Growth Stories: Winning Teams That Know How to Find Gold & Get It Out of the Ground

Key Concepts

• Ramp-up Phase: The critical period following the start of production, focused on consistently achieving planned output levels and operational efficiency.
• Feasibility Study: A detailed assessment of a mining project’s viability, including technical, economic, and environmental factors. Often used as a benchmark, but rarely perfectly replicated in reality.
• ASIC (All-In Sustaining Cost): A comprehensive metric representing the total cost of producing an ounce of gold, including operating costs, capital expenditures, and exploration.
• M&A (Mergers & Acquisitions): The consolidation of companies or assets, often used for growth or strategic advantage.
• Del Water: Desalinated water, increasingly used in mining operations in arid regions like Chile as a sustainable alternative to subsurface water.
• Operational Readiness: The process of establishing the necessary systems, procedures, and personnel to support ongoing production.
• Institutional Investors vs. Retail Investors: Institutional investors (e.g., pension funds, mutual funds) are typically more sophisticated and patient, while retail investors are individual traders often focused on short-term gains.

Operationalizing Production: Insights from Rio2 and West Red Lake Goldmines

This discussion features Alex Black, Executive Chair of Rio2 Limited, and Shane Williams, President & CEO of West Red Lake Goldmines, reflecting on their experiences transitioning from development to production and outlining future growth strategies. The conversation centers on the challenges, strategies, and market perceptions associated with bringing mining projects into operation.

I. The Transition to Production: A Challenging Journey

Both Black and Williams emphasize that transitioning from development to production is significantly more complex than anticipated based on feasibility studies. Williams highlights that investors often view feasibility studies as definitive plans, failing to account for inevitable challenges. He advocates for a cautious approach, emphasizing the importance of a “slow and steady” ramp-up to build operational readiness – encompassing systems, procedures, and a skilled workforce. Black echoes this sentiment, drawing on Rio2’s prior experience with projects in Peru (Lena and Shaindo under Rio Alto). He stresses that navigating the construction and ramp-up phases is “never easy.”

II. The Importance of Team and Empowerment

A recurring theme is the critical role of the team. Black asserts that success hinges on having a “great team” in place, both at Phoenix Gold in Chile and the recently acquired Condestablair copper mine in Peru. He likens the team to the “salsa” in a recipe – an unquantifiable but essential ingredient. He advocates for empowering team members, giving them the “liberty to deal with problems” and trusting their expertise. This approach, he explains, is central to Rio2’s operational philosophy. Williams similarly emphasizes the importance of attracting and retaining a strong team, particularly in a competitive labor market. He contrasts two management styles: one that empowers employees and another that relies on excessive control.

III. Measuring Success and Managing Expectations

Williams addresses the challenge of measuring progress during the ramp-up phase. While feasibility studies provide a benchmark, he cautions that reality invariably deviates from the plan. He suggests focusing on consistent month-over-month improvements in production as a key indicator of success. Black acknowledges the difficulty of providing precise guidance during the first year of production, particularly regarding ASIC (All-In Sustaining Cost). He notes that the initial ASIC will likely be higher than the life-of-mine average projected in the 2023 feasibility study. Both executives agree on the importance of honest and transparent communication with investors, even when facing setbacks. Black states he is prepared to “sit in front of institutional investors and tell them like it is.”

IV. Rio2’s Growth Strategy: Diversification and Expansion

Rio2’s strategy involves both organic growth and strategic acquisitions. The company is focused on expanding production at Phoenix Gold to 80,000 tons per day, aiming for 300,000 ounces of gold production. A key challenge is securing a reliable water supply, with Rio2 actively pursuing a project to bring desalinated (“del”) water to the site. The acquisition of the Condestablair copper mine in Peru provides diversification and potential for expansion, with plans to increase throughput to 12,000 tons per day for an estimated investment of under $50 million. Black also suggests the possibility of another gold acquisition to further round out Rio2’s portfolio. He anticipates a potential sale of Rio2 within 3-5 years if they successfully demonstrate a clear growth pathway.

V. West Red Lake’s Growth: Steady Progress and Market Rerating

West Red Lake’s growth strategy centers on expanding production at its existing Red Lake property, with a pathway to 150,000 ounces per year. Williams emphasizes a methodical approach, prioritizing consistent problem-solving and operational improvements. He believes the market has yet to fully recognize the value of West Red Lake, particularly given its successful transition to production. He anticipates a market “rerating” as the company continues to deliver on its promises. Williams also highlights the potential for M&A activity, but emphasizes the importance of building value internally.

VI. Market Dynamics and Investor Expectations

Both Black and Williams observe a current market trend where developers are receiving higher valuations than small-scale producers. They acknowledge the challenge of meeting investor expectations for immediate cash flow and rapid growth. Williams notes that investors often underestimate the time and effort required to achieve sustained production. Black points out that the current high metal price environment provides some leeway, but also creates pressure to deliver results. He predicts increased M&A activity in the mining sector, potentially driven by companies seeking to deploy their growing cash reserves. He also suggests a potential shift towards more shareholder-friendly policies, such as special dividends.

VII. Key Challenges and Mitigation Strategies

Black identifies water management as a significant challenge at Phoenix Gold, particularly given the project’s location in an extinct volcano and the need to winterize operations. He emphasizes the importance of proactive planning and learning from the experiences of other mines in the region. Williams highlights the difficulty of attracting skilled labor, particularly in Canada, as a major challenge. He stresses the importance of building a strong team and fostering a culture of trust and collaboration.

Notable Quotes:

• Alex Black: “It all comes down to the team…the unquantified source to the whole story, the salsa to the recipe.”
• Shane Williams: “You’re solving problems every day…as long as the team is focused on that, eventually you get a mine.”
• Alex Black: “I have no problem in sitting in front of institutional investors and telling them like it is.”
• Shane Williams: “Ramp up…is important to be slow and steady because remember when you go into production, it's operational readiness.”

This discussion provides valuable insights into the realities of bringing mining projects into production, emphasizing the importance of strong teams, realistic expectations, and a commitment to consistent execution. Both Rio2 and West Red Lake Goldmines are positioned for growth, but acknowledge the challenges and uncertainties inherent in the mining industry.