Auryn Resources: The Management Assessed

Summary

• An able and ‎conscientious management team is one of the most important attributes to look for while stock picking in the junior mining space.
• How to use scant information to connect the dots in sizing up junior mining entrepreneurs is a challenging yet rewarding task for investors.
• In this article, I introduce how we at The Natural Resources Hub go about the assessment of managers, using the Auryn Resources team as an example.
• Based on what I believe to have led to the serial success of Ivan Bebek-Shawn Wallace, I considered whether their entrepreneurial idiosyncrasy can be parlayed to the current venture - Auryn.
• This idea was discussed in more depth with members of my private investing community, The Natural Resources Hub. Start your free trial today »

The key to our success is that we're a disciplined group with skilled people.

Right now (2015) we are preserving value, rather than creating it, by being prudent.

We want to be the people making the wave, not the people riding it." - Shawn Wallace

To have a management team, which is technically capable and operationally resourceful, is one of the key criteria in stock picking in the junior miner space.

In this article, let's have a close look at the duo leading Auryn Resources Inc. (AUG), i.e., Ivan Bebek (executive chairman) and Shawn Wallace (president and CEO).

Track record

They certainly have a track record of making their investors rich. Since 2005, they raised a total of C$600 million and built four junior mining companies, with two monetized.

• The first, Keegan Resources, found 3.83 Moz of gold in the Measured and Indicated category with an average grade of 1.73 g/t Au and 1.25 Moz of gold in the Inferred category with an average grade of 1.75 g/t Au, based on a 0.8 g/t Au cut-off in the Esaase gold project in Ghana (see here). In 2013, the company changed its name to Asanko Gold Inc. (AKG) (see here) and acquired PMI Gold Corporation which operates nearby (see here). Asanko is now a producer of gold (see here).
• The second, Cayden Resources, was acquired by Agnico Eagle Mines Limited (AEM) for C$205 million or C$3.79 per share in 2014. Cayden owns, has options to acquire or has staked, concessions constituting a 100% interest in the 41,000-ha El Barqueno Property in the Guachinango gold district in Jalisco State, and a 100% interest in the 13,000-ha Morelos Sur Property in the Guerrero gold belt in Guerrero State, Mexico (see here).

Auryn Resources is the third start-up, originally incorporated in 2008 under the name Georgetown Capital Corp. as a capital pool company. After having completed a qualifying transaction with Full Metal Minerals USA Inc. in February 2011, Auryn assumed its current name Auryn Resources Inc. in October 2013. Since 2015, Auryn has acquired seven projects in Nunavut and British Columbia, Canada, and in southern Peru. As of 2019, the company decided to focus on two flagship projects, i.e., the Committee Bay gold project in Canada and the Sombrero copper-gold project in Peru, and divest two non-core assets to fund the ongoing exploration.

• True to their serial entrepreneur reputation, they have started yet another junior mining company Torq Resources Inc. (OTCQX:TRBMF), f/k/a Stratton Resources Inc., which currently explores for gold in North America. Torq is being run alongside Auryn, both sharing the same office and staff as of April 2019.

This is a solid track record of entrepreneurship. However, to follow them from the monetized companies to the next big thing - Auryn, it may be a good idea to know why they have been so successful behind apparent track record.

How to size up the management

At The Natural Resources Hub, I analyze an executive from four angles, i.e., his/her instinctual, emotional, social, and cognitive idiosyncrasy (Fig. 1). By studying the decisions made in the past by that executive about corporate development strategy, asset management, financing, capital allocation, team building, operations, shareholder treatment, and local community relations, we can learn a lot about the executive as a person.

The operating environment changes and humans are relatively malleable, however, something about a person never changes. Therefore, I believe what we set out to learn empirically about the character and idiosyncrasy of an executive from his past record should shine important light when we decide whether to take (or keep) fractional ownership in the company he manages.

Fig. 1. The human tetrahedron, TNRH's way of analyzing an executive, by Laurentian Research.

The drive

Wallace and Bebek as partners appear to show a strong drive to succeed as evidenced in their ambition. The drive to succeed always has a twin, i.e., the drive to not fail as manifested in survival instinct.

They do not hide their ambition to make district-scale discoveries, a taste which Wallace said he acquired while he worked at Hunter Dickinson as junior staff. Their rationale for going for the giant discovery is, characteristically, the major mining companies, the perceived suitors for their find, need a potential takeover target that can move the needles for them. They "want to be the people making the wave, not the people riding it." Hear what Wallace has to say about what they are after:

When we went out to make acquisitions with the Hunter Dickinson Group, they always had to be significant. With Auryn we did not want a postage stamp somewhere that would produce 45,000 ounces (45 Koz) a year. That's not for us. We're going for large scale. It's all about getting that critical mass because that's the only way we're going to get a major mining company interested in making a transaction."

They are, on the other hand, averse to getting into a survival situation. When metal prices go south, they will switch to a capital preservation model, a decision many junior explorers cannot make until liquidity dries out and terribly dilutive equity has to be issued.

• For example in 2018, they had about C$7 million in the treasury when the market crashed. They promptly stop drilling to preserve capital because, in their eyes, the market at the time couldn't care less about drilling results.
• In 2015, they again saw it as the time to preserve value "by being prudent" "rather than creating it" (see here).

They are frugal. They rent office space "in a B-class building off the beaten path in Vancouver" since the Keegan and Cayden days. They share office space and staff, including the CFO, between Auryn and Torq. "Capital efficiency is a big theme for (them)".

Emotional discipline

The intelligent capital allocators are fearful when others are greedy and greedy when others are fearful.

The junior miners have been suffering since 2015, as shown by Van Eck junior gold miners ETF (GDXJ) which crashed from north of 175 to a range between 20 and 50 (Fig. 2). Nonetheless, Wallace and Bebek went shopping for high-quality projects at incredibly cheap prices which would be unthinkable in a commodity bull market.

• Within two years, they acquired seven projects in Canada and Peru, laying the growth runway for the company in the next decade. Two of these projects are identified as core and two are currently negotiated for sale, pending gold price recovery, to generate funds for deployment to the flagship projects.

Fig. 2. Stock chart of Van Eck junior gold miners ETF (GDXJ), shown with times when Auryn Resources acquired the Committee Bay project (1), the Sombrero project (2), and Homestake Resources (3). Source.

There are times when an intelligent entrepreneur goes for the jugular. After their technical team started to work in the field on the Sombrero project in Peru, they couldn't believe half a dozen major mining companies have overlooked the extremely prospective area due to a belief that it's covered by young volcanic rocks. Wallace and Bebek saw the opportunity to monopolize the area, so they decisively secured claims over a 120,000-ha tract (Fig. 3).

Fig. 3. Blocking up in the Sombrero project, modified after source.

Build a following and build a winning team

They recognize the importance of getting the word out, especially in the junior mining space where company name recognition is, understandably, low. Asked how to raise investor awareness, Wallace said:

Three things would be continuing to make accretive acquisitions, having some exploration success and spending money prudently on marketing efforts. That's important. We have an adage here: If you're spending money on the ground, you need to be spending money on marketing. Those are things that are going to help us be better known."

Through their successes in Keegan and Cayden, Wallace and Bebek have attracted a following among the family and friends, bankers, and retail investors. Back in early 2015, the family and friends held as much as 35% of Auryn, which may stand at around 15% today after dilution. The insiders currently hold around 15% of the shares outstanding. As Wallace saw it (see here):

We do have a following. I've lacked the perspective of what it's like not to have a following. That's not to say that we haven't had our lean times. That just comes with being in this business. We are very respectful of our following and we don't take it for granted."

And their way of respecting the followers is to minimize equity dilution as they have repeatedly assured while delivering value for shareholders. In their words,

We're not going to issue shares just to keep the lights on. Many companies have fallen into that trap. We're not going to let that happen."

• As of early 2019, they are trying to raise cash on hand by selling two non-core assets (supposedly, Homestake, and Gibson and MacQuoid), which, if going through, would fund the company's exploration programs for another four years, thus sparing the existing shareholders equity dilution. During this time, the gold price appreciation weakened, which seems to have slowed the pace of the negotiations. So, to fund the Sombrero trenching, they raised C$5.26 million in a non-brokered private placement in March 2019, with approximately 600,000 shares out of the 3.28 million shares issued being from the insiders (see here).

Over the years, they have built a technical team that's uncharacteristically strong for a junior miner of their size. In Bebek's words, "Auryn is a junior exploration company with a major mining company's taste for discovery and with major mining company's exploration team" (see here).

• The core technical team consists of predominantly geoscientists who previously worked at Newmont's (NEM) global exploration division, including David Smithson, vice president of exploration, who introduced now-COO Michael Henrichsen to Bebek and Wallace in Africa; Antonio Arribas, formerly Chief Geologist at Newmont and a mining guru; Miles McAlister, Kim Cook, Mike McMillan, Nigel Radford, all ex-Newmont.
• Along with acquired assets, they also managed to keep the key technical personnel who have been working on the projects for years. They kept the technical team of North Country Gold when they got the Committee Bay project. They trust Miguel Cardozo, from whom they bought the Sombrero project in 2016. Cardozo, another ex-Newmont, is credited for heading the exploration program that led to the discovery of Yanacocha gold and Galeno copper-gold mines in Peru.

The superb technical team is a critical component of their secret sauce of success. The technical team brings a disciplined, rigorous science-based approach to the exploration programs. Wallace humbly commented:

Ivan and I get a lot of the pats on the back, but frankly, it's our technical people-the geologists and geoscientists who go into the field and create value for our shareholders."

Rational decision making

Learning. Wallace and Bebek are still young, at 50 and 41, respectively. They said they have spent 20 years getting good at running a junior exploration company and they continue to improve. The ability to continue to learn is definitely an attribute a successful entrepreneur must have.

• There's something in them which probably will not change. As they admitted, they knew what they were good at - exploration - and they knew what they wanted to achieve - discovering major mineral deposits (see here). On the other hand, they seem to be flexible enough to adapt to changing times, "not getting too hung up on the things that we can't control and trying to mitigate the risk of the things we can control has helped us in these difficult markets."

Being methodical. They have established three criteria in their global search for assets to acquire:

• "It had to be a district-scale opportunity, which means a land package where multiple deposits could be developed in the same geological setting;
• It had to be situated in a stable jurisdiction where people get mining permits in a reasonable timeframe; and
• It had to be high grade because it's only in times like these when you can economically acquire high-grade assets" (see here).

Additionally, they create value "by purchasing or getting involved with high-quality assets that would not be available in a better market." So they have been opportunistic, patiently waiting for the right projects that sell for insanely low prices at a time the seller is "financially challenged." They acquired the Committee Bay project for C$20 million in which North Country Gold had invested approximately C$50 million, They bought the Homestake project for C$15 million. They established the landholding position in Peru with little upfront cash payments.

Patience is probably the most important skill that anyone who tries to do what we do needs to have because people tend to make more impetuous decisions in a bull market, both technical and financial. Now those people have to live with those decisions. To be patient and measured in everything you do is important" (see here).

Execution. Mineral exploration is a capital and time intensive business, which makes proper planning and flawless execution extremely important.

Wallace and Bebek even went as far as bringing machine learning into drilling targeting as part of their planning for the Committee Bay project, where they only have two months of time each summer to conduct field operations (see here).

There is an old Italian tailor's adage that says measure twice, cut once. We're going to measure three times here because if you get it wrong, it's expensive. Good execution is really important."

Fig. 4. A comparison of the geologist and machine-learning derived targets from the central portion of the Committee Bay gold belt. Overlapping targets variously derived give Auryn's technical team confidence in further exploration. Source.

Investor takeaways

From an investing point of view, there's a lot to like about the Ivan Bebek-Shawn Wallace partnership.

At their young ages, they already have a stellar track record of delivering value accretion for shareholders. Furthermore, as I attempt to show above, their successes in rewarding their followers and shareholders are not an accident. The attributes in their character, such as frugality, survival instinct, emotional discipline, the ability to attract a crowd of followers and to build a strong technical team around them, and the methodical and rational decision making, in one package, are rare among the junior miner executives.

Going forward, I believe these character idiosyncrasy may continue to serve shareholders well, which is yet another reason to go long Auryn.

They currently choose not to shepherd a mining project from exploration to production, perhaps partly due to Wallace's learning at the Hunter Dickinson Group. There's nothing wrong about sticking to junior exploration. However, many superachievers in the junior mining field did evolve from "dress 'em up and dump 'em" to the majors to direct involvement in development and production, a case in point here being Robert Friedland. In the future, they may come to this phase in their careers too, especially considering they may end up holding a stranded gold mine in arctic Nunavut, or they may not. That's something only time can tell.

Disclosure: I am/we are long AUG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.