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Montreal’s Abitibi Royalties Inc opens new way to build a gold company

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Ian Ball of Abitibi Royalties Inc

Montreal’s Abitibi Royalties Inc opens new way to build a gold company

By James Brewer

Canadian entrepreneur Ian Ball has been fascinated by the world of mining stocks since he was a boy. Now, with mature experience of the sector behind him, he is pioneering a business model that he has characterised as ‘disruptive,’ in the Uber sense, for the extractive industry.

His strategy represents what he says is “a huge paradigm shift going on in the market.”

He is up-ending the template of investing in the stocks of companies, by building a portfolio of selected royalties – a royalty is the right to receive a percentage of the top-line revenue from a mine, which can be agreed at any stage from exploration to development.

Mr Ball’s company, Abitibi Royalties Inc, has been developing royalty structures specifically related to early exploration.  Its approach makes it unique among royalty companies of its size, he contended during a presentation to London investors.

Listed on the TSX Venture Exchange with the symbol RZZ, Abitibi is mainly focused at present on the eastern part of the huge Canadian Malartic mine in Quebec, Canada’s largest gold mine. This, he says, gives his company “exposure to significant new discoveries.”

Abitibi Royalties was spun out of exploration group Golden Valley Mines (TSX-V: GZZ) and listed as a public company in 2011. It is named after the resource-rich region of Abitibi-Témiscamingue. Mr Ball, whose background includes posts at Goldcorp and McEwen Mining, joined Abitibi in 2014.

In transforming mining investment, Mr Ball perceives a way to break free of dependence on the gold price.

“Most mining companies are not run for the shareholders,” he claimed at the outset of his City briefing.  “I think that shareholders should speak louder to management teams that changes need to be made in the sector.”

A drone’s eye view of Canadian Malartic.

The object is to capture the upside potential in the various stages of the sector, while limiting risks from the difficulties of assessing success rates and predicting costs of exploration, development, and mine operation, especially of small, entrepreneurially-led sites.

Abitibi pays claim fees in return for royalties: its cash flow comes from current investments and royalties at the mine (starting in 2018), as opposed to the corporation.

Mr Ball gives the example of a venture which has property to mine and to do so needs money fast: if the conditions were right “I would buy the royalty from you. We will give you a yes or no answer in 48 hours.” So far Abitibi has considered more than 140 submittals, out of which 18 royalties have been purchased at a total price of $196,000. Mr Ball says that part of his philosophy is “You need to be patient.” From 2018 the company will be ready to take royalties in physical gold.

Canadian Malartic was developed as an open pit, with the modern phase of commercial production beginning in May 2011. The mine name and that of the nearby town of Malartic is that of the Comte de Malartic, an officer in the army of the Marquis de Montcalm, commander of French forces in Canada from 1756–59 against the British.

Mr Ball says the mine is in a “unique geological setting.” At an earlier peak, between 1935 and 1983, it produced 8.7m ounces of gold.

Jointly acquired in 2014 as part of a $3.9bn takeover of Osisko Mining Corp by Yamana Gold and Agnico Eagle Mines— companies quoted on the Toronto and New York exchanges — Canadian Malartic has ramped up to a 55,000-tonnes per day open pit and plant, producing an annual record 585,029 ounces of gold in 2016, with another 600,000 ounces expected in 2017.

Extensions of the current open pit have been designed to increase mine life by six years to 2028.

This eastern portion of the mine, which includes the Barnat extension and Jeffrey deposits, has given rise to the flagship play in the Abitibi portfolio – a  3% net smelter return royalty. The royalty includes the Odyssey North discovery announced in 2014.

The company’s 3% royalty also covers significant drill intercepts that have been reported at the former East Malartic mine. Mr Ball said: “I believe that at some point Canadian Malartic is going to become one large underground mine. We have approximately 80% of what I would call the current underground potential at Canadian Malartic.”

Residents of the town of Malartic are planning to launch a class-action complaining of excessive dust, dynamiting and noise, but whatever the outcome of that filing, this is not expected to affect work on the underground extensions.

The mine operators have budgeted US$11m for a total of 99,700 metres of drilling at the Odyssey property in 2017, and may increase the outlay during the year.

The Jeffrey zone is a separate deposit, immediately east of the main open pit, of which the Barnat extension is the eastern portion. Production from these two areas is expected to start in 2018 and 2019 respectively.

Abitibi Royalties holds a 2% net smelter return on a portion of the mine known as the Gouldie deposit, 300 m south of the main open pit. The 2% holding also covers the historic Charlie Zone 100 m northeast of Gouldie.  The operators have reported that they will be conducting an exploration drill programme at Gouldie and Charlie to identify open pit or underground zones that could be a potential source for ore for the Canadian Malartic mill.

Abitibi shares have climbed to $9 from 35c in the two and a half years that Mr Ball has been with the company, which has a market capitalisation of C$100m.

Mr Ball said that Abitibi Royalties has a strong balance sheet, with C$43.1m in cash and securities (including Agnico Eagle shares worth $22.2m and Yamana shares worth $13.2m), and is debt-free. The company is keeping the number of shares small, with gradual buy-backs among the 11.3m units outstanding, aiming to reduce the total over three years to 10m. “The reason we are buying back is because I believe Abitibi is trading at a discount to its net asset value,” said Mr Ball.

The company is 49% owned by Golden Valley, 12% by Rob McEwen (a leading mine owner and investor), 5% by Quebec Labour Funds which is part of the provincial pension plan, 5% by clients of wealth management firm Richardson GMP, and 4% by Abitibi board and management members.

Mr Ball likens his business strategy to the sentiments of the Justin Bieber song As Long as You Love me: “The grass ain’t always greener on the other side, it’s green where you water it.” (The hit also includes the line “As long as you love me, I’ll be your platinum, I’ll be your silver, I’ll be your gold”).

Abitibi Royalties’ website is www.abitibiroyalties.com

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