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Issue link: https://emj.epubxp.com/i/131325
PDAC ROUNDUP 2013 (PDAC Roundup - from p. 54) Kaiser: After Bre-X, the disclosure and quality control regulations that created 43-101 have been very successful. We now have the most reliable data in the public domain. Everyone wants to list on the TSX and TSXV so that they can make these disclosures. Where we need less regulation is in the attitude of regulators to protect retail investors from themselves. The retail investors can max out lines of credit, buy lottery tickets, gamble and impoverish themselves, but they seem to be forbidden from putting money into speculative stocks. The brokerage firms, which are largely owned by the banking establishment, are turning their brokers into asset gatherers. The retail investors have their time horizon and risk requirements mapped out. Brokers are not allowed to take orders. The investors give them their money. They collect 2% and stuff it into the proper mix of structured products. The retail investors are being forced out to the discount brokers who are order takers. That's a good thing because the junior sector is a form of gambling. It's a productive form of gambling where exploration is performed and real wealth is created. The bad regulations are coming. They have cranked up the accredited investor threshold to $1 million, not including household equity. They have shrunk the pool of eligible investors. They are choking the juniors to death. They need to make it easier to flow money into companies via private placement and easier for public companies to market the existence of a private placement. Lower the threshold for eligibility and enable the discount brokers to flow the money to these private placement accounts. Goldie : 43-101 good; helicopter-parenting of investors bad? What do you think? Goodman: 43-101 is globally accepted as a great document. We do not need any more regulations. We need better regulations. When we have regulators who take apart a company like Sino Forest, and it takes 18 months and billions of dollars are lost, and with lawyers all over the place they find that nothing was wrong. That's our regulation and it's scary. Topic No. 4: Should the juniors use the debt market? Sprott: If the company is a producer, yes, they can use the debt market. If you are not a producer, you should never touch debt. Debt is getting cheaper because of low inter136 E&MJ; • APRIL 2013 est rates. It's something that should be considered. Many of these companies have substantive cash flows and they can take on a little debt and avoid the equity dilution. I still have a minute and I would like to talk about the U.S. economy. Everyone lost 2% off the top of the paycheck. That's 3% after taxes because the one-third still comes off the top. Now we have the sequester. The American's discretionary spending is down 4% or 5%. How can you have a recovery when people are earning less than they were the year before? It can't be pretty down there. If 70% of the people are not doing well, you can't have a strong economy. They are holding it together with 0% interest rates. Kaiser: Right now there is $8.7 trillion in household savings earning 0.5%, next to nothing. That's more than the $7.5 trillion in net real estate equity that went down $7.4 trillion during the real estate melt down in 2008. That money at some point will be deployed. Once the U.S. is past these austerity measures, and back in a growing economy, the Fed will have very real concerns about inflation as credit expansion gets under way. As far as debt for juniors, it's not an option. There is a new craze: loan-to-own, which is a vulture capital, predatory lending system, where they want you to put your asset up as collateral for some sort of financing. For juniors, it costs so much to get the deposit to a feasibility study and production decision. You are going to need more and more money. If we have a lengthy sideways market with gold and silver, they are not going to be able to finance equity and they will be bankrupted. The mentality behind this loan-to-own is that we are stuck in a bit of bear market and they are putting a structure in place to cheaply acquire assets in which tens of millions of dollars in investments are stranded because of the capex explosion and this bias toward the downside and the negative outlook. Goodman: Debt is an interesting thing. You lose your whole company if you can't repay it. Sprott is correct. If you have cash flow and you can afford it, interest rates are low and they might be able to use it successfully. When industry has the risk levels that it has, debt is the wrong tool to use. Equity is the more likely way it should happen. Royalty companies: Loan Sharks or Guardian Angels? Sprott: They can be helpful in certain situations. I would never encourage a precious metals producer to accept an off-take agreement unless they are totally strapped for money. I have no problem with off-take agreements for base metals because I'm more of a believer in precious metals than base metals. Investors buy gold because they have this vision of where gold should be. Whether it's $3,500/oz or $5,000/oz, when prices get there, and believe me they will, these equities will be looking spectacular. I don't want to look back and see these guys selling their gold at $1,200/oz to raise $25 million. I prefer to see them gut it out and fund it themselves. Kaiser: This trend toward juniors selling a royalty, at the early stage of the project. They are not going to get much money. It might make sense to have a bridge financing royalty agreement when you have an advanced project where you can calculate the value of the royalty. One of the dangers of this royalty fad is that it doesn't really apply to these emerging markets where we are seeing these super royalties. For example, Guyana now has a 7%-8% gross royalty. When you start stacking up all of these royalties, all of these projects that are encumbered with private royalties are dead in the water. The royalty stream will never happen. I think this is a temporary fad that has no long term serious implications for fund raising in the junior sector. Goodman: Having founded a couple of royalty companies, I do not want to speak against them. In certain instances they do not make sense. I have been on the board of a few companies where we refused to do royalty deals. We calculated that if we didn't have the price we needed we didn't want to give up those precious metals and it would have made the difference between the company being bankrupt or alive. It's an exercise in arithmetic. Off-take deals are entirely different. You can usually get a bottom price from an offtake deal and that bottom price that will make money or keep you in business. I'm on the board of a company that is currently negotiating an off-take deal and I am insisting that the off-taker become a major shareholder of the company as well as getting an off-take agreement. These deals are dangerous; Rob [McEwen] is not totally wrong. You're not protected from a drop in the price of metals. The company could go broke while paying these firms their royalties. www.e-mj.com