On the 15th anniversary of the S&P TSX Venture
Composite Index (INDEXTSI:JX), here’s some radical
thinking.
I’m starting a new mining company. This company will be
called Ethical Mining Corporation. The shares will be owned by investors, and
no senior management will receive more than a living allowance until they put
a mine into production. There will be no options issued to the senior
management. All their upside will be derived from profit at the mine. Their
share of the profit will be be substantial, which, while yes diminishing long
term returns on an annual basis, will nonetheless be a superior structure for
investors because the interests of the investors will be perfectly aligned
with those of management. The Average Weighted Cost of Capital over time will
be a fraction of what it is in the traditionally funded Canadian mining
company, because management and their bankers will not be able to blow stock
into the faces of retail investors to support a life ‘style’.
There will be no warrants issued on any financings, which
will all occur at the 20 day weighted average closing price of the last
thirty days. Unless that prices is deemed to be ‘anomalous’ or ‘irregular’ by
an external committee comprised exclusively of non-insider shareholders. The
government of Canada Sovereign Development Fund (This is a fund that I will
start and the government of Canada will be invited to participate in, but I’m
not holding my breath. When I die, I will bequeath this fund to the
government of Canada on the condition that it only invests in enterprises
that benefit Canada and Canadians directly.) will provide the initial $2
million, and will be prevented from selling its shares until the mine has
produced a profit of at least 10%. No taxes shall be owed to the government
until it has divested itself entirely of its shareholding, which can only occur
as to 20% each six months.
In the event of commodity price bear markets, the fund will support the
company’s payroll on a ‘care and maintenance’ basis, until the prices of the
commodity being developed is deemed acceptable.
Management will be barred by corporate charter from accepting any
financing that dilutes or subordinates current shareholders without the
approval of the above-mentioned committee. Foreign ownership will be
restricted to 25% of any mine in Canada, and up to 80% outside of Canada. Flow-through
financings will not be permitted, as they provide unfair advantage to
Canadian residents at the expense to foreign investors.
Environmental contamination from mining will be acknowledged and its
remediation will be determined, as much as is possible ahead of time, and the
funds for the remediation of the site will be payable to the Canada Sovereign
Development Fund, who will be liable for the cleanup.
The municipality in which the mine is located will be entitled to 25% of
after tax profits for life of mine. No matter where the mine is. Hiring from
within the community where the mine is located must be prioritized over
importing workers.
Mining is fraught with risk – nobody can doubt that. The reason the
Canadian mining market is in such a shambles is not due entirely to the
profligate spending habits of management, and the investment bankers would
have us believe. It is the usurious and abusive financing structure that
currently characterizes the typical private placement that provides
discounted wholesale pricing to investment bankers at the expense of retail
investors that contributes at least half of the disadvantage that retail
investors face in mining companies. The risk needs to be aligned with the
reward. Retail investors have been the exit strategy for investment banks
from the get-go, and that more than anything else, is why the mining market
can’t catch a bid right now. Who, as a retail investor, wants to put up a bid
when you know the fill is going to come from the banker who got a volume discount
four months ago, and can afford to blow out the share at a loss cause he’s in
the high volume stock churning business, not in the investment business.
I’ve outlined this idea to people in the mining business and in the
financial industry. They assure me that this will never get financed, and if
by some miracle it does, will never attract a talented mining team and result
in a profitable mine. None of the reasons they offer have the ring of
sincerity or are in the least bit founded on logic or experience. The model,
is, yes, a ‘social’ model. But not a socialist one, as it has been painted by
some. This model accurately places risk and reward within the context of the
public interest above the interests of bankers and management.
Does this seem protectionist? Well thats good, because it is intended as
such. Our government has failed to support the industry upon which Canada’s
standard of living has been substantially derived. They furthermore continue
to fail to grasp how predatory the United States’ foisting of
fabricated-from-thin-air U.S. dollars is on the industries that Canada
depends on, and the commodities that are its product.
The Canadian Sovereign Development Fund will not focus strictly on
commodities. It will support, in equal measure, the growth of industries
founded on intellectual property, such as technologies and life sciences.It
will take a leadership role in the commercialization of low to zero emission
fuels for baseline grid power and motor transportation.
The fund is designed to offset the Harper government’s misguided pursuit
of chaining Canada to the Petro-state model, which is short-sighted and
ultimately, unsustainable. What’s happening right now in Canada is not going
to abate any time soon, and the damage that is being done to the long-term
prospects of our economy is not widely perceived at this point. But it the
oil price has in fact become the U.S.’s principle weapon against its foes, as
is certainly the case, then Canada is in the process of becoming an
unintended casualty.
Our failure to support industry in a profound financial way, as the U.S.
has done since the financial crisis through their process of capital and
credit fabrication, is partially to blame for the damage now unfolding in our
economy. When the longer term nature of oil price weakness sparks the
collapse in home prices that will likely result from prolonged weak energy
and metal prices, thats when the smug bankers proud of their conservative
approach to financial stimulus will begin to understand that their pride was
misplaced in the face of agressive U.S. fiscal and monetary policy, and is
really just ignorance and complacency, which the U.S. exploits the nth degree
to its advantage.
Go Canada! Vive le Canada!
