My voyage to Vancouver this week to attend the Cambridge House World Resource Investment Conference yielded a treasure chest of information and insights that I will never be able to relate in full. But my interview with Minefinders (AMEX: MFN ) CEO Mark Bailey -- conducted on the very day that Minefinders and Pan American Silver (Nasdaq: PAAS ) announced a watershed $1.5 billion transaction to move Minefinders' assets into the gorgeous Pan American stable -- constitutes an unforgettable highlight that I am delighted to share with you here.
In Part 1 of this excerpted transcript, we took a bit of a retrospective view over the 17-year transformation of Minefinders from a hopeful exploration company to a highly profitable gold and silver producer in Mexico. That success is reflected in the stock's 60% outperformance of the S&P 500 since I initiated my bullish CAPScall on Minefinders back in 2007. Here in Part 2, the conversation turns more toward the present and future by delving into the rationale behind the proposed transaction, the assets that Pan American will thus acquire, and what the resulting silver powerhouse will look like.
Christopher Barker: The structure of your deal with Pan American Silver gives shareholders the option to receive shares, cash, or both. I like the three-option approach. It's a nice touch. Have you decided which option you'll select for your own shares?
Mark Bailey: I'd like as much stock as I can get, because I like the stock. I like their paper. I think with our assets, and their current and future assets like Navidad, I'll see a real re-rating of the company, and a lot of upside back to that $40-plus share price we saw in 2011.
Barker: This transaction brings pro forma proven and probable silver reserves to about 500 million silver-equivalent ounces (converting gold to silver at 50:1). What portion of that total is from Minefinders' assets?
Bailey: On P&P we're almost the same in reserves (silver-equivalent) as they have. Last year we produced 3.6 million ounces, and once we add the mill we can get up to around 7 million ounces [not including gold production].
Barker: This is their first material exposure to gold, isn't it?
Bailey: Yes, but the gold helps them offset their costs. And because we do produce a lot of gold, their cash costs are going to go down. And so instead of having cash costs in line with all their peers, the combined company is expected to produce silver at a cash cost of less than $6 per ounce. Our cash cost on a silver basis last year was about negative $11. That's going to be very beneficial to Pan American, whose costs last year were $8 or $9. They're going to be able to apply our minus number to that, that's what is going to bring their cash costs down. So it's a good deal for them in that respect, and I'm very happy to be part of this deal.
Barker: So you're fairly bullish on Pan American's prospects for Navidad?
Bailey: I'm very bullish. I've not been to the property, but one of our directors has been to it, and he says it's unbelievable. It's world-class.
Barker: And the political landscape?
Bailey: It's changing. They had a ban on the use of cyanide in the neighboring province, and they just removed it. And another nearby province already has four or five mines operating in it. This is encouraging, and I hope we'll see a change in the province that Navidad is in soon too. These areas benefit from the income, the investment, and the jobs that result.
Barker: For my readers' sake, could you discuss the plans you had in place for the "Dolores" operation? I imagine Pan American may wish to study that plan before marching forward, but maybe we can just focus on the plans that you had in place.
Bailey: Yes, we're well advanced on those. We received board approval for the mill expansion at Dolores, which we expect will cost $160 million to $200 million. We also received approval to go underground at Dolores. We have a good underground deposit defined, and we actually are in the process of starting the underground. The mill was going to be 6,500 to 8,000 tonnes per day because the current gold and silver prices justify that along with the current heap leach operation. But you're correct to say that Pan American will probably step back and do their own assessment -- maybe tweak it a little bit -- but I have a feeling they'll end up with roughly the same size we ended up with.
Barker: Minefinders has always been viewed as a primary gold producer, albeit with an unusually powerful silver kicker. It reminds me of Aurico Gold's (NYSE: AUQ ) Mexican assets, which look great whether viewed primarily in the context of gold or silver production. What would you say to retail investors who may be surprised to see a major silver producer targeting a miner that has been primarily known for gold?
Bailey: I think they ought to be encouraged, because there have been those who disregarded our silver entirely. I think this lays that to rest. I don't think a silver company would acquire us if we didn't have any meaningful silver in our reserves and resources.
But I consider us a precious metals company; we produce gold and silver. If gold goes to $2,000 and silver stays in this range, we will be a gold company. If silver goes to $50 and gold stays at this rate, we will be a silver company. It's the best of both worlds.
If we had converted our gold-to-silver equivalent, we would have produced 7 million ounces of silver-equivalent in 2011. But we use gold-equivalent, so [2011 production] was 155,000 ounces.
Barker: Can you name some competitors whose work you particularly admire, and why?
Bailey: You mean besides Pan American? I admire Pan American, and I've known the company for a long time. I've known the people for a long time. Agnico-Eagle (NYSE: AEM ) has a good reputation. I like the way they do their work. They're professional.
Barker: They've had a run of bad luck.
Bailey: They have had a run of bad luck … it's the mining business. There're others out there like them that do good work, that aren't promotional, and they face the realities of the mining business. And I think they've done a good job.
Barker: What does it take to make turn a geologist into an effective CEO of a mining company?
Bailey: I have no idea [laughs]. Not many get there. It's people skills, maybe. I depend a lot on all the people that work for me. I have a good geologist working for us, good engineers that work for us, and we have a great operating team now and across the board good people. And that's what makes a good company. Some geologists are better at that, and some geologists are probably terrible at that because they're good in the field and they don't like to talk to people. I used to be that way, but I've mellowed in my old age [laughs]. If you wonder around the hills by yourself for a few years, you become anti-social. [Joking] We have a few on our staff … I won't name them. They're good geologists, though.
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