XL: Your career in mining is, in a word, remarkable. Did you pattern your approach to business after anyone in particular?

There are a number of people in this business that I respect, and that I have learned from, but I’d have to give credit to my father as a role model. He was an entrepreneur who built a successful forest products company and did it while remaining true to his principles and treating people well.

As far as the people in this business, I have always admired Norman Keevil, the Chairman of Teck Cominco (TEK/A.T) and his father who built Teck from scratch into a multi-billion dollar enterprise. Both of the Keevils operate in a way that has resulted in their being universally respected by their peers in the business, which proves to me that you can build a big business ethically and without having to step on people’s feet.

XL: What was your first resource company?

The first was Equinox Resources Ltd., which did its IPO in 1985, raising a grand total of $110,000.Equinox was a great learning experience, with most of that experience coming as a result of trial and error. It was a lot of hard work and a bit of luck. After nine years of asset-building, the company had the good fortune to be acquired by a major in 1994 for $107 million. At the time of the sale, we had two producing gold mines and one producing zinc mine. We also controlled a lot of exploration properties, most of which were under joint venture. One of those exploration properties, Rosebud in Nevada, which we staked in 1986, turned out to host a major gold discovery and was the trigger that attracted Hecla to buy Equinox.
While it was, at times, a painful learning experience I’m proud of how it turned out. The last trade for the company was the highest in the company’s history, so I can safely say that every shareholder could have made money.

XL: What were some of your other successes?

In the sale of Equinox, Hecla took the assets but I kept the people. So, the day after the deal was done, I started two companies with the same management team, Pan American Silver (PAA.T, PAAS,NASDAQ) and an exploration company I named Da Capo Resources, which means “back to the beginning”.

The strategy of Pan American was to develop into the world’s premier silver mining company – with emphasis on the word “mining”, but for Da Capo, which held two exploration properties in Bolivia, the strategy was simply to take the two properties, add value through exploration and sell them once a pre-feasibility study had been completed. And that is exactly what we did , two years later when Da Capo was sold for $57 million to Granges Mining to form a new company called Vista Gold. From $0 to $57 million in two years, so it turned out to be a good deal all the way around.

In 1997, I started another exploration company, Altoro Gold, which was working in Bolivia as well as Brazil. In 2000 Altoro was bought for about $30 million by Solitario Resources in a merger. Solitario remains an active exploration company today.

XL: And Pan American Silver?

While I obviously kept busy with Da Capo and Altoro during the 1990’s, my primary focus remained on Pan American Silver. Seeing that company keep moving forward on its silver strategy has been my greatest business success so far. Instead of being simply an options play on silver in the way that, say, a company like Silver Standard is, PAAS quickly evolved from acquiring uneconomic silver properties in its first year in 1994, to becoming a complete mining company in its second year.

In September of 1995, Pan American acquired its first operating silver mine, Quiruvilca, a large underground mine in northern Peru that had been operated by Asarco since 1924. While that deal turned out to be a great move, we had some bumps in the road in our quest to become the world’s premier silver play. For instance, in 1996, we embarked on an ill-fated adventure in Russia to buy and build the world’s third-largest silver mine. The adventure ended when a Russian company attacked us and we were forced to withdraw from the project while keeping a 20% stake.

Despite that misadventure, Pan American has been a great success and now operates four large underground silver mines and a small surface silver operation. Our market cap is US$850 million, we have over 4,000 employees, and we are in very solid financial condition with a great future.

In 2004, our silver production should exceed 13 mm ounces and we are forecasting this to reach 24 mm ounce in 2007. This will position PAAS, by a wide margin, as the world’s largest primary silver mining company.

We have no debt, US$114 mm in cash and are generating about $30 mm annually in cash flow from our operating mines.

XL: You make building successful mining businesses look almost easy. Do you have certain rules you follow?

I believe the mineral development business is somewhat akin to a game in that there are certain rules to winning. If you follow them you have a very good chance of success. In no particular order…
 

  1. Keep your story simple and totally focused and stick to your strategy. If you are an exploration company, focus on exploration. If you are trying to build a mining company, focus on that.
     
  2. Secondly, shoot for size. For example, I typically won’t acquire properties from large companies as those tend to be garbage those companies are looking to unload. Instead, I look for properties that large companies want… large deposits that command large premiums.
     
  3. For your shareholders, don’t look for 10% returns, look for 1000% returns. Face it, the mining game is a highly risky business, and you should try to earn your investors massive returns in exchange for them taking the risk of investing in this sector.
     
  4. Be careful with your deals. I never forget that I am trying to make a home run for our shareholders. Typically a mining company can’t make a homerun if it only owns 20% of a project. Many good geologists have given away great discoveries because they made bad deals along the way.
     
  5. Also on shareholder value, I am very careful about giving away cheap stock because it dilutes away any prospect of making significant gains if you are successful.
     
  6. Treat the company’s money as if it were your own and be frugal.
     
  7. Wherever possible, when running an exploration company, joint venture your risk.

XL: You’ve had both exploration success and acquisition success. What are the differences?

We were fortunate to have had exploration success in Equinox, Da Capo and Altoro. The key in exploration success is to be very aware of the risk of the business and seek joint venture partners to help finance that risk. To find a good property you have to know what you are looking for and remain focused on finding big projects and cutting good deals. It is also important when looking at exploration prospects that you acquire 100% interest so you have something to joint venture.

XL: How important are geologists to the exploration process?

Obviously you want to work with the best geologists you can, but at the end of the day it is the president of the company who is going to drive the exploration strategy. I’ve always believed in running a diversified exploration program… at the time Equinox was sold, we were sitting on about 30 properties, and had probably looked at 200 before making the discovery that made the company.

XL: What about acquisition success?

Pan American Silver has largely followed an acquisition strategy. Again, knowing what you are looking for and keeping focused is key. As is not getting overextended. I never lose sight of the fact that the business is highly cyclical. Therefore I avoid going into a bear market with lots of overhead and development commitments. Timing is very important.

XL: How do you time these markets?

Pan American Silver has largely followed an acquisition strategy. Again, knowing what you are looking for and keeping focused is key. As is not getting overextended. I never lose sight of the fact that the business is highly cyclical. Therefore I avoid going into a bear market with lots of overhead and development commitments. Timing is very important.

XL: Where are we now?

Right now, we are probably half-way through a bull market, but I believe this particular cycle will be longer and stronger than at least the last two cycles. That’s because of the profound economic transformation sweeping through Asia… notably China and India, the two world’s two most populous nations. This bull market could extend 10 to 15 years versus the normal 4 or 5.

XL: But many analysts are concerned about the U.S. economy, and China is heavily tied into the U.S. economy. Does that concern you?

There will be corrections along the way, but I don’t see the growth slowing profoundly, even if the U.S. slows down. I’m convinced China will become the world’s largest economy in our lifetime and end up bolstering the U.S. economy. It is also worth watching what is going on in India as it will be a major factor in global metals consumption over the next few decades.

XL: Your latest venture – Lumina Copper – certainly benefits from Asia’s growing demand for raw materials. Tell us about that company.

Lumina is a custom-created vehicle designed to benefit from the lessons I’ve learned about market cycles over the years.

XL: Can you sum up the strategy?

The Lumina strategy is simple: buy large defined copper deposits at the bottom of the price cycle, develop the deposits to add value, then sell the deposits when the copper price goes much higher as I expect it will in the next few years.

The company has successfully fulfilled the first part of its mission, and now offers shareholders enormous exposure to higher copper prices. I think it holds something like one tonne of copper and one ounce of gold per share – a total of 28 billion pounds of copper resources and 15 million ounces of gold resources versus about 14 million shares outstanding. It’s a pretty good gold play too!

Once a copper property is acquired, value is typically added through additional exploration or other work, and then, when copper prices move higher, the properties will be sold off piecemeal or as part of a sale of the whole company.

XL: Are you having trouble finding copper properties to acquire?

Yes. It’s no longer a buyers market, it’s a sellers market – and I see it becoming even more of a sellers market in the next few years. While that makes additional acquisitions a bit of a challenge, the really good news for shareholders at today’s prices is that LUM has already achieved its initial property acquisition goals.

XL: How advanced are the projects in Lumina?

The ten properties are all different in their location, stage of development and potential profitability. For example, we think three of the properties in Chile can be economically developed at current copper prices. Other properties require either higher copper or gold prices or additional investment in infrastructure in order to generate economic returns, but I expect they will all become economic at the copper prices I believe will occur in this cycle.

XL: How advanced are the projects in Lumina?

The ten properties are all different in their location, stage of development and potential profitability. For example, we think three of the properties in Chile can be economically developed at current copper prices. Other properties require either higher copper or gold prices or additional investment in infrastructure in order to generate economic returns, but I expect they will all become economic at the copper prices I believe will occur in this cycle.

XL: How high is that?

I am confident that we’ll see $1.50 per pound for copper, but it would not surprise me at all for it to briefly spike to $2.00 per pound this cycle. And it could happen within the next 18 months.

XL: So, another big success. What’s next?

With Pan American, my goal was always to build a world-class company that would outlive me, and I think I’ve now achieved that.

I intend to remain fully engaged as Executive Chairman, even though in May I turned my CEO position at Pan American over to our president. I did so to reflect the strong management team we have in place and in recognition of my own limited abilities to run a company as large as it has become. At heart I’m an entrepreneur, and I’ll do my best to keep Pan American and Lumina moving in the right direction, I just love creating wealth for shareholders through building resource companies from the ground up. It’s what gets me out of bed in the morning.

XL: What mistakes do most retail investors make investing in the retail stocks?

I’m a little at a loss to answer this, because I tend to keep my head down and typically don’t talk to my shareholders about the dogs they buy. I am always the biggest shareholder in my companies, at least during their early years, and so my focus is on building my own companies. My guess is that the biggest mistake they make is not doing their own homework but relying on brokers to do it for them. They fail to go to investment shows to meet with management groups, and don’t bother subscribing to the better newsletters such as Doug Casey’s or Bob Bishop’s. I think there is a tendency to not pay enough attention to management or to the financial structure of the companies they buy. Pretty basic stuff.Thomas in the diamond business have done well. The Hunter-Dickinson Group is always is worth following, Mike Kenyon is very successful and a great guy. Those are just some off the top of my head.

XL: Any final comments?

The most satisfying thing about the companies I have helped build – and I don’t forget for a moment it has been a real team effort in every case – has been the wealth created. Not just for me and my shareholders, but also for our employees, contractors, communities and countries we work in, and our other stakeholders. That has been immensely satisfying to me, not just to my pocketbook and my ego, but to me personally – very satisfying.