Micro-cap to mid-cap: Journey to the ASX 100

Tim Serjeant

Eley Griffiths Group

Raleigh Finlayson is Managing Director of Saracen Minerals, a long term high conviction holding for us. Following their recent entrance into the ASX 100, I spoke with Raleigh about what's made them so successful over the years. We believe that money is made in small caps by backing the right management, the right business, getting in early, doing the work and seeing the journey out. Saracen is a terrific example of this.

When Raleigh took over as MD in April 2013, things were already tough in the Australian gold industry, with AUD gold well down from its 2011 highs. A week later, gold dropped another $200.

In this interview, we discuss how they got through the tough times to grow into a $5 billion company today, how he builds investment conviction and his tips for assessing gold stocks.

Recorded Wednesday 1 July.

Edited transcript

Tim: I'm Tim Serjeant from Eley Griffiths Group and today I'm joined by Raleigh Finlayson from Saracen Minerals. Raleigh's been managing director for over eight years at Saracen and with the company for over 10 years. We're lucky enough to have been an investor in Saracen for much of that journey. It's the 1st of July, and recently the company entered the ASX 100, which is a significant milestone. I thought we'd look back at the start, and then we can expand the chat further. I remember the days when it was $50 million market cap, today it's $5 billion. Your role has changed significantly over that time. You were COO for a time, you were in operations, investor relations. How has your role changed over time?

Raleigh: Earlier on, being small and being in the operations role, we had to be quite detail-focused. As you grow and evolve your role changes a fair bit. But I think the biggest lessons for me, the best bit of advice I could provide anyone, is to surround yourself with good people. You can't grow a business without having some really good, competent people around you.

The second observation I'd make is; don't forget where you've come from. All the things that got us into the ASX 200 and 100, we try and keep a good check on that. I think you can get a bit focused on things that aren't important. The biggest things are keeping the focus on what got you there in the first place and surrounding yourself with good people.

Tim: When we’re doing our due diligence checks, we often hear that others envy the culture at Saracen. How have you been able to preserve some of the unique features from the beginning as the company's got bigger, and how have you been able to bring people along for the ride?

Raleigh: We have a six-monthly senior management meeting in which we often invite more junior people to come along to. The line I start with every single meeting, and have done since 2013, was “keep the DNA.” There are some things that must evolve as you get bigger. But we got some really good advice as we went into the ASX 100. Talking to some of our peers like Jake Klein at Evolution Mining (ASX:EVN), the advice he gave us is don't forget what you got you there in the first place.

I remember going and celebrating getting into the ASX 200 for the first time. Three rebalances later, we were out again. It's a stark reminder not to get too carried away with where you are.

For us, it’s important to keep that DNA and make sure that everyone in the organisation retains it. Celebrate your wins, but don't lose sight of where you are. That’s probably the biggest thing that's been retained through our business from the last 10 years.

Tim: As investors, we often look at incentive structures for board and management teams. As MD, you’d have to implement them throughout your business. What have you been able to do to build that culture from the ground up?

Raleigh: One of the things we implemented about five years ago was ‘Think and Act Like Owners’ - TALO. We were asking employees, rather than acting like an employee, to act like an owner. The best way we thought to achieve that was making more owners, so we have a $1000 share issue that we do on an annual basis, and 98% of our workforce have taken up those shares. It shows they're intent on hanging around because they don't vest immediately.

It makes it a lot easier for us to talk to them about being an owner when they actually are an owner.

That's really what we're trying to instil in people and I think that helps to dovetail back to this DNA, keeping it focused. Don't just start spending money because commodity prices start going up.

We also go deeper into incentives on performance rights etc than what others have traditionally. We make sure our KPIs are very much aligned with shareholders. If shareholders are successful, so our employees, and vice versa. If the commodity price goes down, we make less cash flow, our employees make less. We're on a journey with the shareholders as well which is really important.

Tim: It's been a near unparalleled journey the last five or six years, but could you tell me about a low point. A time where you doubted yourself or thought, "Are we doing the right thing?" What did you do and who, if anyone, did you turn to for guidance and support?

Raleigh: A couple jump to mind. April 20th, 2013, the gold price dropped about $200 over two days. I was appointed as MD on the 13th of April that year, so seven days after becoming MD, gold price had its largest two-day fall that I can recall… probably in history. We had to make a raft of changes and at that stage you sort of wonder, "What are you doing it all for? This is not what I signed up for." You expect the share price to go up, not down.

Our founder, Guido Staltari, was someone I could rely on heavily. I still remember his slogan at the time and just rings true to me in my ears all the time; "Stay on the bike." So many companies go through that, haven't planned well, fall off the bike and miss an opportunity for gold to uptick.

Of course, since not long after that, gold's almost been on a seven-year upward trend. If we'd fallen off the bike, we would have missed that upward trend, and becoming a $6 billion company today.

The other example is probably a low point at the same time as a high point, which I know sounds strange. Last year, we paid $1.1 billion to acquire 50% of the Super Pit. I found the month going into that, and probably the three months after that, a really lonely place. We take this very seriously, we're acknowledging that's a significant amount of money that we're asking our shareholders to put in to acquire this asset. I'll wear that for the rest of my career, the success of that asset. It was a pretty lonely place for a lot of that time. But it’s helped to have the Executive Chairman, Tony Kiernan, to lean on for advice and support and reassurance, that we've done the work and it's the right call. Despite all the celebration, deep down you're still very worried about making sure you've done the right thing for shareholders.

Tim: Let's talk about the acquisitions. There have been two pivotal ones over the last six or seven years. Thunderbox for about $40 million in early 2014. And the Super Pit late last year. At EGG we often say that the best investments often feel a little bit uncomfortable at the time when you're making the decision. What was it about those two acquisitions that made you pull the trigger and say, "We have to do this"?

Raleigh: I'll talk about those two, but my favourite is actually our smallest one. I think it's a really good lesson about picking stocks when they're low and the opportunities you see at the right time in the cycle.

Thunderbox was very much a cycle play, we paid $32 million for that. Around $100 million when we allow for the capital we spent to restart production. We purchased it in early 2014, when the gold price had been on a steady decline for several years. Part of the reason was really optionality; if the gold price went much lower, we had a hedge book that kept getting bigger. If the gold price went much lower, we could’ve cashed out the hedge book been in a position to go into hibernation on both of those assets for a time. But if it went up, we had a really good asset we bought at the bottom of the cycle, which is exactly what's panned out.

KCGM (Kalgoorlie Consolidated Gold Mines – owner of the Super Pit) was different. That was late last year, so the gold price has certainly run up a lot from early 2014. That was a significant opportunity due to the relevance factor – it’s irrelevant to the previous owners, Barrick and Newmont, being probably 1-3% of their entire portfolio globally. We now own half of KCGM in a joint venture with Northern Star (ASX:NST). It makes up around 30-40% of our portfolio, and it’s a similar metric for Northern Star. All of a sudden, you've got two owners with a lot more care for the asset. It's far more meaningful for them.

My favourite one that very rarely gets talked about, was the acquisition of King of the Hills and Kailis. I think it’s the best deal we've ever done. We acquired it from St Barbara (ASX:SBM) for a total price tag of $3 million. It was at a time when St Barbara was burdened with debt. Saracen wasn't making any money ourselves at that point in time. We couldn't even afford $3 million to acquire the asset. We did an upfront payment of $300,000. The other $2.7 million was a deferred payment on production.

Within two years, we turned that $3 million acquisition around. It's running well north of $120 million now. As a percentage uplift, it's by far the best deal we've done. It's also the smallest deal we've done. KCGM was the most uncomfortable because of the size of the price tag.

But this was uncomfortable in the context of outlaying money we didn't have at a time in the cycle where we weren't really sure if it was ever going to be viable. It was really uncomfortable, but we had conviction around the work we’d done technically. We knew the asset would make really good money with any increase in the gold price. The rest is history.

Tim: Tell me how you build conviction in an investment case or asset. If we think back to 2017-2018, Saracen was going against the grain versus the rest of the industry. You were investing heavily in your asset base, organically, and other peers were returning capital to shareholders. What was it that gave you conviction to invest aggressively in your asset base, and grow reserve life and mine life?

Raleigh: I remember it distinctly. It was early 2017. We had a strategy session. We dubbed the strategic plan ‘future proofing the business’. If you go back through some of our presentations, we talked about it then. Absolute credit to yourself and to Eley Griffiths Group, you guys picked up on it really early. In fact, it goes back further. In 2013, we had a very similar period. The presentation at the Diggers and Dealers Forum in 2013 was coined ‘Pick A Gold Price. Saracen Has A Strategy.’

Future-proofing the business was about recognising that at that juncture, we couldn't really compete with, for example, Regis Resources (ASX:RRL), which was a very strong dividend-paying company. There are two sides of the road; you can either be on the right-hand side of the road, which is an income-generating business that returns a lot of dividends but may not have the same amount of growth. Or on the other side of the road, you’ve got the growth avenue, which we've been on.

We chose that side because we had assets that had only been discovered in the late '90s. We just simply hadn't had the amount of development taken out of them that some goldfields assets had, which were discovered over 100 years ago. We recognised that, so we wanted to back ourselves on expiration. We're leading the sector for discovery cost and reserve cost per ounce, so the return on investment has been fantastic.

In 2013, we were producing around 100,000 ounces per annum. Next year we're forecasting 600,000+ ounces per annum. That's come through M&A, as well as significant investment into our business. That's really where we coined ‘future-proofing the business’, The only detriment of that was not generating as much cash flow as we could have. But the astute analysts and PMs out there, and I put you guys in that bracket, were able to recognise what we were doing.

A lot of the industry's got a very short term focus, measuring performance on a quarterly basis. For those who could understand the strategy and the opportunity, now we're yielding the benefit of that.

For us, it's about doing the work, understanding the asset, understanding the return on that investment. Likewise, for those in the market who recognised what we were doing, it created a significant opportunity to invest in us in that period of time.

Tim: Finally, let's talk about gold prices. Everybody's got a view and people will be interested to hear yours. From a business perspective firstly, you have to plan for all sorts of gold price scenarios. We talk about AU$1250 an ounce back in 2013-2014. We're looking at $2500 - $2600 an ounce today. But you have to plan a business for $300-$400 hundred dollar falls in a short time. But today, everybody wants to know how much leverage you've got to a rising gold price. How do you go about managing expectations and running the business accordingly?

Raleigh: Being in the market, you talk about people. Maybe the next generation of brokers and analysts coming through haven't been through a down cycle. You have to experience one to really understand it and know the implications. Having been a week into my tenure as MD as the gold price fell has held me in good stead about what can happen.

You mentioned everyone's got a view on the gold price, you might be surprised to know that I don't have a view and I think it's probably dangerous to have one per se.

I generally take the philosophy that you hope for the best but plan for the worst. If you don't plan for the worst on a commodity, I think it's a very dangerous game. You need to understand the downside. I've seen plenty of strategic plans of businesses that have come across my desk over the last 10 years that are all about the future and all about the upside, but not so much on the downside. Risk management and understanding the downside is paramount to any business.

That's why we do things like hedging. Hedging is an interesting philosophy. When people are most vocal in telling us not to do it, inevitably it's very close to the top of the cycle and it's exactly when we should be doing it. It's the same philosophy as buying an asset when everyone is talking about it. I think it's a really bad idea to be doing such things. It’s the same for you guys in investing. It takes a lot of courage to hold your nerve and see through cycles. If I could plot the amount of negativity I get around hedging in correlation with the gold price over the history, I think it'd be stark to say when you're hearing the most noise is when you should be doing it, and vice versa.

We could rest on our laurels, but we want to retain that ‘future-proofing’ business status. I think this COVID situation has been a really good example of us being able to pull that lever. In fact, right through the heart of COVID, we've generated the strongest cash flow we've had in a quarter in our history.

We like to take advantage of gold prices like this to try to reinvest as much as we can. We try to find the balance between that ongoing reinvestment of growth, at the same time, returns to shareholders. I think we've navigated through that pretty well. Mind you, we've had a pretty good gold price for the last seven years. But what goes up must come down and we want to be well prepared for that.

In particular, we want to be prepared for M&A opportunities. Like Thunderbox, which we acquired for $32 million in early 2014, it’s probably worth $1.5-$2 billion, something in that order now. This shows you it's about picking assets at the right time of the cycle. It's about making sure you do your work and avoid the noise. When people tell you not to do something, that’s when you need to have the conviction in your work, back yourself and make a call. Go against the grain. That's where the best returns often are.

Tim: What are the two or three things that you’d look for in making a gold investment, or an investment in any company for that matter?

Raleigh: For my mind, it's about people. Every day of the week. It's very difficult when you’re an investor looking at buying a stock to get to know the people. But it's understanding the track record. It's not about a CV per se. It's about people's attitudes and how they go about things. It’s about aptitude versus attitude. I’ll always take someone with a really good attitude because you can often train people with some skills. If they've got the right attitude, that's going to win every day of the week.

It’s also recognising that concept of acting like an owner. Take Simon Jessop, our COO, as an example. If you spent a week with him onsite, you would think he owns the business 100%. That's what you want to instil. If your leaders are showing that attitude, that becomes a habit in the organisation, and it gets distilled all the way through.

Assets can move around, and we're in a commodity that's had plenty of resources, so you can't rest on your laurels. You've always got to try to find more, whether it be organically or inorganically. Then you've got people that have got a really positive mindset, act like it's their own money. That goes a long way. I think you can pick those people pretty quickly and often they're in teams.

If I go back to some idols I looked up to, the Regis Resources team, and before that, Equigold. I studied how they went about things. For me, it's about understanding how they used to attract good people. You want to get that strong cultural element in your business. If you can find that, it wins over asset quality most times.

It's an old adage; good mines often make bad managers, but bad mines make really good managers.

If you can get people that have been through some tough times, got through it with their head held high, and had good integrity through it, they're the type of people you want to back.

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Eley Griffiths are a specialist investment management company focusing on Australian listed small and emerging companies. We are style agnostic and can own both growth and value companies to construct portfolios that will outperform. To find out more click the contact button below. 

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Tim Serjeant
Portfolio Manager
Eley Griffiths Group

Tim has over 12 years’ experience analysing small and emerging companies. Prior to joining EGG in July 2012, Tim was a Resources Analyst at Argonaut, a boutique investment bank and stockbroking firm. He holds Bachelor of Commerce (Honours in...

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