...According to investors, not much.
I was down in Peru recently looking at the Constancia copper, moly, and silver porphyry project of Norsemont (NOM-T). With a stock at $4.60 in January of 2006, management of the company failed to promote the stock or keep investors informed as to their progress. So after 15 months of drilling and solid progress, the market spanked them severely.
When I was in Peru, you could have picked up shares at the discount counter for $1.50. Naughty, naughty guys. If you don't tell your story, investors will punish you. If you have a story worth telling, better tell it or pay the consequences.
With a tiny 29 million shares outstanding, every share is backed with 60 pounds of copper, over 1.5 pounds of moly and .75 ounces of silver. When Palmarejo sold their silver project to CDE, they got $6 for every ounce of silver in the ground. NOM is getting about $2.00 an ounce for silver in the ground and not a single red cent for $200 bucks worth of copper and over $45 worth of moly per share. I must be missing something. That sure seems cheap to me.
Norsemont acquired the property from Rio Tinto in February of 2005 with copper at a dismal $1.32. Rio Tinto had been in a joint venture with Mitsui of Japan and Rio felt the property didn't meet their criteria for size or grade. But $3 copper makes up for a lot of sins.
Mitsui and Rio Tinto put about $5 million into exploration. Rio Tinto had a historical resource when they did the deal with Norsemont. Over 5 years, Norsemont must spend $7.8 million US on exploration, pay $5 million in cash to Rio and issue Rio 1,250,000 shares to earn 51%. Norsemont can earn an additional 19% to bring their interest up to 70% by paying Rio an additional $8 million.
Once Norsemont has earned their 51%, Rio has 60 days to make a decision whether to clawback to 36% by paying back three times the money spent by Norsemont if the project is larger than 8.8 billion pounds at that time.
Rio obviously understood what investors don't get. $12 billion dollars worth of rock is worth something. Norsemont didn't get handed the keys to the candy story, they paid a fair price to get in the door. The price of copper has more than doubled; they have made nice increases to the resource and are in the midst of conducting a major drill program in the San Jose zone, which could easily add a billon pounds of copper to the resource.
I spent two days in Peru with Bob Baxter, President of Norsemont. He is the first person in the industry that I have talked to who actually has thought out the primary issue of mining a major copper/moly porphyry today. It's not the size or even the grade that matters; it's how soon you can get into production. At today's prices, every inch of ground on earth is either a prospective mine or it's good for nothing but raising moose. I've seen a dozen or more major systems. There is lots of copper around in the ground and I know there is 150 years production of moly identified.
Prices are high today reflecting both the destruction of the dollar and enormous demand from India and China. But supply and demand are laws written in rock. Today's prices are sucking metal out of the ground but one day there will be too much supply. When that day comes, and you are in the midst of the ribbon-cutting at your opening day ceremony, it won't matter how much metal you have, by the time the ends of the ribbon flutter to the ground, you will be closing up shop.
Bob Baxter and Norsemont get it. And Bob is cracking the whip to both increase the quantity and quality of his resource, but also to fast track that puppy to production. To the victor belong the spoils and to the swift go the high prices. Norsemont has a great system and the faster they get it into production, the more they stand to make.
By and large Norsemont is in the driver's seat. Mitsui would love to have an off-take agreement but that isn't part of the deal and Norsemont can ship their cons to whomever they wish. That's a giant lever for Norsemont to either nudge Mitsui into buying them out or to accept a buy-out of their 30% interest. Likewise, Rio was smart enough to have a clawback but it's not valid unless Norsemont more than doubles the resource. But copper doubling in price has exactly the same effect as doubling either the resource or the grade. Who on earth would have projected $4 copper two years ago? Well, in a way Norsemont did and whether through skill or just blind luck, they are sitting on a multi-billion dollar lottery ticket.
But no one is perfect. At the beginning, after Norsemont did the deal with Rio, the company focused on getting the story out. They got listed in Frankfurt and made sure the Europeans knew their story. It paid off in a big way and the stock was trading 200% higher 16 months ago. But Norsemont got lazy and started taking their shareholders for granted and shareholders bit back with a 66% decline.
There is no real reason for the decline, the resource is substantial, metal prices are strong and management is being very aggressive about fast-tracking the project to production. But we have a situation unmatched at any period in history. Every hard commodity is in shortage and there are 3,000 juniors out there begging for attention from a small and growing smaller group of loyal metal bugs. Until and unless the industry starts communicating its message to the great unwashed, share prices will languish even as metal prices are banging against the roof.
Norsemont has seen the error of its ways and has become a sponsor. I like the aggressiveness of management and that's worth a lot. This is not the time to be sitting on the egg until it hatches. We own shares and I am biased. Do your own due diligence, you get to keep all the profit.
Norsemont Mining Inc