Target Audience and Acknowledgements

This presentation has been delivered at various international forums, including at Randol 97 in Puerto Vallarta, Mexico, on Monday, January 13, 1997, at the 50th. anniversary of the Chihuahua Mining Association in Chihuahua, Mexico, on August 23, 1997, and at the World Mining Congress in Acapulco, Mexico, on October 17, 1997. Its purpose was to explain to the Latin America mining companies and to the owners of mining properties in Latin America the potential of coming to Vancouver to obtain technical or financial resources. Another purpose was to explain to them, in very general terms, the minimum requirements for a project.

The presentation was also directed to Vancouver-based mining and exploration companies interested in doing business in Latin America, where our services could be of some use.

We thank those who contributed their time and ideas for this presentation.

Why Latin America?

Latin America has become a preferred destination for Vancouver companies seeking new discoveries, or in the process of developing new mining ventures. There are important reasons for this rapidly growing interest:

• Excellent mineral deposits (quality & quantity): Countries such as Mexico, Chile, Bolivia, Peru and Argentina have a geology that is indeed extremely rich and attractive.
• Rich mining history: from pre-Hispanic times, through the Spanish Colonial period and on to the modern era, there’s plenty of accumulated data and experience. With new technology becoming available very fast, exploring where there’s previous experience is very attractive to prospectors. There is also an important asset in the region: the quality of the human resources: experienced geologists, miners, etc., who have deep understanding of the country’s geology and of the mining engineering techniques. This technical expertise is often harder to find in other parts of the world.
• Location: close to markets (U.S., Canada): this factor makes Mexico and other countries farther to the south naturally attractive, especially if compared with other places much farther away in other parts of the world. This means comparatively shorter travel times, reduced transportation costs, both for people and equipment, and better control. If we add the fact that Canada, the U.S. and Mexico are bound by the NAFTA accord, and that other countries such as Chile have plans to join a regional free trade zone, we have a situation that is difficult to surpass.
• Well developed infrastructure: compared to other places in the world, countries such as Mexico and Chile have an excellent highway system, their telecommunications network is improving every day, and it is comparatively easier to obtain support services.
• Competitive operation costs: a competitive foreign exchange rate, as well as comparatively lower labour costs, make exploration more attractive.
• Favourable legislation, allowing up to 100% ownership for the mineral rights in some places. This is the main trigger for the recent interest in the region.

 Why Vancouver?

There are several reasons why foreign owners of mineral properties go to Vancouver when they need technical expertise or financial resources:

• Vancouver is well known to be the "Venture Capital of the World". Vancouver is the place in the world where most of the high-risk venture capital is raised, and there is ample experience by local exploration companies and brokerage houses.
• Vancouver is also a world leader in mining exploration and exploitation, with hundreds of companies dedicated to this activity. Vancouver has leading edge technical resources in geology, exploration techniques and equipment, mineral exploitation, etc.
• Vancouver is the place where people from all over the world come to invest in venture capital, with the potential of very high returns on their investments.
• Vancouver has easier access to capital markets and other sources of financing as compared to other parts of the world.
• Vancouver-based exploration and mining companies are actively seeking new projects wherever in the world they become available. There is intense competition to seek out viable properties, and therefore the owners of foreign properties will have little problem in getting attention.

Importance of Vancouver

According to data provided by the Vancouver Stock Exchange (VSE) at the end of 1996, there are over 800 mining and exploration companies listed on this exchange alone. If we add those listed on other exchanges such as Toronto, this number of Vancouver-based companies performing mining and exploration activities grows substantially.

The number of VSE-listed companies operating in Latin America is counted in the hundreds, and this number is significantly larger if we consider the activities of companies that trade in other Canadian or U.S. exchanges.

Once again using VSE data alone, over $1.5 billion was raised in 1996 by natural resource companies. The following graph provides information on the number of companies performing natural resource activities (mostly related to mining), as well as the dollar amounts raised:

As the following graph indicates, most of the capital raised in Vancouver goes to mining exploration and exploitation:

And most of the capital is raised through private placements:

 Vancouver: one of the world’s most important sources for both technical and financial resources.

A new reality

From the beginning of 1997, several events have caused a dramatic negative impact in the capacity mining and exploration companies have for raising venture capital. Two of them are essential:

1. The decrease in price of precious metals, especially gold, which has fallen by 22% during 1997. This has increased the cost/benefit ratio of exploration projects, making many of them financially unfeasible; some projects that were economically viable a year ago have now been abandoned. In addition to this, many investors have abandoned the precious metals sector for more profitable ventures.
2. Specific sector events, such as the Bre-X scandal, caused a massive capital flight from the mining and exploration sectors to other areas of the economy; this has directly impacted the capacity for raising venture capital for mining exploration. The VSE composite index fell by almost 50% during 1997, while other sectors were experiencing healthy growth (the Dow Jones index up by 24% during the same period). The VSE mining index, inaugurated in April, 1997, has also suffered a dramatic decline to December, 1997:

These statistics will cause many institutional investors are likely to stay away from the sector for some time.

The combined effect of the situation described above, while it has certainly not caused a "halt in operations", it has caused many companies, now with a reduced capacity for raising capital, to shift focus, to become more rational regarding their exploration projects, and to become more demanding during negotiations, trying to minimize short-term expenditures while the market recovers.

Challenges and Opportunities

This new reality brings a new challenge to countries for exploration in Latin America:

• Companies will be more selective with the projects they examine for exploration. Owners of properties will have to respond with better and more complete information, as well as with flexibility in negotiations.
• There will be a smaller number of active companies, since the ones without their financial situation in order will reduce or suspend activities. Only well managed companies will survive this transition phase.
• Companies will need a new degree of adaptability: search for new more cost-effective minerals, and a shift from traditional metals (gold, silver) to other options.
• The stock exchanges will likely impose more stringent regulations to avoid or reduce the risk of similar frauds.
• Mexico and the rest of Latin America will likely benefit from a preferential treatment as compared to other regions of the world.
• Since this represents the down side of a traditionally cyclical market, there are new areas of opportunity now that the prices are comparatively lower.
• We have the opportunities of a temporary transitional phase, but not a long-term problem.

The process

 There are several ways for owners of foreign properties to establish contact with Vancouver. Although the following procedure is an oversimplification, it summarizes the major steps that are commonly followed:

The owner of a mining property is in need of technical/or financial expertise, or wants to sell the mineral rights, or wants to establish a joint venture with a Vancouver-based company. Initial contact is established.

• In the case of projects at the exploration stage, there will be interest by a so-called "junior" exploration company, which will be capable of raising funds in the venture capital markets, and most commonly at the VSE (although there are many cases of junior companies raising capital elsewhere, or even major companies becoming interested). The exploration phase is statistically a very high risk venture, and junior companies are usually better suited to raise capital for this kind of activity.
• At the end of the exploration cycle, if results are positive and attractive, it is quite common that a "major" company will become interested in acquiring part or all of the project from the original joint venture in order to carry out exploitation activities. The major companies are less prone to high-risk exploration, and are more inclined to take over once positive reserves have been found. This is normally the goal of junior companies.

Combinations

Again here it is difficult to number the possibilities, since each case is basically different from any other. However, the following options have been a common pattern:

• Joint Venture: the owner of the claim establishes a joint venture with a Vancouver-based exploration company, and agrees to a certain percentage of participation. Normally the foreign part will want a controlling share, especially to maximize the benefit for its own investors and shareholders in case the results are positive and a major company becomes interested in the project.
• The Vancouver-based company acquires up to 100% of the rights from the original owner. In the case of some countries (Mexico, for example), it creates a local wholly-owned subsidiary company.
• Another possible case for the Latin American property owner or mining company is to apply for listing at the VSE with the purpose of raising risk capital on its own. This option requires a company with ample financial resources, capable of meeting all the listing requirements. This is less common, given the comparatively small number of mining companies in Latin America that are in a position of obtaining their own listing.
• A Latin American mining or exploration company acquires control of an existing Canadian company (reverse takeover), gaining access to Vancouver's venture capital market.

A Typical Case

A commonly used model in exploration property negotiations has the following characteristics (although each case may vary significantly ):

• The Canadian company reaches an agreement with the owner of the mining claim or property, and gets the rights to do some preliminary exploration and due-diligence on the property. The exploring company usually pays a small fee, and gets a "first right of refusal" in case someone else is interested in buying the rights.
• If the exploring company decides to go ahead with serious exploration work beyond the preliminary phase outlined above, a price negotiation will take place. In most cases, the price is not the problem issue, but the payment procedures. The exploring company will generally offer payments throughout a period of several years (three to five normally), and payments will be a combination of cash and shares. Normally, payments will tend to be small at the beginning, and increasing in value towards the end of the exploration period. These payments are normally regulated by the stock exchanges, and companies will need to disclose them and get special authorization if payments exceed the standard amounts.
• The exploring company will contract an obligation to carry on exploration work with a certain minimum to be spent, and to provide the owner with test results, geological studies, etc.
• At the end of the exploration period, the company will make a final decision whether the property can become a mine or not. In case of favourable results, the owner will be paid the remaining amount, part in cash, part in shares, or part as a Net Smelter Return (NSR) or Net Profit Interest (NPI).
• In case the results are not favourable, the concession returns to the original owner, who will keep the payments received, the studies, assay results, etc.

The above process is, of course, only one of many examples, and is oversimplified. In reality, there will be important variations, and the payment schedules and legal requirements will likely be more complex.  

Obstacles

After conversations with several Vancouver-based mining and exploration companies, the main obstacles that are usually faced when studying mining property information are the following:

• The property owner or foreign mining company lacks the right Vancouver-based contacts: does not know where to start and where to go. As knowledge and experience grows in Latin America, this problem is becoming less frequent.
• The foreign mining company or property owner lacks enough financial resources to initiate the promotion of the project.
• There could be some degree of mistrust, especially if the Vancouver-based party is not known to the foreign part. Although the reputation of the VSE-based companies in general has improved substantially in recent years, there is still some mistrust by foreigners who wouldn’t feel comfortable before knowing the potential partner better.
• The foreign property owner or mining company does not structure the project well, and is therefore unable to attract interest on the part of a Vancouver-based exploration company. This is a common problem, especially when the data are confusing and incomplete, not to mention language and interpretation problems.
• There is not enough information for the Vancouver-based company to make a decision; sometimes the documentation available is insufficient or illegible.
• Slow responsiveness can play a decisive role in determining whether a deal can or cannot be made: North-American companies tend to work very quickly, in a highly competitive marketplace, and decisions are made fast. On the other hand it is quite common for Latin American property owners to analyze options with more time, and by the time a decision is made it may be too late for the other side, who may have allocated their resources to a different project (or even in a different part of the world).
• There have been cases where the objectives of the Latin American party are not clear enough regarding the type of deal desired, or they do not know the options well enough. After an initial approach, a new set of possibilities is opened before their eyes, and they need more time to understand the implications of each one. This slows the process down and can have a decisive impact on whether a deal can be reached or not.
• There are the usual communication problems, that arise more from cultural differences and different ways of doing business than from the language barrier itself. Both sides have to make a special effort on this issue in order to reach basic agreements.
• The status of a property may not be clear enough for the Canadian investor: unclear claims, clouded titles, etc.
• There may be too many participants or owners on the property owner’s side, which slows down the decision making process substantially, and creates a situation where the Vancouver entity may reject the offer.
• In many cases there is a lack of understanding about the deal proposal. A small foreign property owner or mining company will usually want a cash payment for the property up front, while the Vancouver-based investor will try to negotiate payments through share participation, or by deferred cash payments over the life of the project and subject to exploration results. Both sides need to make concessions in order to reach an agreement.

Project requirements

Latin American property owners or mining companies wishing to invite a Vancouver-based exploration company to participate must provide as much information on the property as they possibly can. Some of the required information is itemized as follows:

• Property name.
• Exact location.
• Indicate the type of access and communications facilities (roads, telecommunications, supply centres, etc.).
• The commodity for the property (Au, Ag, etc.).
• Clear and precise property description.
• Property size.
• Technical information:
• A regional geological report, which will give the prospector a general idea of the possibilities in the area, as well as neighbouring experiences.
• A local geological report on the property.
• Submit any studies that might have been performed.
• Submit the results of any geophysical or geochemical information available.
• Mineralization description.
• Type of deposits (in veins, disseminated, etc.).
• History of the property is usually important, especially if dealing with or near an old mine.
• Results obtained in the past (preferably in table format).
• Past mining activity, including results.
• Amounts (both in dollar and tonnage figures) obtained.
• Legal information: this is an essential part that has to be clear before a foreign company can become seriously interested, since it can be the source of major problems and disagreements:
• Property ownership.
• Claim ownership.
• Land ownership.
• Underlying agreements and contracts, concessions, etc.
• Public registry data.
• Royalty agreements (NSRs).
• Applicable laws & regulations.
• Stage of development: this has to be clearly specified, since the degree of interest may vary if there has been some previous work done on the property.
• Feasibility studies performed (forecasts, reserves, etc.).
• Estimated potential (size of the claim and ore grades).
• Photographs and samples.
• Legible maps and plans.

Project Preferences

Exploration companies have different preferences for the projects they choose, depending upon their expertise and their objectives. However, in very general terms, there are some points that property owners should consider as general guidelines to attract interest:

• Sellable size:
• Normally the shareholders of a public company will demand that the properties under consideration be large enough to make the investment attractive. There has to be the potential either for high tonnage, or for lower tonnage but with very high ore grades. Owners of smaller projects will face more difficulty, although they shouldn’t be discouraged to come forward. Sometimes lumping together several smaller projects can result in a more attractive offer.
• A Vancouver-based company will prefer a partially developed property, with some proven reserves, to one that is totally unexplored. Although this is a generalization and there may be important exceptions, a partially explored property will attract more interest..
• Since public companies are in intense world-wide competition for properties, the property in question should be available in the short term rather than in the long term. The Latin American owner should be ready to carry out negotiations quickly and efficiently, and obtain the necessary permits and legalities reasonably fast.
• The property, of course, should be economically and financially sound and attractive for the shareholders of the investing company.
• There should be flexibility in negotiations, especially regarding the payment, compensation and participation formulas.

 Networking needs

Any foreign company that wants to establish some form of deal with a Vancouver-based resource company needs to establish relationships with an ample number of entities, such as:

• Exploration companies: which will be ultimately the ones with which the deal will be closed.
• Mining firms (for cases where the exploration is at an advanced stage and production can begin).
• Professional services (surveying, geology experts, geochemical and geophysical analysts, etc.).
• Brokerage houses & banks will be necessary to carry out the capital raising activities, and therefore a good knowledge and selection of the options is essential.
• Law firms will be required for formalizing any deal. In this case the preference should focus on firms that have ample securities experience as well as international & joint venture experience.
• Contact with government agencies on both sides will be required for approval of agreements, deals, permits, etc.

Our Services

The main focus of InterAmerica Consulting and Development Inc., based in Vancouver, Canada, is the promotion of business ventures between Canada and the Spanish speaking world. As such, we can assist foreign property owners in the following:

• Help in preparation of project materials.
• Search for interested reputable companies.
• Organization of presentations and events.
• Assistance in negotiations.
• Recommending companies from our ample network of local contacts.
• Translation & interpretation services.
• Web site design and development, as well as other information services.

InterAmerica Consulting and Development Inc. is member of

• The Vancouver Board of Trade,
• The Canadian Council for the Americas (B.C. Chapter),
• The Mexican Business Association of Canada (B.C. Chapter).
• The Canadian Chamber of Commerce in Mexico (Mexico City)