gold play in Namibia, where I have a lot of background.” I said, “Sounds good. How much do you need?” He said, “X dollars.” I said, “I’m more than happy to back you and I’ll end up being 25-30% shareholder.” It was truly based on absolute faith and judgment of one person. And look what’s happened. He’s built a company around that. That was a few years ago when I started that, just as a punt, and he’s turned it into a very exciting company and I’m really proud of him and excited.

I don’t really know too much about what he’s got at Namibia. I mean, I read all the stuff that he puts out in news releases, but I would say it’s been a classic case of you bet on the jockey and they deliver more times than not. That’s really my association with Heye and I’m so proud and pleased with what he’s done.

Bill: Regarding future investments, is there anything you can share with the investors listening about where you’re looking beyond the companies we’ve talked about, to potentially make some money in the junior resources?

Ross: You know, Bill, I’ve really got my head down right now. I’m really working hard to build Equinox Gold into a really huge, long lasting gold focused company in the Americas. So far, so good. It’s been a great run. I’m also helping the management at Pan American Silver navigate the crisis right now and make sure they stay as the world’s preeminent silver mining company. Lots of work to do in Ecuador. There’s work to do in Argentina for them to increase your silver production, not only 10% or 20%, but as much as 200%.

Pan American has this giant options to increase its silver production, and it’s really executing that that is the main focus for the company. Equinox Gold I’ve talked about, Lumina Gold I’ve talked about, Luminex I’ve talked about. Those are my main plays. I’ve also got a renewable energy business, Bill. You probably don’t have too much interest in that, but it’s a really nice company, Innergex Renewable Energy. It’s a Montreal based company traded on the Toronto Stock Exchange and I’m really excited about that, because I’m really trying to help the world get off of fossil fuel energy and more clean energy. It’s really important for us and I’m trying to encourage all the mining companies to go renewable as much as they can.

I’m doing a lot of stuff and it’s been a great run. I’m not really invested in very many other companies. Occasionally now and then I’ll follow-up my investment like with if Osino raises X dollars, I’m usually there for my proportionate stake.

Bill: Ross, a year ago when we spoke at the Sprott Conference, your parting words I remember were, “Don’t sell your gold stocks too early” because of your positive expectation for this bull market. What final advice would you like to leave us?

Ross: Yeah, I mean, that’s often a mistake that a lot of people make. They’re in a bear market, you’ve had all these … No market is straight up or straight down, so bear markets have these agonizing, agonizing year after year down trends. Every so often you’ll get an up trend, the stock might go up 10% or 15% and people tend to get in the habit of selling and being more traders. They trade when it goes up, they sell, and then it goes down, they buy a little more, then it goes down further, then it goes up a little bit, they sell, it goes down further. It’s a good trade for a while and then all of a sudden there’s a sea change.

There’s a cyclical bottom and a cyclical uptrend. We hit that in 2016, in January, 2016, when gold bottomed at $1,050 and it started an uphill trend. It was in an uptrend before COVID came along. It had been going on for three and a half, almost four years, in an up trend. Not beginning of any bull market, I said I think in January, to most people I talk to, that we were in the fourth inning of a gold bull market. So, in the cyclical up turns, the worst thing you can do is not realize that this is a secular change. This is a shift in a long term trend.

The worst thing you can do is trade that and sell out after the stocks have gone up 10% or 15% off the bottom because it’s the start of a run where most of these gold stocks, big companies, small companies, all companies lever to gold or silver, they’re going to go up 100% or 200% or 300%. A big cap stock like Pan American’s already gone up 300% in this run, since 2016. 300%. It’s a $10 billion company now. That’s a pretty nice move.

That really was the advice that I was giving, Bill. Don’t treat this as a trading situation. Treat is as a long term trend. If you want to, if you really want to, because it’s maybe good business, sell enough stock to take your original investment off the table and then just leave the rest and enjoy the ride. It’s a free ride at that point. Have fun, just read the tea leaves and try to figure out when the party’s over, but it’s not going to go over for a while. We are not in the fourth inning anymore. We’re maybe in the fifth, and of course, it’s likely we’re going to go into extra innings now because of COVID, and all of the extra juicing of debt that the world is doing, synchronized debasement of paper currencies. It’s incredible.

For 5000 years that’s been going on when countries have strife and trouble, and the beneficiary has always been gold. Gold keeps its value. Paper currencies lose value over time. It’s just a fact of life. This is what’s happening now, and quite frankly, it’s likely to stick around for a few more years. I would just say people, if they get nervous, take their money off the table and leave the rest and enjoy the ride.

Bill: Ross, I really appreciate your mentorship through this interview and taking the time to come on today’s show. Thank you very much.

Ross: My pleasure, Bill. Thanks for the opportunity.

 

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