A 'last frontier' for exploration...
THE UNIQUE political history of Saskatchewan has created a modern-day last frontier for exploration. Within its borders is a treasure trove of early-stage resources, so many that Tom MacNeill, president and CEO of 49 North Resources, says his Saskatchewan-focused natural resources company can't tackle every project it wants to.
As an incubator enterprise to raise capital for early projects throughout Saskatchewan, MacNeill's company is capitalizing on the build-out of capital markets in the province. Read why MacNeill says Saskatchewan is wide open in this interview with The Gold Report.
The Gold Report: Tom, few if any Canadian provinces are booming the way Saskatchewan is. Québec used to be Canada's top province for mineral exploration and now some believe the recent election of the Parti Quebecois could curtail resource investment in the province. Is Saskatchewan just an election away from boom to gloom?
Tom MacNeill: I seriously doubt that. Saskatchewan is fundamentally different than Québec in that Saskatchewan doesn't politicize as many things.
More important, a lot of the changes happening under the current Saskatchewan administration were initiated by a left-wing government starting with the Roy Romanow and Lorne Calvert Saskatchewan New Democratic Party (NDP) administrations. We've come out of the dark ages here. We had very left-leaning governments that led us on a path to overt nationalization of certain parts of industries in the 1970s. In the 1980s, the pendulum started swinging in the other direction. A big part of the changes with leveling the royalty playing field in oil and gas and becoming friendly to mining development and business started in the 1990s and 2000s under NDP administrations.
We don't have any fear that we could go back with a swing in government. That was obvious in the election last fall. Dwain Lingenfelter, the leader of the New Democratic Party at the time, started making noise about creating a Saskatchewan oil and gas company again, using old party rhetoric from the 1970s and 1980s. He was rebuffed even by his own party because things are good here because business is getting done. We're not going to go back.
Also, Québec didn't have the mandate to change as much as one thinks. Anything the Parti Quebecois wants to do will take budgeting. Since they have a minority government, there will be a confidence vote the first time they try to do anything rash. Their rhetoric is mostly hot air because the party is going to be compromising on a whole range of issues or else it will not be able to govern. We don't have that problem in Saskatchewan.
TGR: Do politics play too much of a role in resource development?
Tom MacNeill: It can play a good role in resource development by staying out of it unless necessary. In the 1970s, we created three of the most detrimental things to our capital market in Saskatchewan history.
At that time, the government gave itself the right to back into any project it wanted by recouping 50% of the capital costs to the explorers and developers that expended it. The effect was similar to what we see in other jurisdictions that lean that way—it scares away external capital. People don't want to deal with government because they feel that it can change the rules at any time.
More important, the average taxpayer was burdened with the risk of resource development. Taxpayers were saddled with the risks of the downtimes. The Saskatchewan government jumped headlong into the resource business because resource prices had gone up 400% between 1969 and 1974. It's a very volatile business, as we all know. The commodity cycle goes up and down. By the time it went down, taxpayer Dollars were being expended on capital projects and investments that were underwater.
TGR: Let's get into a tangible example of politics playing a role in investment in Saskatchewan. In fall 2010, an Anglo-Australian mining powerhouse made a bid for a Saskatchewan company, but the bid was killed by Prime Minister Stephen Harper, his conservative government and Saskatchewan Premier Brad Wall. Did that send the wrong message to the investment community?
Tom MacNeill: It probably wasn't helpful from Saskatchewan's perspective. The whole world is getting sensitive about trade barriers and international capital flows and that didn't do us a lot of favors. It didn't particularly hurt us either because we're wide open for business, which is clear. We had the unique situation where a very high-profile transaction happened leading into an election year and that really got the fervor going.
TGR: Saskatchewan remains fairly top heavy when it comes to publicly traded resource companies. Why is that?
Tom MacNeill: It's a function of our history. Saskatchewan has early-stage prospectors and senior mining companies that are absolutely behemoth, but we have no capital market supporting that because our capital market left in the years when socialism was the flavor of the day.
We're still living the hangover. However, that hangover is an opportunity that's similar to our neighboring province Alberta a half-century ago. There's a big void between the top-heavy senior mining companies and the bottom end of the scale where we work, but we're happy to watch that fill up over the coming decades.
TGR: You've been able to take advantage of that paucity of capital.
Tom MacNeill: We get to deal directly with the majors once we prove something up. We can deal directly with the senior mining companies. All the major ones are in Saskatchewan now and are looking for the large-scale projects that this province is filled with.
Our advantage is that there is no one else here doing it. We see everything that's happening on our landscape. Once we get to the point where we've developed an asset that would be of interest to a large integrated miner or oil and gas enterprise, we can deal with it directly.
TGR: Have you had any trouble raising funds?
Tom MacNeill: We haven't tried in the last two years. We've been working internally with our own generated cash flow because the capital market has been abysmal. From July 2010 to July 2011, there were about $4.3 billion (B) in financings on the TSX Venture Exchange. The following 12-month period had just $1.2B. We've been keeping our powder dry waiting for things to turn. We saw a false market bottom in 2010–2011 because the companies had enough money to limp along. That's finally been drained out of the system.
TGR: You don't believe we've seen the bottom?
Tom MacNeill: We're heading to it now. The most recent bottom was this summer, but things haven't improved enough for me to confidently say it was the bottom. There's too much at play right now.
TGR: Are there some tangible financing advantages for a company operating in Saskatchewan?
Tom MacNeill: There would be some real advantages if there were others besides us. They would have a wide-open playing field. We have a backlog of resource projects in our own offices here in Saskatoon. There are reams and reams of projects. We simply cannot develop every high quality project that we see. The Saskatchewan Geological Survey has been around for about 75 years and it does some of the best work in the world to get explorationists a head start. Government is very supportive. We have infrastructure everywhere. It's still wide open here.
TGR: Are there any other publicly traded companies that are operating exclusively in Saskatchewan?
Tom MacNeill: There are very few of those. Typically, a Saskatchewan project is brought into a company that exists with assets elsewhere.
TGR: When we spoke in February you said that it would take a few more years to see where the macroeconomic policy of the world's financial leaders takes us, but that it would ultimately prove positive for gold. Is that picture any clearer now?
Tom MacNeill: It's not a lot clearer because there hasn't been much traction in world economies. Central bankers are going to keep their foot on the gas pedal until the car fires.
If you've ever owned a car that's carbureted, during a cold winter you go out and try to start it by pumping the pedal a couple of times. That's the first round of quantitative easing (QE). But it doesn't start, so you try it again. You pump it a few more times and it fires, but it stalls out. That is QE2. So, you put your foot right to the floor. You hold the choke all the way open until it fires and when it fires it runs a like a son of a gun because there's so much fuel coming through it and you can't even contain the revving for a while, even when you take your foot off the gas. That's QE3.
Central bankers have said that they're going to hold the gas pedal all the way down until the car starts. Great, because you will, at some point, have a period of inflation that cannot be contained no matter how much they try. All of this macroeconomic QE is likely to result in inflation at some point, which is going to be very good for gold.
Let's say that all of this macroeconomic QE doesn't cause rampant inflation, but instead sticks the way the central bankers want and that it creates real economic growth. That's going to be good for oil because it's at supply/demand capacity right now and an expanding economy on the back of QE will drive up the price of oil. That is going to be inflationary. There will be a follow-on that will bring the price of gold up.
Oil trading volume is up 25% in the last quarter, which means that institutions and investment bankers are trading it as if it were just another financial asset. That adds volatility to it. We've seen oil go up to $110/barrel (bbl) and down to $79/bbl in the last 12 months, and then back and forth and anywhere in between. That means the world doesn't know which way it's going yet.
TGR: Are you more bullish on Saskatchewan or gold?
Tom MacNeill: I can predict Saskatchewan a little bit better than I can predict the price of gold. We're going to do fine because we're in the very early stages of economic development in Saskatchewan. Saskatchewan is going to do great over a very long period.
However, there are likely going to be much higher Gold Prices very quickly. There's too much implied risk in the system and too much desire for competitive currency devaluation worldwide in order to get rid of debt on government balance sheets. It's coming. I will not predict when because things are too volatile at this stage but we can see those clouds on the horizon.
TGR: Thanks, Tom.