What happens when 'kingmaker' Eric Sprott backs your penny mining stock

One Friday afternoon not so many months ago, Canadian billionaire Eric Sprott was sitting in a leather wingback chair in a dimly lit room, talking about a junior mining company that he just can’t stop investing in.

The company, Garibaldi Resources Corp., is in the earliest stages of exploring for nickel in British Columbia’s Golden Triangle, an area that has been relentlessly explored and mined for a century without much nickel ever being found.

Nevertheless, Sprott was enamoured: He compared the area to Voisey’s Bay, also a nickel deposit, and likely the largest metal discovery in Canada in the past 40 years. That find has turned out to be worth billions of dollars.  

“It just keeps coming together,” Sprott said about Garibaldi, turning to an interviewer on his left during a video that will be posted on YouTube.

That Garibaldi has never had any revenue passes without comment.

“If it’s Voisey’s Bay, why wouldn’t I just stay the course here?” he said. “Try to get as much money in as you can, to get as much return as you can.”

For junior mining companies, it is basically stock in trade to always claim to be on the verge of an unprecedented major discovery and the endorsement of a billionaire can instantly put a junior on investors’ radar. But there are no guarantees of success in the high-risk, high reward world of mining exploration — as Garibaldi’s story has shown all too well so far.

The setting for the Sprott interview video was the Jekyll Island Club, a private resort off the coast of Georgia, where he delivered the keynote address last October to a conference of investors focused on hard assets, meaning commodities such as gold and oil that have intrinsic value.

“I don’t do conferences anymore because I’m theoretically retired,” he told the group, having stepped down in 2017 as chairman of Sprott Inc. with an estimated net worth above $1.5 billion. “But then I thought Jekyll Island, huh, that’s an interesting place.”

The Jekyll Island Club, as the story goes, is where an elite group of bankers and legislators secretly convened in 1910 to hash out a framework for the U.S. Federal Reserve.

Sprott, who made a fortune investing in gold and junior mining companies, is an avowed critic of the Fed, at times, even accusing it of perpetrating a Ponzi scheme on the public. But the offer to visit the club and speak for an hour about his investing triumphs proved too enticing to reject.

It was also an ideal time to pitch several junior mining companies he’s backing.

By the end of October, Garibaldi’s stock had more than doubled in value to $4 per share, but that doesn’t fully convey its meteoric journey during 2017.

In February, the TSX Venture Exchange ranked Garibaldi as its No. 1 performing stock in 2017: The stock experienced a 1,751 per cent price increase to $2.46, a 2,351 per cent increase in market capitalization to $238 million and a trading volume above 150 million.

Sprott has invested heavily in at least two other mining companies on the list, Metallis Resources Inc. and Novo Resources Corp., whose stocks increased 750 and 361 per cent, respectively, last year.

For a billionaire such as Sprott, there are plenty of opportunities on the TSX Venture — where the average financing is $3.9 million — to change a company’s profile with a multimillion-dollar investment.

I keep thinking why would a guy invest that much? He didn't know anything.

Indeed, there are more mining companies listed on Toronto’s exchanges than anywhere else in the world, which makes the city a financial hub for the mining world, and helps explain why thousands of geologists and prospectors are streaming into the city this week, leaving the remote regions where they generally hammer away at rocks and labour over drill samples.

They are coming for the largest mining conference of the year, hosted by The Prospectors and Developers Association of Canada. Most of the action takes place outside the convention floor in the nearby bars and restaurants, where prospectors, explorers and mining executives hope to cross paths and strike deals with one of Bay Street’s deep-pocketed financiers — Sprott’s old stomping grounds - while the wine and spirits flow freely.

They’re all looking for the oversized stock returns that Garibaldi found. Of course, nothing is as easy at it seems.

Garibaldi’s chief executive Steve Regoci, who has spent the past year at the helm of a company that hitched its caboose to the TSX money-raising machine just as the commodity cycle started to heat up the price of metals, offers a war weary account.

“I wish it was all fun,” Regoci said. “It’s not been all fun.”

In the past 12 months, Garibaldi shares have traded as low as 12 cents and as high as $5.27, before settling down to less than $3 in recent months.

Brady Fletcher, managing director of the TSX Venture Exchange, which is based in Toronto, said such volatility is a good thing, because it creates the urgency that drives investors to make buying and selling decisions. That, in turn, enables mining companies to raise money.

Indeed, in 2017, the TSX accounted for 30 per cent — or about $8.5 billion — of the mining equity capital raised around the world.

“Part of what comes with a guy like Eric Sprott is when Eric Sprott says he’s done his due diligence and is investing in a company, it’s a way for retail Canada … to follow that thought leader,” Fletcher said.

Sprott also sees a special role for himself and similar investors in junior mining companies.  

“I care very much about small enterprise capital,” he told investors on Jekyll Island as the other reason he agreed to keynote. “It’s very difficult for smaller companies to raise capital. You need people to champion your stock.”

'Blown off the mountain'

One of the first things Steve Regoci, who is based in Vancouver, points out about Garibaldi’s property in the Golden Triangle is that it’s not Voisey’s Bay, the gigantic nickel deposit off the coast of Newfoundland and Labrador.

Sprott has repeatedly invoked the comparison, which Regoci, in the past at least, said he “hates.”

“The only thing we have in common with Voisey’s Bay is we’re in the wrong rocks,” he said, referring to the fact that nobody was inclined, at least initially, to believe either company had discovered nickel in their respective regions.

It’s a metal that’s been in the doldrums price-wise and is only now creeping up as the commodity cycle pushes the price of almost every metal higher, from cobalt to copper — two other metals believed to be on the Garibaldi’s property. 

Indeed, in the past few years, when nickel as well as gold and other metals experienced prolonged depressed pricing, Regoci has struggled to gain attention.

“I couldn’t raise a dime of hard dollars even if you put a gun to my head,” he said. “There was no interest, even guys I knew in the brokerage industry, my friends, everyone was doing marijuana deals.”

As a result, 2017 started off slowly for Garibaldi, like other years, with its stock dragging at around 15 cents.

But things changed in the last days of July. The company put out a press release about drill samples taken on its property in the 1960s that showed there was nickel there, and the former chief geologist for mining giant Vale, who Garibaldi hired as an advisor, called them “exciting and highly promising.”

Garibaldi’s stock started creeping upward a few cents per day, every day. As the company put out further press releases about its own crew’s attempt to drill fresh holes on the property, the stock kept rising, finally breaking the $1 threshold in September.

By October, it was trading at $2 per share, and the company announced it closed a $2.5-million private placement with Sprott for about 2.87 million shares — with roughly half priced at 82 cents per share and half at 92 cents per share — plus warrants to purchase more. He now owned more than 10 per cent of the company, according to a press release.

That same month, the stock started jumping in bigger increments. On October 12, about one week after Sprott’s investment closed, the stock rose 28 per cent to $2.69 from $2.09. The next day, it spiked 34 per cent to $3.57. On October 25, it peaked at $5.27, giving it a market capitalization, albeit briefly, of $450.9 million.

“All of a sudden, your stock goes up from 14 cents — it’s hard to wrap your head around it,” Regoci said. “It’s shocking.”

Brady Fletcher, of the TSX Venture, said mining companies rely on “kingmakers” such as Sprott to identify smart picks.

Aside from the Sprott connection, Garibaldi may have drawn investor attention for other reasons: It’s exploring in B.C.’s Golden Triangle, an area where discoveries of vast ore bodies are still happening. 

Take some money off the table

For instance, Seabridge Gold Inc. spent more than $250 million in the past decade conducting tests to prove that its property there holds 39 million ounces of gold and 10 billion pounds of copper.

“Understand how difficult it is in our business to make a discovery, delineate a reserve,” said Rudi Fronk, Seabridge’s chief executive. “We have all these companies in the Golden Triangle, and I would venture to say if you have five mines in there in the next five years, that’s a huge success.”

Those long odds meant that even though some investors view Garibaldi as the next Voisey’s Bay, others see a different way to make money from the huge rise in its stock price: short selling. 

According to Yahoo Finance, there are still about 869,000 shares that are “short,” meaning the holders are betting the stock price will sink.

Regoci said someone even started sending letters to the TSX Venture and the B.C. Securities Commission claiming the company was a scam.

“I told my friends we didn’t have any assays, I would sell,” he said, “Take some money off the table.”

And then, whoosh, a bunch of investors did just that.

Between November 17 and 22, while Garibaldi experienced a delay from the lab reviewing its drill samples, the stock dropped 52 per cent to $2.17.

Its exploration crew also ran into an obstacle: The property is located 1,950 meters above sea level and they were trying to drill in November while living in a survival shack designed to withstand heavy winds. But a snowstorm hit and they were forced to shrink-wrap the drill rig and flee for their lives.

“We were going to start on the 15th hole, and Mother Nature blew us off the mountain,” Regoci said.

The stock rose and fell several more times in 2017, but never closed above $4 per share again, and it has closed above $3 just a few times.

I don't do conferences anymore because I'm theoretically retired. But then I thought Jekyll Island, huh, that's an interesting place.

'Now I'm in it'

Regoci said he has known Sprott for about a decade and often called him when he was struggling to raise money at one of his companies.

Back on Jekyll Island, during his keynote, Sprott said Regoci even proposed a deal in mid-2017 that the TSX rejected: If Sprott agreed to invest $117,000 in Garibaldi, Regoci would offer him shares at 15 cents even though they were trading at 35 cents on the open market.

Sprott said that spurred his interest to read what people in online chat groups were saying about the company. Somewhat incredibly, they convinced him to invest: “You get smart people talking about this stuff … saying it’s going to be another Voisey’s Bay, but bigger, so now I’m in it.”

But even Regoci describes the investment as a roll of the dice.

“I keep thinking why would a guy invest that much?” he said. “He didn’t know anything.”

Of course, for Sprott, $10 million represents a tiny fraction, less than one per cent, of his estimated $1.67-billion net worth.

Sprott declined to be interviewed for this article through a colleague. But in his video interview on Jekyll Island, he provided mixed signals about how he views his investment in Garibaldi.

Despite comparing the company to Voisey’s Bay, Sprott at the time cast it as more of a short-term investment that could rise dramatically depending on drill results. He said the better long-term play is a company called Novo Resources, which is exploring for gold in Western Australia.

“Ultimately, I think Novo, hands down, is going to provide the better return,” Sprott said.

But he continued to invest in Garibaldi, buying shares as recently as February, and at one point accumulated at least 15 per cent of the company.

Regoci acknowledged “nobody knows” how much nickel is in the property, but said the drill results so far have demonstrated high grades of nickel, copper and cobalt. His goal now is to close the credibility gap, and quickly show there’s enough tonnage in the property to justify the attention.

That goal aside, Regoci mentioned something else he’s learned from his years in the mining industry: “I don’t care how hard people work,” he said. “You need luck, you need a lot of luck.”

Financial Post

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