The Toronto office of Warren Irwin, hedge fund manager and CEO of Rosseau Asset Management, is decked out with memorabilia from Bre-X Minerals Ltd., the largest and most famous gold mining fraud in history.
Irwin made a fortune as a young money manager trading Bre-X stock. He had heard about the Indonesia-focused exploration company in 1995, and had some experience in the country and with gold miners.
Irwin encouraged Deutsche Bank, his employer at the time, to take a position in Bre-X at roughly $13 per share. The bank declined, so Irwin acquired a substantial position for his personal account at approximately $18 a share. Within months, Bre-X was hailed as the largest gold find in history. Shares in the company soared beyond $270.
As luck would have it, a cash call from Irwin’s homebuilder forced him to sell half his position at those high prices. He still had a sizeable stake in the company, and decided to visit the site in Indonesia to learn more.
Bre-X informed Irwin there was no room on the summer site visit but he flew to Jakarta anyway, and by chance a seat on the helicopter became available when an analyst lost his passport and did not make the trip. Irwin had a long list of questions for John Felderhof and Michael de Guzman, two key Bre-X executives. Felderhof told Irwin Bre-X would be twinning some of the best drill holes — to provide additional confidence to the market in September. Irwin left satisfied the company was legitimate and was looking forward to seeing the holes twinned in the fall.
Back in Toronto, Irwin saw a man reading a newspaper article about Bre-X in his condo elevator, and Irwin told him he’d just returned from site.
The man introduced himself as Dale Hendrick, an exploration geologist, and former Chief Geologist for one of Canada’s great gold mines, the Kerr Addison Mine. Hendrick told Irwin he doubted the discovery’s legitimacy and said he was prevented from attending the site by the company. The men agreed to lunch, where Hendrick debriefed Irwin on his trip. Convinced Bre-X was a fraud, Hendrick even suggested a crime of this scale would end up with people dead just like the salt job at another gold exploration company, New Cinch.
Irwin was skeptical because there was a lot of misinformation at the time about Bre-X. What did Hendrick know that Teck Cominco, Barrick Gold and Freeport McMoRan, three majors all vying for an interest in Bre-X at the time, didn’t?
“I had my suspicions that Dale was on retainer by a large mining company just to spread falsehoods about Bre-X,” Irwin said. “It was a very Spy vs. Spy time; there was a lot at stake.”
September came and went with no mention of the twinned holes. Other factors started to make Irwin uneasy about what was going on and he thought Hendrick might have been onto something. Bre-X soon announced that co-founder Mike de Guzman had accidentally fallen to his death from one of the helicopters at site in Indonesia.
Irwin quickly remembered Hendrick’s comments on New Cinch, and thought back to his own earlier trip.
“This is where site visits can help a lot,” Irwin said. “I sat in the same seat in the same helicopter de Guzman supposedly sat in. I knew the pilot, Eddie Tursono, I knew how the doors worked, I knew the pre-flight inspection, I flew the same route to the site from Samarinda. I knew there was foul play because he was sitting apparently in the back seat of the helicopter, and the doors are sliding doors. The pilot was rigorous with seatbelts and safety. To open that door would destabilize the helicopter tremendously. It was a big ordeal to open the door.”
Irwin immediately sold his remaining Bre-X shares in the low $200s ($20 after a 10 for 1 split), and even went short the stock. The short was extremely volatile and Irwin eventually covered at 9 cents. As Bre-X shares collapsed, the mining industry entered a five-year bear market and confidence crisis.
In 1998, Irwin started hedge fund Rosseau Asset Management, a focused, sector-agnostic, event-driven hedge fund. His path to hedge fund boss involved hard work and credential building. Irwin completed a Bachelor of Mathematics at the University of Waterloo before joining McLeod Young Weir (now Scotia Capital).
There he designed the mathematics and wrote the software behind Canada’s first bond index and ran Canada’s first bond index fund for a U.S. pension client. Later he completed an MBA from Western’s Ivey School of Business and a CFA contemporaneously. Irwin spent time with various investment houses including Gordon Capital, CIBC Wood Gundy, Scotia Capital and Deutsche Bank prior to starting Rosseau. His expertise was in fixed income, real estate, mining, and oil and gas securities.
“In Canada, it is my belief that a manager can add the most value investing in resource companies. A guy like myself will not add a lot of value buying [blue-chip stocks] like the banks. We have had a lot of success in smaller cap names because we’ve been able to get in early and back some really big discoveries,” Irwin said.
Rosseau benefited from several major discoveries during the mining boom of the 2000s, and assets under management swelled from $3 million in 1998 to $275 million by 2011. Rosseau was a significant backer of some of the era’s most profitable mineral discoveries including Aurelian Resources, Gold Eagle, Virginia Gold, Aquiline Resources, Continental Gold and Guyana Goldfields.
“It is my view generally that the best time to invest in a junior is after the discovery is made but before people have figured out it’s a big discovery,” Irwin says of his strategy. “Sometimes you get it wrong but if you do your work, read all the technical reports, visit the site, and retain any specific expertise that you may lack to fill in any gaps … You miss the odd one, for sure, but generally you can make some sound decisions.”
Irwin and I met in September 2014 during a site visit to NexGen Energy’s Arrow discovery in northern Saskatchewan’s Athabasca Basin. He was aware that NexGen neighbour Fission Uranium had a promising uranium discovery, and considered the area prospective for additional finds.
“We liked some of the drill holes NexGen was pulling and wanted to get off our asses to go to see the property, get to know management, meet the geologists and find out if they’re credible, see the logistical situation, observe the drilling, look at how well-organized the camp and investor trip was, and all these things that help us decide whether to invest or not.”
Rosseau has since acquired a large single digit percentage stake in NexGen, mostly through open-market purchases. In Irwin’s opinion, the incredible results of the past year have not yet been fully appreciated by the market.
“To make money in this sector, you need to stick your neck out a bit, do your own work and do your own resource estimates in advance of the 43-101 technical report,” he said.
According to Irwin, Rosseau’s team spent several weeks building a resource model for the Arrow deposit, plotting all of NexGen’s drill holes by hand on 20-metre sections. “We create individual block models for each drill hole, section by section, and in doing that by hand, we can assess every single assumption we’re making, versus having a computer model make those assumptions for you.”
Irwin now believes Arrow is very close to 200 million pounds of high-grade uranium and is in spitting distance of being a lot larger. At present, most Bay Street analysts are in the 50 to 150 million lb range for comparison.
“We believe this new ultra high-grade zone, which was touched on with holes 44-b and 58-c-1, is the core of the deposit, and at present, that ultra-high-grade core is by no means cut off.”
“If subsequent infill drilling shows that the ultra-high-grade core is continuous from 44-b to 58-c-1, it could quickly add many tens of million of pounds to our model.”
Irwin sees big share price appreciation ahead for NexGen, blaming the mining doldrums and a lack of understanding of uranium discoveries for the tempered market reaction thus far. Shares in NexGen have roughly doubled since last year, but have not made the type of parabolic move typically associated with mineral discoveries.
“In a healthy market when a junior makes a big discovery, not only is every pound in the ground fully valued by the marketplace, but there’s also a 30% speculation premium because people know the deposit is going to grow. NexGen at present is extraordinarily inexpensive given what they have and there’s nothing factored in to their upside potential in terms of market value,” commented Irwin.
“As a very rough rule of thumb, base metal deposits throughout my career have traded at generally 5% to 10% of in-situ value, depending on the strategic nature of the resource and economics. Given that Arrow is very strategic in that it is very large, growing and high-grade, in the best region for uranium production in the world, and given that it is basement-hosted, versus an unconformity deposit, you can use very simple underground mining techniques, I believe it should be at the higher end of that range.”
Recent takeouts in the uranium space have been in the $10 per pound range for lbs in the ground, but with the lower uranium price, Irwin expects transactions in the $4 to $5 range. Based on his model, the project is not yet valued at $1 per pound (Canadian) and the deposit is still open and has lots of room to grow.
Although NexGen has a strong team and capabilities to take Arrow to production, Cameco, the largest producer of uranium, is an obvious suitor for Arrow, Irwin believes. “For a producer like Cameco, Arrow would be a very important addition to their portfolio, and it would reduce the operational risk of the company which relies heavily on production from complicated to mine, but lucrative, unconformity deposits at the McArthur River and Cigar Lake mines. The other reason, in my opinion, is Arrow will be a very large and strategic deposit in the best uranium basin in the world and the incumbents will want to control this production, rather than have it controlled by a new player.”
Fission Uranium’s nearby Triple R deposit is still valued by investors higher than NexGen’s Arrow, but Irwin is confident that is going to change as investors realize how special and large the Arrow discovery will be. Triple R is under a lake and is shallow, which would leave most of the deposit in the crown pillar if they used underground mining techniques. As a result, Fission proposes to build a dyke around the deposit and mine most of the deposit via open pit. Open-pit mining of a high-grade uranium resource also has radioactive dust and contaminated rainwater challenges. Although there are precedences for using dykes, like the Diavik diamond mine, Irwin has a strong preference for simpler mining operations when given a choice.
“Cameco already has two amazing but challenging deposits,” Irwin said of McArthur River and Cigar Lake. “These deposits are vulnerable to water ingress issues, and could be shut down or suspended at any time, just like what happened at McArthur River in 2003. Does Cameco mitigate that risk with an open-pit mine under a lake? Or do they mitigate it with a basement-hosted deposit like Arrow in an environment they are used to mining at Eagle Point? Does Cameco let a deposit the size of Arrow be built by a new player in their own backyard? Irwin thinks he knows the answers.
“Fission will be swinging in the wind well past the mine opening at Arrow.”
NexGen is the highest-conviction name in Rosseau’s portfolio. Irwin hasn’t given an interview in several years, and says he’s going on the record because he believes this is a very rare and mispriced situation.
He concedes he was caught off-guard by the commodities meltdown that began in 2011 but is confident the uranium market is in the process of bottoming. Any move in the uranium price would be a big bonus to all juniors and producers, including NexGen.
Rosseau also owns several development-stage gold assets because the gold mining industry has a dearth of quality exploration and development projects in the pipeline.
At present, Rosseau holds share positions in Dalradian Resources, which is developing the Curraghinalt deposit in Northern Ireland; Lundin Gold, which has the Fruta Del Norte deposit in Ecuador; and Continental Gold, developing the Buritica project in Colombia. All development-stage gold assets have a little hair on them, Irwin says, and so the right strategy is a basket approach.
By popular request, I asked Irwin for any book recommendations, and he told me to read Think and Grow Rich by Napoleon Hill 10X until I finally understand the message.
Rosseau’s investors, of which Irwin is the largest, are mostly high-net-worth individuals and the minimum investment size is $250,000. Learn more about the firm here. It’s one of the most dynamic hedge funds in Canada, and may have its best days ahead – especially if NexGen is as good as Irwin believes.
Disclosure note: Author is long NXE and biased. NXE was a CEO.CA sponsor in 2014 but is not anymore. Author will trade the stock without further notice. This is provided for information purposes only and is not investment or professional advice of any kind. Always do your own due diligence and speak to a licensed investment advisor prior to making any investment decision. Junior mining stocks such as NexGen Energy are incredibly risky and can lose their entire value. Read NexGen’s profile on www.SEDAR.com for important risk disclosures. You are responsible for your own trades.