Miles Thompson had been working for major mining companies during the 1990’s.
But he realized that he could reap the greatest reward from pursing projects that he controlled.
That’s what led him to start Reservoir Minerals and Lara Exploration.
Reservoir Minerals has become one of the top new exploration companies. It owns a well-followed copper-gold discovery in Serbia.
Miles has been through previous mining downturns, and believes that bear markets help the mining industry. The best and brightest have a chance to acquire top exploration properties, like he did.
“I’m hoping the bear market will last a little bit longer,” he says in this interview with Tekoa Da Silva. “I’ve got a lot of stuff I would like to do while things are still cheap.”
Miles spoke with Tekoa at this year’s Sprott-Stansberry Vancouver Natural Resource Symposium. You can still experience this valuable event for yourself – click here.
Tekoa Da Silva: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here today with Miles Thompson, Director of Reservoir Minerals and CEO of Lara Exploration. Miles, good to see you.
Miles Thompson: Likewise. A pleasure.
TD: For the person who might be joining us for the first time or learning about you for the first time—who are you and what do you do? And why is your viewpoint significant to the resource and exploration investor?
MT: I’m a geologist by training and I’ve been a businessman in the exploration business now for 20 years. I started a prospect generator privately in Brazil in the early 1990s and with the assistance of Rick, listed part of that business as Lara Exploration in mid-2000s. So I’ve been doing this for a fair while.
In terms of the cyclicality of this market, this is my fourth cycle I suppose. So I’ve seen a lot of the ups and downs in this business, and have run businesses through the good years and bad years. I think the general public (people who invest in the space) tends to very badly underestimate the timelines involved in the resource exploration business and how to survive and prosper through these markets. So I think the experience I have of doing it is probably one of the more valuable things I would bring to a conversation like this.
TD: Miles, based on your experience and observation in the resource business—when do you buy? When do you build? And when do you explore in terms of the cyclicality that you mentioned?
MT: Yeah, I think it’s very important you understand where you are in the cycle. There are probably two elements to the resource markets themselves. One is volatility and the other is cyclicality.
The last really deep bear market was from 1997 to 2002. That was before most people’s investing memories in this space, which tends to make people very worried about this kind of market. But this kind of market is a spectacular opportunity. You’ve had a filtration process occur so all the idiots and companies that don’t have good assets, or the ones that don’t know what they’re doing or failed to do it anyway, are turning into zombie companies or they’re going to a different sector.
The market is distilling down from the most resilient and competent management teams and the best projects into a much smaller universe of companies that are the cheapest they’ve been in 15 years. I don’t know how much longer this bear market will last. Personally, I’m hoping a little bit longer, because I’ve got a lot of stuff I would like to do while things are still cheap.
TD: Miles, if we look at the granular details—what are you hoping to do during this bear market?
MT: I think this is an excellent time to buy. I think there are two things that you really need to understand, however, as you make your choices of what to buy. One is survivability. There are lots of companies in the resource space that may not survive the next three years. So you need to look very carefully at the way the business is structured. Will it be strong enough to survive? And the other thing to understand is that I believe the next bull market is three to five years from now.
So you cannot buy expecting to reevaluate your position once a quarter for the next 12 months and decide when to sell. For bets that you take now, you need to understand that you’re going to have to hold for a little while.
What I am personally doing is more on the asset side. I have bought a few remarkably good value shares over the last year or so, but I don’t manage a fund of money. I have a little bit of my own money that I am able to speculate with – but what I’m trying primarily to do is add assets to the companies that I run. So I’m looking at projects. I’m looking at, if you will, exploration real-estate that is currently very, very cheap (or free) in this market.
TD: I would like to ask you a little bit more about your companies Reservoir Minerals and Lara Exploration.
MT: Ok. I will start with Reservoir Minerals because that one has been more successful. We’ve been working in Serbia now for more than 10 years, which gives you a sense of how long these things take. I originally went in working on tender processes of auctions when I worked with Goldfields. There were four bidders on a certain land package, which included ourselves, Phelps Dodge and a couple other companies.
We lost on that bid, but ended up working together with Phelps Dodge on contesting the tender process because it hadn’t been very transparent. We formed a relationship and then we both subsequently went back and picked up exploration land areas in the same geological belt. When Freeport took over Phelps Dodge, they dropped a lot of that exploration ground. But we worked together subsequently with Freeport and they said, “Listen, if you can consolidate the district, we would love to do a joint venture with you.”
So we talked earlier about cycles, with a major bottom from 1997 to 2002. But in addition to those deep longer-term changes, you have volatility. So in terms of resource investing, 2008 was the period of volatility. After the crash in ’08, all of a sudden everything collapsed and we were able to pick up the property that had been owned previously by Phelps Dodge (where we’ve made the copper discovery with Reservoir Minerals) for nothing. It was a royalty deal only.
As a result of taking advantage of that market, we now have a $200 million interest in a Freeport joint venture on a property that cost us nothing.
TD: When you say “cost us nothing,” are you speaking towards accepting the carrying costs of that property only?
MT: Right. After the crash in ’08, the company that held it was in trouble and we just did a deal in exchange for royalty.
TD: What was the climate of the region and country like? Did that have any impact on the deal at all?
MT: Yes. It was what made the deal possible. The Bor geological district has the biggest and richest copper mines in Europe. They’ve been mining there for a hundred years. So their operations and resources are obviously not of the quality now that they were a hundred years ago. But it is an area that has produced a very large amount of copper. I forget the exact numbers, but it’s something like ten million tons of copper and ten million ounces of gold, historical production. So very substantial, and while those aren’t exact numbers it’s within that order of magnitude.
You would never get anywhere near that kind of discovery in Arizona or the Andes. But because that region had been part of the Soviet Bloc, they had a civil war and Yugoslavia broke up. It was a politically complicated place. That complexity had left all of this exploration ground available. That was the opportunity; to take the political risk and go in, because you had such good quality real estate that is was going to be worth the risk.
TD: Is that kind of political risk ‘set-up’ something you regularly see in the resource business?
MT: It’s one of the ways to invest. If you look at this very bad bear market, a lot of investors are retreating to Canada, to the US, and perhaps to Chile because they’re just so afraid of everything. They retreat back to absolutely best quality in terms of country risk that they can possibly afford. But what that means is that you overpay for everything in those safer places.
You can acquire something that gives you a much better leverage to success however, by going somewhere that is a little bit more politically sketchy.
TD: Speaking of places that are politically challenging—some parts of South America, Brazil—and Lara Exploration, how did the assembly of that company come together?
MT: I worked in Brazil on and off for 30 years. So I have a very long-standing relationship with the country, some of which has been good and some of which has been bad. We decided to originally list the portfolio as Lara because my previous cycle in the 1990s, I had put properties into five different exploration companies and in each of the five cases I hadn’t been paid properly. So I thought this time around I would prefer to have control of it myself.
We follow the prospect generator business model because we believe it substantially reduces risk and then we further diversify. A lot of my career was spent doing precious metals, particularly gold. But we made a conscious decision when we started to be more diversified and we’ve actually made a lot of money with agricultural minerals. We’ve had some success obviously in copper and nickel as well.
We’ve diversified by country as well. We’re primarily working and perhaps more agile in Brazil and Peru. But we have some nice projects in Chile and Columbia as well. We’ve been opportunistic there.
Those are four of my preferred countries in South America in terms of maturity of politics and the ability to get stuff done. None of them is perfect. They all have their challenges. But I’m more excited about Lara Exploration than I have been in a very long time because all of the countries’ currencies have devalued so much that it has become cheap to operate again.
So at the top of the commodity boom, it was as expensive to work in Brazil as it was to work in Canada. Now the currency is devalued. All of a sudden it has become very accessible again and at the same time, there’s very little activity. So properties are available for staking, properties are available cheap for acquisitions, and geologists are available to work with you who were busy three to five years ago.
TD: Miles, I spoke with a gentleman on your team, Dr. Simon Ingram, and I heard him mention that land is becoming available that you see once every ten years and, more importantly, there’s no competition. Is that something you see pronounced across South America and Brazil?
MT: I think it’s pronounced everywhere. I’ve tended to be most successful where I have the most knowledge. So I work mostly in places I understand well because I think in any business you have to have an edge in order to be successful. The world is full of smart people and money. So you have to know something that other people don’t if you are to differentiate yourself.
For instance, in the Carajás region of Brazil, the portfolio that has made Lara successful took me 10 years to put together and it’s the second portfolio I built. The first one also took ten years. So you have to go back to those places where you have the quality of the targets and knowledge, and time the cycle a little bit.
As an example, I remember looking at some iron ore properties in Brazil back in the 1990s where you could have bought the whole asset for half a million dollars at the time. The owner subsequently went into a deal with Eike Batista for $100 million and then it was sold for $5 billion to Anglo American.
I’m pretty sure that deal took only half of the overall land formation, a ridge. The other half of the ridge was owned by the same original vendor and he was obviously offering it for $100 million at the time in the 2007-2008 period. I bet you anything you could buy that for half a million dollars again now.
So the resource business is a little bit weird. When people decide to go into commodities, a lot of money tries to go through a very small gap and the price of things become silly. Then you get markets like this where all of a sudden people just do not want to know [about commodities] and the value of something is whatever you’re willing to pay.
TD: How do you view the world today when it comes to making discoveries of new deposits? How is that changing?
MT: There’s no question it’s getting tougher. The obvious deposits that were sticking out of the ground have been found. We’ve been doing industrial exploration and mining since the Roman times, possibly earlier. So there have been a couple thousand years of people walking the ground and looking.
You can go to remote areas primarily and perhaps still find something really spectacular at or near surface. But for the most part, you’re looking deeper and you’re making much larger investments in drilling and technology to find things, and because you can’t actually see them, the risks have gone up.
So the average cost of discovery has gone up substantially and the number of discoveries being made has also dropped substantially. It’s a much, much tougher world out there. I’m a geologist by background, and so I see things that I get enthusiastic about but I have much more faith in process than I do in my own enthusiasms.
It is such a high risk business that you have to have a business model that makes sense. I mean my whole presentation at the Sprott-Stansberry conference was about prospect generators, because if you look at Rick Rule’s statistics he has been a pioneer in the space. He has backed 54 companies, half of which have made discoveries and another half of those or more have been bought out.
So you go from something like a one in a thousand chance of success of individual prospect discovery, to a 50-50 chance in a prospect generator by basically following the process. You’re able to turn over more properties. You’re able to test more targets. You are substantially increasing the odds of success.
TD: Miles, in looking at wealth generation—what is the formula you’ve found to produce value for yourself and society? What did you go through to learn it?
MT: Well, that’s not something you can really teach. It’s the University of Hard Knocks. You’re of Brazilian descent, and there’s a lovely expression in Portuguese, “O que não mata, engorda,”—whatever doesn’t kill you makes you stronger.
So I think you go through different processes and you learn and refine what it is you do. The spectacular thing about the exploration business is that you can go out into a new area or possibly deeper in an area you already know and find something of huge value for almost nothing.
I mean the value-add of a mineral discovery is spectacular. You can literally spend a few thousands of dollars and stumble across something possibly worth billions. So I’m driven by curiosity. I love what it is I do. When I try to define it as an activity to people, I say it’s somewhere in between detective work and treasure hunting. You need the optimism and enthusiasm of a treasure hunter and you need to be a detective; using your geophysics, geochemistry, and all the science we now have available to us, to look for clues that guide you to the treasure.
We live in a very sophisticated world where a huge amount of value is assigned to an application for a telephone or some piece of software, but commodities are still the basic building blocks of humans. We each consume several million pounds of commodities through our lives, be it the building blocks of the houses we live in, our cars, our refrigerators or telephones or whatever. Each of us, even the most environmentally-friendly, liberal, and anti-mining among us are huge consumers of commodities. So we offer one of the basic building blocks of modern society, in offering a commodity supply.
TD: Miles, for the person reading that is looking to invest in resources — exploration, development, or a more mature part of the sector –, where do you start? How do you prepare yourself?
MT: I think it’s very much a knowledge-driven business and what I find is that even a lot of people in the business don’t really understand the business. So when you dig down into the technology side of it, into the actual mechanics of the business, it is a very complex thing. So to think you can understand the science from the get-go is a little bit optimistic.
I also think you need to start by being well advised. You need to go to a brokerage house like Sprott that is specialized in the resource space that has geologists like Andy Jackson and Neil Adshead that are performing the due diligence for you, and where you have people that understand the volatility and cyclicality of this market that can guide you through it.
Then I think I personally find conferences like the one we’re attending today, the Sprott-Stansberry Natural Resource Symposium, which is spectacular because you gather such a group of professionals. I’m here pitching my own stories and my own business but I’m always stimulated to talk to my peers and other investors in the space because you just learn so much. So I inevitably come away from a conference like this with ideas of my own both for investment and things that I might care to apply to my business.
TD: Miles, in winding down, is anything we may have missed?
MT: I think you’ve covered it pretty well. I guess I would repeat: It’s a cyclical and volatile business, but this is the cheapest it has been in 15 years.
TD: Miles Thompson, director of Reservoir Minerals and CEO of Lara Exploration. Thank you for sharing your comments with us.
MT: It has been a 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 firstname.lastname@example.org.
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