In Situ

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. I'm pleased today to welcome a new guest to our podcast, Justin Tolman, Managing Partner, Senior Portfolio Manager, and Economic Geologist at Sprott. Justin joins us today with over two decades of global mining and exploration experience. Justin, thank you for joining Sprott Radio.

Justin Tolman: Thanks, Ed. It's nice to be here.

Ed Coyne: Justin, as a new guest to Sprott Radio, I think it'd be best to start talking about yourself, your work at Sprott, and your overall experience.

Justin Tolman: Today, I'm a portfolio manager across a number of products at Sprott with my peers, but I originally started as an analyst here six years ago or so. A unique little wrinkle on the portfolio manager aspect of the Sprott business is the background before that where I spent the previous 20 years, like you said, making discoveries around the world, working in mines underground, open cut, developing projects and running teams. I was basically doing all the things that help to make companies a success in the metals and mining business, which gives me a lot of insight when it comes to selecting stocks to invest in and helps us go a lot deeper with our due diligence when we're looking at potential investments.

Ed Coyne: Give us a few highlights of the parts of the world you have visited and the more interesting sites you've been part of. Please share some of that experience, where you found yourself, and what was interesting. If you don't mind talking about that, I think that would be interesting for our listeners today.

Justin Tolman: I've been fortunate enough to be part of discoveries on three different continents over the years. I was part of the discovery team working with Newmont for a gold deposit in Eastern Australia, now on the cusp of being greenlit. I was the general manager for a junior explorer who made a large porphyry discovery in the Andes and, at the same time, had an epithermal discovery in the Deseado Massif in Argentina, both of which were acquired by larger companies.

Ed Coyne: You mentioned something I thought was kind of interesting. You just said you're in Australia working on a unique discovery that's just being greenlit. What was that timeframe from the point of discovery to the point of extraction? It could be sometimes a decade or longer. Please walk us through that process and what it looks like.

Justin Tolman: I think a decade would actually be lightning speed at the moment, and the answer is always it depends. Averages are a horrible way to measure this because there's a whole legion of ways in which projects can get stalled and fail to advance. Really good ones normally find a way, but not always. From discovery, it takes time to drill something out and put it through its phases, but the real wrinkle we're dancing around is permitting and how that changes in a jurisdictional sense from country to country. Understanding that is critical. It's all too easy to try to blanket a company with one particular set of biases. In many cases, it's more of a patchwork quilt with individual provinces or towns quite willing or unwilling to support project development, including here in the U.S.

Ed Coyne: Are there parts of the world that, regardless of how unique the discovery is, are typically do-not-go places, or are we willing to go all over the globe looking for opportunities? Are there safer places to go than others where you get a return on your money and a return of your money? Talk about that a bit because I'm sure there's also a geopolitical aspect to this.

Justin Tolman: The short answer is yes. In terms of how I think about that stuff, by and large, I'm quite agnostic with respect to country risk. I'm more than willing to consider what some would regard as risky jurisdictions, but it always comes with a couple of caveats. The potential reward has to be worth the risk, which is to say the underlying ore body needs to be spectacular sometimes rather than just good.

Just as importantly, the management team can greatly influence the outcome, where you've got management who can navigate the political waterways and local politics. The ins and outs can differentiate between a project succeeding or failing. That applies whether it's somewhere quite well developed in the south of Spain or somewhere in a very emerging jurisdiction in the Democratic Republic of the Congo. You need a different jockey for a different horse each time, but with the right team and project, I would be comfortable in a surprising number of places.

Ed Coyne: Speaking of team, do you find yourself following the talent around? I'm assuming CEOs and perhaps management teams move around over time. Do you tend to favor the people over the geology or the opposite, geology over people?

Justin Tolman: I think of it as a three-legged stool where management would be one leg of the stool, and the geology would be the second. On the third, you've got the corporate structure of the company. A stool can't stand on only two legs. You need all three to make it work, so it's not a case of one over the other. If something's missing, you're going to fall over. In answer to the first part of your question, absolutely. I have a list of people through my time in the industry who I regard as best in class, who've been serially successful, who understand where the limits of their circle of competence are, and when they go to a new project, it behooves me to pay attention and follow them.

Ed Coyne: Many investors we talk to tend to avoid or shy away from mining in general. It just seems too complicated; too many things can go wrong. With the right amount of due diligence, you can get it right. What are some of the key factors you look for when you're evaluating a mine?

Justin Tolman: The answer is the number of ways projects can fail a legion; arguably, they're all key factors. When I go out to a project for the first time, one of the things that I think we do well here at Sprott that differentiates this is we do go out and visit sites, and we do try to get there as early as we can in the life cycle of a company. I'm looking at everything, and for the benefit of my time management, I often try to find a reason not to proceed and not invest.

The faster I get there, the more time I've saved myself. That starts before we even get on the ground. It starts at a desktop level. If I can't find a reason not to do it, it gets elevated to the next level of due diligence. It's a trite answer without giving you a list of things other people can do. Something as simple as where water comes from is easy, but at the right part of the world or the wrong part-- if you go to the Atacama Desert, it can be more expensive than gold sometimes.

Ed Coyne: That brings up a great point: all the different risk factors. In this modern world of technology where you can pull everything up on your screen, how valuable do you find it to physically see this site and understand what it is made of and the people involved? How much value do you put on that today versus 10 or 20 years ago when you first got into the industry?

Justin Tolman: I don't know if the visit has become more or less valuable. Perhaps what's happened is with the accumulation of scar tissue, I've gotten better at asking the right questions and trying to glean as much as I can from it, but the site visits are critical, notwithstanding the idea that you can see a lot of the hard stuff we'll talk about; where a power line might go, how the topography might hurt or hinder an operation.

There's a bunch of soft benefits. Being in the car on a bumpy road with management for eight hours at the end of that time, you know not just the ins and outs of the project and management's history, but the names of their kids and all sorts of stuff and that kind of access is impossible to get otherwise.

Ed Coyne: What are some of the technologies out there that you've seen change to make this industry safer, more productive, better and more cost-effective? What have you seen change in this business in the last couple of decades?

Justin Tolman: What a wonderful question, Ed. In no particular order, I would point out the rise of remote use of trucks and machinery underground, which means that operators are no longer in dangerous situations. They're not in hot, noisy, or gassy areas, which flows through to the rise of autonomous truck fleets, which are increasingly used on exploration. We've seen incremental improvements in a range of geophysical and remote sensing tools.

A couple of new techniques are being used to improve the turnaround time for assays. If you're in a remote field camp with a limited field season, the idea that you can get a gold assay in less than 24 hours rather than waiting for weeks or sometimes even more in peak times has huge implications for the timeline to discovery. What we haven't seen is great big step changes. Still, we've had a lot of incremental benefits that combine to make us better at what we do both from a productivity standpoint and, as you said, from a safety standpoint, which is arguably even more important.

Ed Coyne: Have you historically looked predominantly at precious metals, mostly gold and silver? Are you getting involved with all kinds of mines now, from uranium to copper to all the battery metals and rare earths out there? What's going on in that space, and is it any different, or is a mine a mine? Does it matter what you're pulling out of the ground?

Justin Tolman: I've worked in precious metals but also spent a lot of time in base metals. I've worked in uranium and coal, so I look at all those commodities. In addition to my activities on the precious metal side of Sprott, I'm also a co-PM on our energy transition fund. The mandate stretches across exactly what you're talking about: copper, nickel, lithium, and all of the exciting metals that will help drive the energy requirements we have for the future, the electrification of everything. Part of my brief is to go out there, reidentify the best projects, and be part of them going forward.

Ed Coyne: As a portfolio manager in this space, how do you try to guard against things that can go wrong, things that go bump in the night? What are those things? From a portfolio manager's point of view, what are the two or three biggest risk factors when investing in a mine?

Justin Tolman: The first has little to do with the commodity itself. I would suggest we need to look carefully at dilution, the idea that these companies don't operate in a vacuum, mines are not cheap to build, and exploration is never free. If you're not careful, you can do everything right and still lose because dilution came to eat your lunch. The share price wasn't appreciating as fast as the company was issuing new shares, which is one of the reasons that I don't push market cap as an indication of value. I look at the share price and how that changes over time.

The other thing that springs to mind is that we obviously can't control where the mineral deposits are located. Our host governments have a huge influence over how fast a project develops and whether or not something goes bump in the night. To use your words, Ed. Thinking about how you mitigate that risk and the hazards of, sometimes, it's outright nationalization like we saw in Kyrgyzstan a few years ago. Sometimes, it's creeping nationalization. Ongoing changes to the mining code that you thought was settled, and it turns out they'd like to come back and reopen that discussion.

How you stay on top of that is part of being engaged and following your investments, but following the countries you invest in as well, and understanding that it's never going to be perfect, you can always be blindsided. Then it comes down to position sizing, making sure your investments are balanced across a range of things and sized accordingly.

Ed Coyne: You talk about nationalization. We have more and more conversations with large institutions, advisors, and investors, even direct investors. We talk about the whole supply-demand of a lot of these different metals. One of the responses always is, "Well, if it becomes so tight. Won't they just nationalize that mine and try to keep the prices in check?" That may not be the right way to understand what nationalization means. Can you talk about why a mine would get nationalized, what that means, and how real that risk is when looking at investments?

Justin Tolman: When I feel there's going to be a strong risk of nationalization, that's a pretty easy avoid. That's where the government comes in and decides it can maximize the value to the country by developing an ore body itself. For that government, it might not be about profit per se. It might be about having as many jobs as they can, which is one way to think about it, but it's not how shareholders would think about it.

Ed Coyne: Right.

Justin Tolman: Historically, that's never worked. Maybe it has somewhere. Maybe one of your listeners can point out where it's been a net positive. Still, I somewhat cheekily referred to what I call creeping nationalization, where the government increases its take of the value of the resources in the ground through additional taxes or royalties.

Increasingly, we're seeing a trend towards partnerships with governments. On an individual mine, companies will sit down on projects of importance and say, "Let's find a situation that we can all live with." They'll look at the total take from the mine, not just taxes and royalties, but salaries, investments in local infrastructure, and all of the generated revenue, and ensure that the split is equitable. That way, nobody feels like they've been exploited, neither the company, nor the locals, nor the host government. The rise of that, I think, has been a tremendous net positive, and it's unlocked a bunch of mining operations or potential mines that might otherwise still be trapped in glacial ice today.

In the past, as an industry, we've done a poor job communicating to different stakeholders exactly what our real costs of business were. We used to report just cash costs. It would be easy if you're a host government or a naïve investor looking at that and going, "These guys are making a huge margin. They should be making a killing." If you're the government, you're asking, "Well, where's my proportion of this? What am I getting on that?" We all know that that's not the case. Mines have large sustaining capital needs, businesses have G&A, and you have to serve as debt. Being as upfront and clear as you can with everybody and all the stakeholders minimizes misunderstandings going forward.

Ed Coyne: People think of mines as destructive to communities. Reality is probably the opposite. They are in beautiful parts of the world. They are in parts of the world where maybe there's no economic opportunity. Bring that economic opportunity to that part of the world. We're self-serving and saying that for sure, but what's your take on it? Have you seen many projects where you can have both? You can have an ecosystem functioning and thriving and have an existing and profitable mine. Is that a reality? Can we see that happen?

Justin Tolman: Absolutely, it is happening. I think most geologists and people who are on the ground early are environmentalists at heart. We took this job because we like, respect, and want to be part of nature. When I became a geologist, part of the attraction was that I'd get paid to go camping. Yes, mines have an impact, but it's contained. Modern mining goes to tremendous lengths to restore the environment to the same or, in many cases, better than it was. As an industry, we have some legacy issues which we need to fix and address.

There are a number of mines as metal cycles fluctuate up and down, which, were they to come back, would undoubtedly repair some of that legacy damage and the water balance work that goes into these things to ensure things stay on-site; the thinking about landforms and visual appeal. It's de rigueur now when you get a mining permit, but all that is controlled and considered. Notwithstanding some of the very real failures in some areas, we have to do better, particularly with respect to some civil engineering and tailings dam works.

Ed Coyne: Well, it sounds to me that technology is continuing to expand, things are getting better all the time, and the world is slowly embracing the reality that we need mines, we need the materials. That's not going away. It's good to hear that things are coexisting and that they're always getting better. Before we sign off, are there any last points you'd like to leave our listeners with or things that maybe I didn't ask that you wish I would have asked that you would like to sign off with?

Justin Tolman: Maybe I can share one of my biases when picking mining and exploration stocks with all the listeners. When doing due diligence on these things, I have an overwhelming bias towards "it makes my life easier." When things are going up, I know they'll do well. When things go down, quality tends to go down. It's very forgiving on my timelines. Some people will talk about high grades, and some people will talk about massive terms or leverage. I keep coming back to quality and margin. That's what has served me well so far.

Ed Coyne: I'd encourage all the listeners who found this interesting to visit our website at sprottusa.com. On that site, you can click on “our firm” and then click on “site visits.” Justin does a great job putting some of the most recent site visits there. Some of those photographs are pretty spectacular. I encourage you to go on our website, look at some of these most recent site visits and some of these photographs, and learn more about what Justin's doing at Sprott and some of the work we're doing as an overall firm. Justin, as always, I appreciate you taking the time today to give our listeners a little insight into the mining world. Thank you for your time.

Justin Tolman: Thanks, Ed. It's always a pleasure.

Ed Coyne: Well, once again, I'm your host. Thank you all for listening to Sprott Radio.