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Tekoa Da Silva

Ross Beaty: Backing Wisest Men And Women Of A Sector, “Usually Recipe For Success”

>>Interview with Ross Beaty (MP3)

Tekoa Da Silva recently sat down with serial entrepreneur Ross Beaty, founder of Pan American Silver and Alterra Power.

Mr. Beaty is a legendary investor in the resource sector. He made his fortune buying up mineral assets in depressed markets and selling them years later at hefty premiums.

Is Mr. Beaty still confident you can make money buying undervalued assets in the resource sector during periods of depressed metals prices?

Tekoa asked him how the current market compared to past bear markets in resources and precious metals, and what he’d be doing today as an investor.

TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here today with Ross Beaty, Chairman and Founder of Pan American Silver and Alterra Power Corp. Ross, good to see you.

RB: Good morning.

TD: I’m happy that you decided to join me here today, so thank you. I want to ask you about your background and your experience, your career in the resource business. But for the person watching, if they’re new to the resource conversation, who are you? What’s your background for that person?

RB: Well, I’m a Vancouver boy, born and raised in the West Coast of Canada and I always wanted to work outdoors. I had my first rock collection when I was young and I became a geologist and it sounded to me the perfect job getting paid to climb mountains and fly around in helicopters. It was a great deal.

But I discovered I was also a decent entrepreneur and a good salesman. I think that kind of goes hand in hand. So I’ve had a career of really not working for anybody except myself and I just started company after company after company and with a huge amount of luck, they’ve been successful in the minerals business.

I’ve recently tried my hand at the energy business, in clean electricity. It has been just a huge amount of fun and a lot of success and they’ve all been public companies. So my background is very public and there has been a lot of other shareholders that have been with me as I’ve gone on this amazing little journey of wealth creation in the resources business. It has worked out well and I’ve got five kids and one wife and just have a lot of fun living life.

TD: Ross, how did you get started in the business? Where did you cut your teeth?

RB: I went to University of British Columbia. I got a geology degree. Then I went to the London Royal School of Mines in London for a master’s degree. On the side -- I hardly ever mention this -- I actually have a law degree as well and qualified as a lawyer but I never wanted to practice. But it was good background.

So I really finished all that in the 70’s, going to school and working as a geologist to make money to put myself through school.

In 1980, I started with my own company Beaty Geological, a little contract geology company. I worked very hard all over the world, West Africa, New Zealand. Lots of work in the United States and Canada and in 1985, I took my first company public. Actually Rick Rule was a seed investor in that company. That’s where I got to know Rick. It was in ’85.

The company was called Equinox Resources and Equinox taught me a lot of painful lessons as my first public company. I didn’t have anybody telling me how to do things or working with me. So we ended up acquiring a bunch of good projects, a lot of exploration work and we had many, many calamities in Africa and in California.

I remember spending three years trying to permit a 50,000-ounce gold mine in California, which is just stupid. I mean it was a lesson that I learned that small projects make small money and yet they have big hassle. So you always should focus on size.

Anyway, we had a lot of projects in Nevada, in California and in Utah, all over the West and eventually found a gold mine. We had a novel exploration technique called “walking” and we walked over the mountains in Nevada and we discovered a gold mine. We staked some ground and optioned it to one company. They drilled it and dropped it, gave it back to us. Then we optioned it to another company. They drilled just a little deeper than the first company drilled and bingo, there was a really nice high grade gold deposit called Rosebud.

Well, Rosebud was owned in a 50-50 joint venture with LAC. LAC said it was a little bit too small for them. So in the bear market of 1992, we offered to buy it from LAC. We couldn’t raise money, but I was able to sell the royalty. With the money from the royalty for a couple of million dollars, we bought it from LAC, had 100 percent of the project.

The following year, we had an offer to sell the whole company to Hecla for $107 million basically on that one deposit. So it was just a matter of – the deal timing was lucky and the market turned right after we did the deal and Hecla wanted an asset like that to replace when it was going out of production.

So it was just an absolutely great deal. It was a win-win and we sold the company in the spring of 1994. At that moment, I didn’t want to retire. So I took all our team and because I thought that the US market particularly needed a real silver play. I thought this was a cool thing. This would be a cool thing to do with my second public company and so I started Pan American Silver from scratch.

We bought a shell company that had no assets and no money and I think it was a seven-cent share price. We had a mission with no assets to build the world’s biggest silver company.

TD: What year was that Ross?

RB: 1994. So it was kind of ambitious but I made some people money. They loved the idea of silver. They backed me. They raised some money. Again Rick came in right at the start. He has always been there when I started a new company as seed shareholder and Pan American went from that idea to try to build the world’s biggest silver company. Twenty years later, we are  the world’s second-largest primary silver mining company. It’s a really big company. It’s in great shape, with a fabulous balance sheet.

We’re not delighted at the low silver prices today but it has been a really successful company. We have about 8000 employees now, a multibillion dollar market value, balance sheets that rival most companies in the industry, about $350 million in cash, and another couple of hundred million dollars in working capital beyond that.

So it’s in great shape and has a wonderful management team. So it has been a lot of fun building out over the years. Again, we made lots of mistakes and had all kinds of calamities. I spent three years working on a project in Russia and it was a disaster and we almost went bankrupt in 2001 with the bear market.

We had three months of cash left and we were losing money at our one silver mine in Peru. Then all of a sudden the market turned and we did a little financing with Bill Gates. We haven’t looked back. The stock went from $3 to $45 in just a matter of years.

So this is what sometimes can happen after a bear market; it can turn into just an absolutely wonderful run. Over the other years I’ve also started other companies. There was Da Capo Resources, a Bolivian gold exploration play that was sold in the mid-90s. There was a platinum project in Brazil called Altoro Resources, which we sold in the late 90s.

Then in 2002, I had the idea to build a copper play. That turned into Lumina Copper which turned into six separate companies. They were – the last of the six companies was sold last August and that was a lot of fun. We invested $170 million in a bunch of copper projects and eventually did exit for a total of $1.87 billion. So it was a really happy story for shareholders and then as you know, I started my little clean energy company in 2008, 2009 and that company is a thriving company today. Alterra Power, it’s called.

TD: For Lumina Copper, what was the market like when you formed that company? Who was the “usual gang” in terms of financiers backing that?

RB: Well, we didn’t really need very much money. I mean with Pan American, we were building a mining company. It’s a very different thing when you need the capital to build mines. You need millions, hundreds of millions. But if you’re trying to build out of speculation – like what we were trying to do with Lumina Copper was identify big – relatively well-proven copper deposits that were not economic at low copper prices.

So they were very cheap and in 2002 and 2003 when we acquired our 10 deposits, it was really a buyer’s market. So we were able to buy these very, very cheaply because the companies that had them didn’t think they were worth anything. The market had been in a bear market for five or six years at that point. Copper had been in the bear market for about 20 years.

So these were things that had been proven up in the 90s or 80s or 70s or even 60s in some cases and they were just on the company’s books for nothing. So it was very easy to make a cheap deal. We acquired a whole bunch of these deposits in mining-friendly countries and none of them had really what I would call a fatal flaw.

So they all had potential to be mines if the copper price went up. That was the one thing that we needed. But because I had looked at a chart of 50 years of copper prices, it was just – to me, it was blindingly obvious that in 2002, copper was at an all time low. It was 70, 80 cents a pound.

Even though a lot of people thought that the copper price was going to stay that price for a long time, I didn’t because I just looked back over the last 50 years and copper prices go like a sine wave with increase in amplitude.

The low in 2001, 2002 was lower than the lowest of the previous 50 years. It was an all-time low. It didn’t take a rocket scientist to think that the copper price was going to go up. I had no idea when it would go up or how high it would go. Ultimately it went to $4 or $4.50. There was the super cycle in China. I had also been in China. I knew it was happening there, that the Chinese demand would drive all of these metal prices beyond what anybody predicted in the late 90s or early 2000.

So Lumina was just a speculation on copper. All these 10 assets in the one company and then all of a sudden in 2003, the copper price took off. It went from $.70, $.80, $1, $1.20, $1.40 and it went all the way to $4.50 lb over the next 10 years.

So it was a very fun time to be creating wealth by drilling holes, adding to the value of these deposits one by one and then quantifying how good they were doing the economic studies and then running a little process and trying to find a buyer. We ultimately sold all companies in the group and for about $1.9 billion. They were all cash deals with cash equivalents. They were all sold to big companies.

One was sold to a huge Japanese company. Another one was sold to a couple of huge Chinese companies. Another one was sold to TAC, a big Canadian mining company and the last one last fall was sold to First Quantum which is a really great  Canadian mining company, one of the biggest copper producers in the world. We kept royalties in all of these properties we had. So we put those all together in a company called Lumina Royalty and we sold that to Franco Nevada.

So it was luck and timing. It was good execution. We have a wonderful team. The same team worked on the whole Lumina story all the way through from the beginning. We still have the team active today and good financial engineering and again lots and lots of luck on specific projects. So just a lot of fun too along the way.

TD: What’s the big picture strategy for Alterra Power?

RB: By 2008, I had done 12 or 13 public companies and they were all in the resources business. I had sort of retired from Pan American as CEO. I’ve got Geoff Burns in to run the company. He’s a wonderful, wonderful guy and he has been running it now for I think almost 10 years.

But he stepped up to CEO and I moved from chairman CEO to non-executive chairman. So it was kind of like a real move back. I’m still non-executive chairman today but I’m not actively engaged in Pan American.

But I didn’t want to retire and I wanted to do something different. So actually it was Rick’s active encouragement. I wanted to do something environmentally friendly that would be good for the world. That would satisfy my desire to try to reduce our carbon emissions and produce electricity that’s in clean technology, meaning geothermal, wind, hydro and solar power.

So it was something different for me. I started the company focused on geothermal power. Both Rick and I thought it was really going to be a great long term solution for the world and it turned out not to be. It turned out to be a very risky, very difficult business and we both had a lot of investment, you could say, ‘disasters’ in looking at different geothermal plays.

I had bought some assets that were producing though in the company which we have to this day. It wasn’t just an exploration play. It was a producing company right from the beginning and we took it public in 2009. In 2011, I had realized just how tough the geothermal business was. But I still wanted to build a clean energy company bigger and bigger. So I acquired a company in British Columbia called Plutonic Power and joined the two companies together into the company that is today Alterra Power.

Since then, we have expanded our production. In fact, we’re increasing it 40 percent this year and early part of next year. It was two big projects, one in Texas and one in British Columbia, to the point that we will have operating assets of about 800 and some megawatts, which is a decent amount of power -- 344 wind, 175 geothermal and the balance hydro.

We had a solar business in Ontario which we sold. We had another geothermal plant in Nevada which we just sold. So we’re buying and we’re selling and we’re building and we’re exploring and we’re trying to get as big as we can, because in the electricity business where you’re selling power on long term contracts, it’s all about finance. That means your cost of capital is everything.

If you have a low cost of capital, you can be competitive. You can acquire things that are on auction for example. The bigger you are, the lower your cost of capital. So I’m trying to build Alterra Power into a really big producer.

Even though it’s a tough business too, we’ve been successful now. We’ve built a business that will sustain itself for literally hundreds of years because these assets go forever. They’re based on wind and sunshine and falling water and geothermal heat.

So this is part of the business that’s so diametrically opposite from mining where every day you eat your future and ultimately your mine runs out. With clean energy, it goes on forever, which is a really cool concept.

TD: There are a few more questions that I want to ask you on the clean energy conservation environmental aspect. What has been your conclusion as to the best approach to conserve earth’s resources? Is it just to consume less as a person?

RB: Yeah, it really is. I mean the big picture solution to get to a truly sustainable lifestyle for humans is moderate our population growth, reduce our per capita consumption and really change our whole focus of life from growth to living in a way that is simply more sustainable. Things that can be done over hundreds of years instead of just a few tens of years where we’re consuming so much oil and so much gas and so much coal and so many non-renewable resources. We’re really taking our children’s future away from them in some respects.

So we can all do something to that end. I’m trying to build something in my small way -- Alterra is still a small company,  just a pipsqueak on the total world electricity stage. But it’s something that I can do and hopefully make money at as well. If I can make money building a clean energy business that’s sustainable for the long term, that’s a double win.

So this is one thing which I can do and I’m doing it. But there are a lot of other things that can be done to the big picture of trying to get to a truly more sustainable world, which is going to benefit everybody.

TD: I guess back to growth, a few years ago I remember you talking about the concept of – a good way to get a good picture of the world is to fly from one major city to the next on different continents, North America, the Middle East, Asia.

What has your travel schedule been like over the last year? How do you view the events of 2014 and now going into 2015 on a global macro picture?

RB: First of all, I really encourage people to travel. I often go to the States and I will be in a room with investors and they will say, “How many people have been in China or India?” Two or three hands go up. How many people can name the five largest cities in China? There are all over 10 million people. By the way, they’re all bigger than the biggest US city. Almost nobody can do it.

So if you want to understand investing, if you really do – especially resource investing -- travel is important. Research is important. Talking to smart people is important, good advisers. It’s not terribly difficult business I think if you can form your own opinions from looking at these things that are going on in the world the way I did say by going to China in the early part of the last decade.

Having said that, today I don’t think ever in my career have I seen more weird things going on that can have unintended consequences that I really don’t know how to figure out.

So let’s just talk about a few. There are the exchange wars where currencies are fluctuating at warp speed. Japan’s currency devalues 50 percent each year. The euro is down against the dollar. The dollar is up 20 percent against the Canadian dollar in less than a year. These are huge changes in currencies. Those are causing winners and losers.

So in Japan, the Japanese yen is weaker than the renminbi now. Well, there’s a push for the Korean won and Taiwanese currency and Vietnamese currency to weaken -- to be trade on some kind of trade  parity with Japan.

If you have those changes, all of a sudden you affect the carry trade where people are borrowing in dollars at low interest rates and investing in Japan or China. Well, there are trillions of dollars in that market. I don’t know where that’s going to end. There’s going to be winners and losers and be careful of the losers.

There are energy wars. Look at what happened to the oil price, the world’s most-traded commodity in two months. It’s down by 50 percent. There are winners and losers.

I don’t know how that’s going to shake out. There could be chaos. There’s already real chaos in those markets right now.

I could just keep going. There are the geopolitical wars that we all know about. Some are small today but they could blow up. You’ve got the religious wars. They’re just brushfires today but they could blow up.

There are the climate wars. There are all kinds of people who are trying to stop global carbon emissions. So the coal industry is suffering. You know, these are giant changes. Thermal coal that is used to make electricity has pretty much gone out of business. Again there are winners and there are losers.

A lot of investors are now starting to dis-invest from oil companies. The oil producers are stressed anyway. The deep ocean producers that aren’t making any money, the fracking producers that aren’t making a lot of money, the tar sands companies that aren’t making a lot of money today. This is just causing all kinds of stress.

There are growth wars. There are people who are like me who think growth is almost certainly going to moderate. It’s not going to be 3.5 percent a year globally for the next 10 years like it has been for the last 30 years, because we’ve hit limits to growth. We’ve hit all sorts of limits. Ecological limits, demographic limits, land availability limits, ground water, soil, all kinds of things that are stressing our ability to grow like we’ve grown in the last 30 or 40 years.

There are debt limits. We simply can’t borrow any more to juice growth like with the traditional model for the last 30 or 40 years.

Put all that together and it’s all happening now. You know what? There are a lot of weird things that I can’t really figure how it’s going to end. But quite frankly, my salvation here, my refuge, is in precious metals. It’s in gold and silver.

So I’m very bullish on gold right now. I’m particularly bullish watching what’s happening to the gold price relative to the US dollar. I’m bullish on silver because silver will follow gold. Silver has always traded with gold. Silver’s industrial side is very strong as well. So I’m quite encouraged by the fundamentals on the silver side. I’m also very much of the view that investors today should have a refuge from all these storms that are blowing up all over the place by having some significant amount of gold in their portfolios.

So I’m putting a lot in right now as an investor. I don’t buy the physical metal. I buy companies because even if I’m wrong, even if gold doesn’t go up, a well-run company will create wealth and that will be a successful outcome for me as an investor.

So with my investment money, I’m buying various gold companies, some public, some not so public. That’s how I see the world right now, as pretty crazy.

TD: I’m glad you bring that up about investing in people and companies that will do well wherever the price of gold and silver goes. I’m often presented with a question, “Should I put everything I have into gold and silver and go live in a cabin somewhere?”

My thinking is, “Why not look towards people who can build things, who can create efficient organizations and take an asset, make it profitable and deliver returns to investors? Why not do that while still having exposure to the gold and silver price?” So I’m glad you mentioned that.

RB: This is the end of four years of really weak markets, in the metal space and in the resources space. So a lot of investors are bruised and bloodied. We’re starting the fifth year. If the tide is going out and there is a huge macro wave -- a wave for metal prices declining, you’re probably better off to own the metal than the companies, because the companies tend to underperform the metals in a bear market.

Bear markets feed on themselves. So if an investor is losing money, he’s not going to want to buy another speculative gold company or copper company. So it’s true that even in bad, bad markets, you will have some great investment successes where a company has had good exploration results or has done a really, really smart acquisition. You will have those. But typically the whole sector is going to be losing out and the best strategy then is to do what nobody does which is sell at the top. Buy at the bottom, sell at the top. That’s what you’re supposed to do. But of course nobody ever does that.

It’s times like this where we’ve had four years of bear markets and I don’t know whether the bear is going to turn into a bull market in a year or two years or two days. I really don’t know when the bottom is. But I know this is not the top. We’ve had four years of terrible markets. I would say today is just a really good time to be building a portfolio of well-run junior companies. My bias is in gold because I think that gold and silver are going to outperform the other metals.

But buy a portfolio of companies and really focus on a couple of things. One is the asset has to be good. You can have a genius with a crappy asset and he’s not going to make money. You can have an idiot with a phenomenal world class asset and he’s actually going to make money. The stock is going to go up.

The second thing is: people are really, really important. But my first priority is to look at the asset, to look at the quality of the project that the company has.

After that, I look at the people because weirdly, there are certain groups of people in every market who just seem to know how to make money for people. Lukas Lundin would be one of my best examples. He just has a nose for building a team and building a story – he just has an incredible gift for that.

The  Hunter Dickinson group did that for many, many years. I’ve been very successful in doing that. There are a handful of people who just seem to be lucky I would say. I’m definitely – I would blame a lot of my success on just sheer luck. But I have been lucky and I know it’s true. The more you work, the luckier you get. But people are important. The teams that run these companies are really important.

There are some really good teams right now, guys like 20 years ago. I’m not an investment adviser so I’m not particularly interested in talking about them. But at Sprott, you guys know who they are and where they are. I’m sure you’re backing them and I’m sure you’re following them. So today is a good time to be getting into this. Four years ago, I would have said no.

TD: Outside of Lukas Lundin, are there any other management teams that come to mind that you think are really doing some interesting things, have good attitudes and a good approach?

RB: Sure. There’s a number – well I see Mark O'Dea’s group as one of those. There’s a group that works with Sandstorm Gold in royalties. There are a handful of good operators out there today and they are making money for people. Some are having various problems in individual projects or countries. But there are just lots of good stories.

Recently, I was walking around the Prospectors and Developers Convention here in Toronto and I was really impressed with some of the stories I heard. They’re very cheap stocks but it has been a fun trip here to look at these opportunities that exist today.

TD: As a final theme before we wind down, when you look at today’s market, projects that may trade back and forth between companies. Do you see similar conditions now that you saw in the early 2000s when you were putting together Lumina Copper?

RB: Yes, you do. Every cycle has similarities and differences. Every metal is different. Today, there is more resource nationalism. Well, that will improve in four, five more years because countries have overshot their demands for tax and all of these things are costing companies more money. So they don’t invest in them like they used to. Things take a lot longer today to get done. That will keep prices higher for longer.

Like I said, the metals are all different. Today you’ve got some winners and you’ve got some losers. That’s normal. It’s easy to paint things with a broad brush. But actually when you get down to detailed investments, you really have to be careful. I wouldn’t buy anything with say iron ore or thermal coal in its name. I would be looking up nickel or maybe lead and other things I really like. I like copper. I like gold. I like silver. Uranium is kind of interesting to me right now.

So you have to look at each individual metal and the prospects for it. But there are a lot of similarities today to what typically happens in the bottom of the bear market. There is a lot of sadness, a lot of difficulty raising money, a lot of very stressed junior companies, and very unhappy investors. That’s the nature of the beast. When things turn, the tide will come in and everybody will be happy again.

TD: Is there a single one thing that you can quickly recommend to the viewer if they’re new to the resource sector?

RB: Follow smart people. You guys are the smartest in the business. So I would certainly give a plug for Sprott. Rick Rule has been a friend of mine now for – oh boy, it’s hard to believe, but 30 years. I’ve watched just how successful he has been and how wise he is and following wise people is never a bad thing. A lot of companies are run by wise people. Tracking those people down, men and women, and backing them is usually a recipe for success. It has worked for me. It should work for most people today.

TD: Ross Beaty, Chairman and Founder of Pan American Silver and Alterra Power Corp, thanks for sharing your comments with us.

RB: My pleasure.

For questions or comments regarding this article, or on investing in the precious metals & resource space, you can reach the author, Tekoa Da Silva, by phone 760-444-5262 or email tdasilva@sprottglobal.com.

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

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