Portrait of Samuel Clemens by John W. Alexander
Witness Post: Mark Twain’s Gold Mine
The People & The Place
Jeff Ward, arms sternly akimbo, was not happy. He had greeted a colleague of ours, Cara Denver, at the dinner table with a not-so-warm stare and Ward immediately fumed:“Oh, so you are from The D3 Family Funds? You people called the teachers at my children’s school and I’m not happy about it. That feels like harassment to me … an invasion of privacy!” Cara had not made any calls to the Ward kids’ school, but I had.
So maybe I have a geologist friend, John Bloch, who distantly knew Jeff Ward. And maybe Bloch lived in Albuquerque and, coincidentally, his children were attending the same school. Albuquerque was not that large a community after all. Besides, Jeff Ward was semi-famous among geologists in the Four Corners States for hitting solid singles with an extraordinary copper vein called the Cobre Mine in Arizona. This time around, though, Ward and his partner, Rich McNeely, were “swinging for the fences.” Their company, called Metallic Ventures Gold, hailed out of Reno, Nevada. Metallic Ventures Gold was exploiting one of the great mineral areas of the world. Samuel Clemens (aka Mark Twain) and his brother had prospected there and owned a piece of the rock.
Nevada is a particularly mineral rich state: if it were an independent country, Nevada’s gold production would rank it fourth among the largest producers in the world. Metallic Ventures and its Toronto-based investment bankers from Canaccord had invited us on a site visit in Nevada. As interested investors, we wanted to walk the properties, meet the production team, and finish our due diligence to see if we were the right “owners” of a mineral company. The claims we were to visit included one, called Esmeralda, which was once owned by Samuel Clemens and his brother, Orion Clemens. That notoriety seemed pretty cool!
After a sidebar conversation with Cara Denver, I introduced myself to Ward politely but I was unapologetic about my phone calls, saying that he had no need to blow up at my colleague. I told him I had not interrogated his children’s teachers; I had spoken with the Headmaster, Andrew Wooden. Plus, public company executives at company’s big or small, high or low tech, live in a fish bowl. Though protected in glass, company executives need the circulation of cold hard cash from shareholders like oxygen. Our investigations assay executives to determine if they can measure up to their press clippings. The analysts who cover most public companies spend an inordinate amount of time on the numbers and they spend too little time on the people. Like Peter Lynch and Warren Buffet, we feel that “finding the real leaders” is one of the key ingredients to success in the investment business.
Calling Headmaster Wooden at the Bosque School in Albuquerque, according to John Bloch would give me some insight into Ward. Bloch felt Wooden knew Ward well. John could tell from personal observation that Wooden held Ward in high regard, and John felt that it would be worth a phone call. That phone call to the Headmaster and about a dozen other phone calls proved reassuring to us, because they confirmed several traits of Jeff Ward’s: his intensity, drive, and intelligence. We had heard these attributes mentioned by others, but at D3 we felt it was critical to understand the motivations of executives as reflected by our “off the record” reference checks. We welcomed access to people who knew prospective portfolio executives well, as those contacts could give us clearer impressions of the people.
Jeff Ward Map of Metallic Ventures Goldfield Project
The other point is that, as the President of Metallic Ventures Gold, Ward was in the hot seat. He had painstakingly assembled a vast collection of old mining claims over the past few years. McNeely and Ward had rolled the mining claims into large tracts of land southeast of Carson City, Nevada. Now they wanted to exploit the mineral resources using “OPM:” other people’s money.
None of us can see through rocks, so as investors, we have to discern if the prospectors and miners are competent and trustworthy. The challenges are many: they have to operate a solid company, survey and drill test holes, assay the core samples, pay the bills, haul the rock, operate the mill, produce the ore, melt it into exchange-worthy ingots, earn a profit for the shareholders, and then, when the job is complete, return the land to as close to its natural state as possible. Many things can go wrong in the process, so picking a winning team is critical part of the calculus. With its deeply depressed stock price and gold trading at about $450 an ounce, the market seemed to be betting against Ward and his Metallic Ventures team.
Ward & McNeely
Jeff Ward and Rich McNeely had plowed millions of their own dollars, which they had earned from the final Cobre Mining transaction, into their new venture, making them the controlling shareholders of Metallic Ventures Gold. They had learned a lesson about “control” of your own company while running Cobre, which they did not want to repeat.
At Metallic Ventures they hired first rate engineers and went to work. Their first capital investment had been to refurbish the ball & sag mill on the Esmeralda property. The mill, once fully operational, was the linchpin in their strategy. The team planned to use the cash flow from the Esmeralda mine to finance the build-out of two other choice Nevada properties:Goldfields and Converse, which held the most significant quantity of “measured and indicated” gold resources.
The Esmeralda mill, however, was missing a critical component. Without it, the mill could not grind the ore. The special-order part was weeks away from delivery. Once operational, though, the analysts at Canaccord were convinced this mill would be a winner. They wanted us to come to tour the mines, to meet the people, and to determine for ourselves if the venture were golden.
Since we are neither geologists, nor assay experts, we brought along our own volcanologist, Norm Banks, from Vancouver, Washington, who helped us with our questions of inquiry. Norm had grown up climbing volcanoes. He was there watching Mount St. Helen’s when it blew, so he knew his way around the “ring of fire.” He had also traveled extensively around the world and had inspected many copper and gold mines. It gave us great comfort to have his extra set of eyes on the land and the people.
The shares of Metallic Ventures traded only on the TSE (Toronto Stock Exchange) at the time. The Canadian exchanges, particularly the Vancouver Venture Exchange, are as close to gun slinging wild-west investing as you can get in North America. It is on those exchanges where fortunes are won and lost daily, while prospectors are speculating on oil, gas, gold, silver, platinum, rare earth minerals, and the companies which drill, pump and dig up these reserves. Not quite riverboat gambling, it is still a risky business that has been “marketed to fools and newcomers” for decades. Mark Twain is believed to have said:“A gold mine is a hole in the ground with a liar standing in front of it.” We wanted to protect ourselves from the liars who might be malingering nearby.
“There’s Gold (and Silver) in Them Thar Hills!”
Samuel Clemens was not only a writer about riverboats, Connecticut Yankees and jumping frogs. Those stories by Mark Twain sprung from his storytelling imagination. Perhaps he just loved spinning tales and trying to make a buck. Whether navigating the Mississippi or prospecting, Clemens was working to take care of himself and, when he had a family, to take care of them as well. For four years, Clemens was a successful riverboat operator out of Hannibal, Missouri, plying his skills on the Mississippi River. Then in April, 1861, with the start of the Civil War, all river traffic on the Mississippi was suspended. His riverboat dreams stopped dead in their moorings and sank.
Orion Clemens encouraged his younger brother, Samuel, to accompany him to the Nevada Territory, which had just been opened up by President Lincoln. They had heard all of the stories of the prospectors who had made a fortune in the Comstock Lode, one of the richest metal deposits in the world at the time. The stories of silver clumps lying on the ground and sheepherders amassing enormous personal fortunes were infinitely more attractive than working at a regular job, if you could find one.
Orion Clemens Samuel Clemens
Almost immediately upon reaching Nevada, the Clemens brothers became involved with mining, traveling to some of the most promising gold, copper, and silver prospecting regions of Humboldt, Esmeralda, and Aurora. Samuel Clemens found it extraordinarily difficult to dig his way to fortune; over time he tried his hand at nearly every aspect of the mining business.
Esmeralda County prospectors Miner on stock certificate
Clemens supported himself mostly by writing. His book Roughing It is an account of his experiences in Nevada and California during the gold and silver rushes. In those pages he discusses his zeal for wealth and his fleeting experiences with success.
The Metallic Ventures Gold Team
Rich McNeely was Jeff Ward’s partner in Metallic Ventures Gold. The two had come to know and respect each other over the years. McNeely had known Jeff’s father, Milton Ward, and Rich was very respectful of him. Rich was a graduate of the Mackay School of Mines out of the University of Nevada – Reno. He had studied the volcanic areas all over the Sierra’s and in the southwest, so he was a great mine executive to have on the team.
Jeff Ward had grown up in mining territory, living in Pruitt and Grants, New Mexico, while his father, Milt Ward, was an executive at Magma Copper. During his distinguished career Milt Ward had worked at Kerr-McGee, Homestake Mining, Freeport McMoRan, and Cypress Amax Minerals. Milt was considered the “Elder Statesman” of the mining industry long before he retired. He was recognized also as the mining executive of the year several times.
Jeff Ward took after his father in many ways, and sought an educational background to eclipse him. Jeff earned enough university degrees to make even Mark Twain salute. Jeff held an engineering degree from the University of Arizona, a mining degree from London’s Royal School of Mines, and an MBA from the University of Chicago. On paper, with Jeff Ward as the CEO, Rich McNeely as the COO, and Miles Bachman, another Cobre veteran, as the CFO, this looked like a Cracker-Jack team.
The non-executive Board Chairman of Metallic Ventures Gold, Bill Blundell, was the President of ManuLife of Canada. Blundell had great faith in Ward and McNeely and he proved to be a good cheerleader.
The Cobre Mining Story
The way a resource vein snakes through the earth is one of the toughest things for a geologist to predict in the mining business. The vein can flow wide and deep; it can start and stop; it can be rich and it can be poor grade: you never know completely what you will find until you start digging. We made some other investigative calls to geologists and executives from Phelps Dodge Corp., who helped us understand Ward and McNeely a bit better. As owner/ operators they wanted to control the exploration of their company, Cobre Mining, which was in southern Arizona, bordering New Mexico. Phelps Dodge ran a successful mine, called the Morenci Mine, which was on property directly adjacent to Cobre Mine.
The original claim owned by Cobre Mining, was an extraordinarily rich and deep mineral vein. Its copper resource picked up in total reserves, where the neighboring Morenci Mine dropped off. Both were excellent open pit properties, rightfully entitled, but Phelps Dodge wanted it all. Known as a fierce competitor, Phelps Dodge coveted the assets and, after watching Cobre’s mining success, started devising a way to own them. We surmised from public filings that Phelps Dodge had bullied Cobre shareholders into tendering their shares in the company. Jeff Ward, Rich McNeely and the Cobre board put up a good fight, but in the end, the Phelps Dodge machine outmaneuvered them by creating a shareholder rights offering and gaining control of the public shares of the copper company. The Cobre team had lost.
Cobre Mining Co, Arizona, (left) a subsidiary of Phelps Dodge, owners of Morenci Mine at the time (right)
Although the Cobre management and board had lost the strategic fight, they had won in their pocketbooks, so it was not a loss from the shareholders point of view. Bill Blundell told us that throughout the Phelps Dodge battle he liked Ward and McNeely so much that, if asked, he would be pleased to serve again as Chairman of their next venture. Not too many years later Metallic Ventures Gold was conceived, the rights to mine properties were carefully bought, and Blundell signed up as the new Chairman to see how he could help.
The Reward & Risk of Outsiders
In our experience interviewing boards provides valuable and keen insights into the management team and the enterprise. When the board members are as “committed” as employees, we feel it was worth paying attention to them. After our deliberations were complete, and our visit over, we plunked down our money, taking a major stake in Metallic Ventures Gold. We were ready to see the team go to work! Our geologist friend, Norm Banks, and his brother also invested their personal fortunes in Metallic Ventures, which made us feel more comfortable that the assets were “in the ground” and would soon be on the table in the assay office. We started to count the coins of our gold mining success-in-the-making. Ka-Ching, Ka-Ching!
Esmeralda Hotel c. 1890
As Clemens writes in Roughing It, “I confess, without shame, that I expected to find masses of silver lying all about the ground. I expected to see it glittering in the sun on the mountain summits…I began my search with a feverish excitement that was brimful of expectation – almost of certainty. I crawled about the ground, seizing and examining bits of stone, blowing the dust from them or rubbing them on my clothes, and then peering at them with anxious hope…Of all the experiences of my life, this secret search among the hidden treasures of silver-land was the nearest to unmarred ecstasy. It was a delirious revel.”
Clemens, after imagining all he could buy with a pile of ore, tossed a shiny nugget of his first newfound treasure to a knowledgeable prospector and asked for his opinion:“I think it is nothing but a lot of granite rubbish and nasty glittering mica that isn’t worth ten cents an acre.” Twain moralized right then that “all that glitters in not gold!”
Clemens’ sad travails in mining for the ore for hours and days-on-end were followed by sincere efforts to succeed at other aspects of prospecting. He tried to sink a mine shaft with a pick and a shovel, but with bleeding blisters and nothing to show for it, he quit after a week. Next he tried surface prospecting but threw in the trowel after a few- too-many hot days discovering only quartz with flecks of pyrite, also known as “fool’s gold,” and mica. He again fell victim to the rumors and fever of “the richest mines in the world” and he invested his remaining savings on another claim.
Prospectors on a stock certificate Goldfield Nevada, c. 1890
Samuel Clemens was swiftly losing all of his money, so he cut his losses and sold his stake in the mine. It had caught his attention that flour was selling for a dollar a pound, so he switched from mining to milling. Clemens was a common mill laborer for about a week, because it paid $10/day and marvelously included room and board. He would “screen tailings” in his off-hours, in hopes of finding some slivers of gold or silver the other prospectors had left behind. He also tried his hand at firing the metal and working as an assay specialist, each of which he quit after a week of terrible working conditions and intense heat. His feelings swung like a pendulum.
As Clemens put it:“I thought the very earth reeled under me. Doubt – conviction – doubt again – exultation – hope, amazement, belief, unbelief – every emotion imaginable swept in wild procession through my heart and brain, and I could not speak a word.” Mining, just like the stock market, is an emotional way to make a living.
Mark Twain said a lot of things about the risks of mining, but his second most-often quoted line is:“A mine is a hole in the ground with a fool at the bottom and a crook at the top.” The quotation seems appropriate because Clemens felt foolishly swindled out of his hard-earned riverboat captain wages, with nothing to show for it, other than his stories.
The Clemens Boys & the Esmeralda Mine
The precise explanation of the Clemens brothers’ stake in the Esmeralda Mine is clouded in history, but Mark Twain tells the tale of a claim that offers some clues. On a “tip” from a drunken geologist, Samuel and Orion went to the claims office and invested in a vein, which was an offshoot of another company’s active claim.
At the time of the Clemens’ journey, a miner had to make a down payment on a claim at the local office and research that no one else held the property. Once cleared by the local claims office, a miner had ten days to “work the claim” to guarantee ownership. Un-worked claims and their down payments were forfeited, and property came available to other claimants. The drunken geologist working with the Clemens brothers apparently went on a bender, wildly spending his imaginary newfound wealth. And when neither the Clemens brothers nor the geologist worked the claim within the 10-day limit, they lost their down payment and claim to the mineral vein. Soon after losing the property, the Clemens brothers sadly watched as the Esmeralda Mine was successfully owned and worked and by other prospectors. The rest is history.
So What Do We Own? Questions & Answers
The D3 Family Funds were now major stakeholders in the Esmeralda property once owned by Samuel & Orion Clemens. Cool! The mining records, just after the Clemens forfeiture, had shown a long history of successful gold and copper mining extractions from Esmeralda. But questions arose about new owners’ possible fate with the mine …
Q1: If it were such a great property today, why had the latest owners not been able to fully exploit the resource? A: Cyanide had long been discovered to leech out the gold from the surrounding rock, so it was not necessarily a “recovery issue.” And recent core samples showed extraordinary promise for rich recoveries.
Q2: With the benefit of new technology and mining expertise, why had the last owners closed down the ball & sag mill? Perhaps the gold was fully exploited? A: With the help of Norm Banks and other geologists, we had come to believe that the drill holes, though wide apart, had accurately measured the percentages of gold in the rock. Once that mill was fixed and running, we believed it was only a matter of time digging out the rock, putting it through the crusher, dumping it into the chemical slurry, and waiting for the gold to leech from the rocks.
Banks inspects a core sample Nierenberg & Denver go underground
An early geologist research note stated that the test drill holes were dug on 100 foot centers, leaving lots of room between holes for changes in the fault line. Since gold veins are the result of volcanic action, there can be narrow mineral veins that are hard to follow and even harder to capture from surrounding rock, without extracting tons and tons of debris along with the gold.
Aurora Nevada, 2006 and c. 1890
When the Esmeralda ball & sag mill started operating, the Metallic Ventures stock price shot up from $3/share to over $7/share. We were excited. We held tight as the first quarterly reports started trickling in, expecting a further pop in the share price. Analysts were looking forward to a double digit stock price valuation: one as high as $12/share. Our emotions were singing, “Wow, that will be a 4X on our investment!”
Although Esmeralda was the smallest of the three properties in Metallic Ventures treasure chest, the strategy was to operate the mill to generate enough cash flow to fund expansion of the drilling programs and mining at Goldfields and Converse. The bonanza would come with those other two properties; we just had to wait and be patient.
As the quarters went by, though, the gold yields per ton from operations of Esmeralda were not showing much progress. As a matter of fact they started slipping. Investors in the Canadian markets, notoriously fickle, panicked and sold their shares. As they fled, the stock soon started to tank. We bought more stock and watched with anxiety as it kept declining. We owned so many shares, at this point, that if we had tried to sell any shares in the open market, we would have hammered down our own holdings. We were stuck between a rock and a hard place, literally.
As Mark Twain had put it:“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so!”
We flew to California and met with Jeff Ward and Rich McNeely about the current situation with the company. As Jeff described it, the veins of gold were so thin and narrow, it was nearly impossible to carve out the gold economically. Despite their rich ore deposits, digging it out brought along so much low grade rock that it was difficult to process it in the mill and make money. Jeff walked us through the various scenarios he had in mind to salvage his investment and ours. The least desirable, but the most appropriate step seemed to be to shutter the Esmeralda mine, try to sell the equipment and to find another way to make the operation cash flow to work. We knew the stock was going to take a serious hit. All that glitters is not easy to extract!
After the meeting, we decided that as long-term investors we had little choice but to wait for the opportune time and the company’s sale to exit the stock. We flew back to Vancouver with a promise from Ward to keep us fully in his confidence about the prospects for a recovery of our investment. A little later that year Rich McNeely’s health began to fail, and his doctor warned him that the stress of the business might kill him, so he retired from active management in the company. The top engineers were starting to peel off from the management team as well.
About a year later Jeff Ward flew to see us in Vancouver and verbally reported that he had a letter of intent to sell some of the minor properties, but no progress had been made to raise the kind of capital needed to get the company moving again. David Nierenberg called Jeff Ward a few weeks before the end of the year and offered to sell him our stake at a discount, or for about $0.25/share. We would use the losses from Metallic Ventures Gold to offset some other gains in our stock portfolio, saving our investors on their tax bills. Not a pretty outcome, but with the sale it was over. In the end, the best thing I can say is that we endured the same fate as the Clemens brothers at making a profit by mining the Esmeralda Mine. We all lost our shirts!
In February, 2010, Jeff Ward and Rich McNeely sold their majority ownership shares in Metallic Ventures to a multi-national mining company for $1.70/share, plus a minority stake in the acquirer. The new firm, International Minerals Corp (IMC), is still digging away at Goldfields and Converse mines. Rumor has it that the Esmeralda Mine has still not been reopened for excavation. IMC may be waiting for gold to trade above $2,000/ounce before that next venture.
As any student of Mark Twain should know, even a bunch of Yalies “can never let our schooling interfere with a good education.”
One other lesson we learned is that even if the management team is great on paper, sometimes the resource and the strategy are wrong. We took that lesson to heart and kept investigating other gold and copper mining companies around the world. I am happy to report that Cara Denver helped us uncover another company with the capital, the management team, the strategy, AND the mineral resources to produce a big winner in the mining industry, Yamana Gold. The gains we earned from Yamana more than offset our losses in Metallic Ventures Gold. Mistakes in the stock market and mining industry have humbled us. We are quiet about both our mistakes and successes.
We have been fond of quoting Mark Twain, again, on what we say about our investing:“It is better to keep your mouth shut and appear stupid than to open it and remove all doubt.”