We recently sat down for an interview with Warwick Smith, CEO and Director of American Pacific Mining Corp (CSE:USGD) (OTC:USGDF), a precious and base metals explorer with a core focus on assets in the Western U.S. including its joint venture with industry major Rio Tinto Group (ASX, LON: LON:RIO) in Montana. We asked Warwick to share his insights on current mining sector opportunities, why Canadian junior miners offer a particularly interesting opportunity, and what the investing public needs to know when qualifying junior mining ventures.
Ketki Saxena: Hi, Warwick. For our audience, let's start with an introduction to the junior mining investment space and a brief overview about American Pacific Mining.
Warwick Smith: Yeah, I'm happy to do that. The junior mining space as a whole… For people to understand it, juniors get greater leverage and move significantly higher on a discovery or a hint of a discovery than the price of gold itself. Whether it be gold, silver, base metals, etc., there's a tremendous amount of leverage.
What juniors are doing is essentially fulfilling a need that the major mining companies have, which is exploration. The Newmonts, Barricks [and] Rio Tintos of the world, they all have depleting reserves that need to be filled to keep their balance sheet solvent. They're producing millions of ounces a year that are coming off the books and they need to backfill those ounces. They need discoveries of new ore bodies. So now, rather than doing the exploration themselves, which in the past they did, but over the past 20 years, they've really stopped doing.
They now prefer to back well-managed advanced exploration assets that they believe can become mines. That's sort of the key for them. Before one of these majors is going to spend a dollar, they will think that they can find it, increase the size of it and produce it. There is a tremendous amount of due diligence that goes into it. To that point, when I'm talking to retail investors, family offices, funds that are entering or emerging in the gold space, I always say, look for a junior that already has a major involved because in many ways they've done a lot of the due diligence for you.
In terms of the company, American Pacific was started by myself and Eric Saderholm, who is my business partner. [At the] beginning [of] March 2020, we picked up an asset down in Montana that is under partnership with Rio Tinto, the second largest mining company in the world. Recently, we announced a transaction where we're taking over another public company by the name of Constantine [Metal Resources]. We now have the partner on it, in a company called Dowa [Metals & Mining].
Ketki: In essence, investors working with juniors that are partnered with a major.. they have the security and due diligence done of knowing what major but having the potential and the growth potential of a junior company.
Warwick: 100%. So, let me give an example of that. There was a company called Reservoir Minerals that owned 30% of the Timok copper deposit in Serbia. Nevsun [Resources] was their partner. Nevsun owned 70%. Again, Nevsun came in, felt like, “okay, we see what you see; we think this can grow.” Sure enough, it did. They took out that 30% for $365 million US. So, there's your leverage.
Ketki: So the fact that junior miners work with a major company there is sort of an asymmetric risk-return. You're taking on the risk of the major, but you have the return potential of high growth, so I think that's very exciting.
Warwick: I think sector demand, that's one of these key things. Is the sector in demand? Is there liquidity? Is there a liquidity profile for the company is incredibly important. And then the opportunity for large-scale discovery. When you're in that discovery phase, people want to know that the opportunity is there for it to be big. That's an important piece of the puzzle when people are looking at that junior mining space. Now, this doesn't differentiate between retail and institutional. People may debate me on this, but I will argue the point: Retail leads institutional. You need to be able to create retail demand, create that liquidity, to get the institutions interested.
Ketki: It's almost like you're testing it with retail investors and once you've demonstrated some demand, that's when the institutional support comes.
Warwick: 100%. The mining institutions are smart. They're looking for something that's got that opportunity for large-scale discovery. They aren't looking to come in and bet 100% of their capital for a 10% return. They're looking to put in 10% of their capital for 100% or multiple 100%s of return, that's what they're looking to do, so large-scale discovery is important. But they want to see that there's excitement in that particular company, in that particular stock. There needs to be liquidity there. You need to create that demand via the retail [investors], even some small family offices, etc.
Ketki: And now to look ahead, I'd love to know what you think the catalysts will be in the upcoming year for the mining sector and whether that differs between retail and institutional investors.
Warwick: The catalyst going forward here for junior mining for the upcoming year? I think the biggest catalyst is this whole new green demand. The world wants to go green. The part that I think the institutions, [and] a lot of retail [investors] understand, but maybe not your average person who walks the street necessarily [does], is that green demand is filled with copper, it's filled with lithium, and it's filled with zinc.
Your regular gas engine in a car takes 23 kilograms of copper. A hybrid takes 40 kilograms of copper. A plug-in electric vehicle takes 60 kilograms of copper. So, as we go green, we're going to need way more metal and [more] specific metals. A three-megawatt wind turbine contains 4.7 tonnes of copper. A lithium battery for an electric car [contains] eight kilograms of lithium. The demand for zinc is enormous. I mean, if you look at zinc batteries, there were 600 tonnes of zinc, for zinc batteries, in 2020. They're saying by 2030 it'll be 77,500 tonnes, by 2030 [referencing a presentation made by Andrew Green, Executive Director of the International Zinc Association (IZA].
This EV electric revolution…this green revolution… will be funded through mining. It's going to need these specific metals. This will create all kinds of opportunities to lift [us into] a supercycle and give great returns for juniors, because they're the ones that are going to need to bring those new assets online and sell those to the majors.
Ketki: Right. And I think especially in Canada, obviously there's a huge green push, but it seems that we don't have a lot of the resources or the infrastructure really to fully develop that.
Warwick: Well, I mean, if you look at lithium, [or] if you look at uranium, which is a great example. With all these issues that are going to be created now in Europe with the cost of electricity going up, they need these uranium mines to go back on stream. The US now is aggressively funding uranium because they need that offtake created locally. There are good uranium companies that are US based, Kraken Energy is a great one. They're looking to produce it locally. Those companies are going to get a tremendous lift going forward.
In California, they want to eliminate gas vehicles by 2030. Right now, 12% of their vehicles are electric and they're already having issues where they're having to shut down their grid. The amount of copper that they need to be able to make that, just California alone, never mind the rest of the world, is staggering. That copper component alone, you see the value of that. When you start thinking of that demand, you can see a rising commodity price ahead of you and the importance of these juniors being able to find these big deposits to bring them on stream.
Ketki: Honestly, I'm really enjoying learning about it. One thing I wanted to touch on about how uniquely placed Canadian companies with US dual listing as well.
Warwick: Having that dual listing is very important. If you're creating interest down in the US, which we're looking to do, which all companies should be because you've just got such a big market down there. For American Pacific, because all the assets are down in the US, you need the ability for people to transact, to be able to buy and sell stock and the OTCQX gives that to us in the strongest manner that we're looking for today. So yeah, it was incredibly important to be dual-listed and have that opportunity for full liquidity.
Ketki: And so just before we close out, I'd like to also touch on the challenges. Our investing audience would probably like to know about the potential challenges or risks involved as well in the junior mining space.
Warwick: High risk, high reward relationship towards the stock for sure. Our biggest, predominant risk is market risk. [There is] exploration risk as well, of course. When you're drilling, you're either going to find something or not.
But there's always exploration risk in these companies, market risk as well. I think a good bet are companies that, like us, are fully cashed up, got world-class partners and you're putting out a tremendous amount of news, you've got that opportunity for continual growth, that's the most important thing for us going forward.
Ketki: Great. And you mentioned you're all cashed up. Why is this crucial for investors to look at when selecting a company to invest in?
Warwick: It’s a very important thing for investors to know that companies have cash and the ability to get cash. That's key because it's a cash-intensive business. So, having capital but also having the right investors who are backing it to add additional funding or put you in the right direction for additional funding, and working with teams who have the ability to raise capital, is incredibly key. Good deposits need capital.
We've got around $10 million in cash. When we close the transaction, with us taking over Constantine, we'll have around $11 million in cash or thereabouts. So, we are strongly financed for years to come, which is a nice position to be in.
Ketki: Is there anything that you think we haven't discussed yet that investors should know about?
Warwick: I think we've covered it relatively well. In terms of American Pacific, The closing of the transaction with Constantine will happen at the end of October. Dowa is spending $18 million US this summer on the project, so it's a significant year of growth. Now, Madison, partnered with Rio Tinto. We'll have significant news from them as well.
We had five nominations at the S&P Global (NYSE:SPGI) Platts [Metals Awards], which is certainly a nice nod this year. I was nominated for CEO of the year. …And yeah, look, we're going to continue to look to build this company, by way of growth by drill bit, acquisition and pushing these assets forward. We're going to do that aggressively as we have done and look forward to the years ahead.