First Mining Finance: Buy Low, Sell High

T.FF, First Mining Finance, gold, Ontario,

“Buy low, sell high” is both the most obvious and most difficult investment strategy. Back in late 2014, Patrick Donnelly, President of First Mining Finance (T.FF) knew one man in the Canadian mining industry who had managed to execute on that strategy: Keith Neumeyer.

“My father was a miner and I am a geologist. I evaluated mining equities as an analyst for years and I learned one thing, “always bet on the jockey.”

In late 2014 the junior mining market was at rock bottom. “The valuations were shocking,” said Donnelly. In early 2015, Donnelly met with Neumeyer who had already come up with the concept of a mineral bank.

“We wanted to raise some money and start buying undervalued assets,” said Donnelly. “People told us we were crazy. That the bear market was going to last ten years. But we managed to raise 7.5 million dollars and, in April 2015, we were listed.

Part of the key to raising the money was that Neumeyer had done this before. His first success story, First Quantum Minerals, has grown to become one of the world’s largest copper producers and his current company, First Majestic Silver, is one of the largest silver producers in the world. Both were started by Neumeyer in similar market conditions.

In just over a year, First Mining had completed eight transactions. “At the time,” said Donnelly, “we were going against the wind, big time.”

For First Mining the fact an asset was selling cheaply was not the whole story. “Before we would buy an asset we’d sign a non-disclosure agreement and get the resource database and the drill results and the resource model the company was using for the asset. We have a very strong technical team, who would rebuild the resource model of the asset. We wanted to verify the resource estimate. We do a very granular level of work and we build our model on the basis of $1200 an ounce gold. We do a full on internal study and come up with our own resource estimate. We dig into the numbers before we make an acquisition. It takes us a couple of months to vet an asset.”

First Mining is thorough and there were a lot of assets on offer. Fairly quickly First Mining acquired 25 assets at various stages of development. “We want to take 100% of an asset or a company we’re interested in,” said Donnelly.

So that is the “buy low” side of the business, what about selling high?

“We’re not at the stage of selling assets,” said Donnelly. “Right now we want to put money into the ground to de-risk the assets we have.”

Putting money in the ground leads to announcements such as the results of an Economic Assessment for the Springpole Gold Project in northwestern Ontario, Canada illustrates. “This updated PEA study represents a significant improvement in both economics and annual and total ounces of gold and silver produced when compared with the previous PEA completed for Gold Canyon in 2013.  The PEA demonstrates that the Project has excellent margins with low cash costs of US$619 per ounce of gold equivalent and an average annual payable production of 322,000 ounces of gold equivalent, over the life of mine.  On that basis, once in production as contemplated by the PEA, Springpole would be one of the largest gold mines in North America,” said Keith Neumeyer, First Mining’s Chairman in the release.

This sort of news flow from a single asset will be multiplied as drilling programs at other properties report. “At Goldlund (also in Northern Ontario) we are spending ten million dollars to do 28,000 meters of drilling. It’s infill drilling and of the first 100 holes, 87 host gold mineralization. This drilling will let us move forward with a resource assessment and we’re also drilling at Hope Brook in Newfoundland.” said Donnelly. “We’ll have lots of news out going forward.”

As First Mining drills, it is watching the gold industry carefully. “For the last few years, the majors have been mining their assets. Now they need to replace the gold they have depleted. We’re beginning to see that,” said Donnelly. “At the recent Beaver Creek Precious Metals Summit we had seven large producing companies seek us out.”

When will First Mining begin to sell high? Donnelly is in no hurry. “We’ll continue to put out results,  we’ll de-risk, and we’ll wait for valuations to go up. We’re looking for more than $100 an ounce.”

At the same time, Donnelly and First Mining are looking for creative ways to monetize their assets. “We will not be putting our assets into production ourselves but we are open to joint ventures, spinouts, royalty agreements which are based on the Wheaton Precious Metals or Franco Nevada business models.”

If gold prices continue trending upwards and the majors continue to have to replace their gold resources, the First Mining business model should begin to pay off for investors over the next few years. The “buy low” part of the formula is locked in, now it is just a matter of waiting for the right time to “sell high”.

At time of writing, First Mining Finance was trading at $0.675 with 551.7 million shares outstanding for a market cap of $372,412,766.

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