Argentine tycoon 
Elsztain bets big on gold

Eduardo Elsztain — one of Argentina’s richest men — has been buying and selling hard assets for the last 35 years.

His first real estate deal in 1982, when he was in his early twenties, was selling a piece of property in an affluent district of Buenos Aires to the government of Russia to use as its embassy in the Argentine capital.

Today Elsztain controls a business empire through private investment fund Inversiones Financieras del Sur, which has assets in agribusiness, real estate, banking and mining.

The empire includes the country’s largest real estate company (Inversiones y Representaciones S.A. [NYSE: IRS]), with shopping centres, luxury hotels, office buildings and residential properties; agriculture (through Cresud (NASDAQ: CRESY), one of Argentina’s leading agricultural companies with cattle, crops and dairy interests, and close to 1 million hectares under management, with operations in Argentina, Brazil, Bolivia, Paraguay and Uruguay); and banking (Elsztain holds a controlling stake in Banco Hipotecario, which is one of the country’s largest commercial banks, with a speciality in mortgages).

Repeated political and economic crises in Argentina, including its default on billions of dollars of sovereign debt in 2001–02, which ostracized the country from international markets for more than a decade, along with enduring hyperinflation, and repeated currency weakness, only intensified his belief in the importance of owning hard assets.

“I remember when people asked my grandfather about how he measured his accounts in the depths of big inflation, and he said that at the end of each year, he always knew whether he had one more square metre, one more cow or one more parking space — he measured it in basic things,” Elsztain says by phone from his office in Buenos Aires.

(Elsztain’s grandfather, Isaac Elsztain, left Poland in 1917 to start a new life in Argentina and first invested in real estate. Today Elsztain’s offices are in a colonial building that his grandfather bought when Elsztain was five years old.)

Given his world view on the importance of owning hard assets it was almost inevitable that eventually he would turn to gold. Elsztain remembers the day in 2003 when he got a call to buy a past-producing gold mine in Chile called Guanaco that was owned by a subsidiary of Kinross Gold (TSX: G; NYSE: KGC).

It was during the middle of one of Argentina’s meltdowns when the banks were closed to prevent a run on deposits. “We had no experience in mining, but we bought the mine over the phone,” he recalls. “We had due diligence of less than a week.”

Elsztain acquired Guanaco through Austral Gold (ASX: AGD), with the vision of creating the region’s next leading precious metals company.

Guanaco, a gold-copper-silver mine in northern Chile, is 220 km southeast of Antofagasta and 40 km east of the Pan-American Highway. The high-sulphidation epithermal deposit is just south of Yamana Gold’s (TSX: YRI; NYSE: AUY) El Penon gold mine and BHP Billiton’s (NYSE: BHP) Escondida copper mine. (Before Austral Gold’s involvement, previous owners produced a combined 1.5 million oz. gold.)

After buying the mine, Austral Gold spent years building up its management team, refurbishing the existing mill and restarting production — first from an open-pit and later underground.

“We weren’t experts in the field, so we did it step by step,” Elsztain recalls. “It took us nearly a decade to develop our first mine and build our management team, and I’ll tell you that the team we have today is a team that is unique in Latin America. It is people who have decades of experience working together, a group of managers that have tremendous background.”

He points in particular to Stabro Kasaneva, the board’s executive director, as an example. The geologist has spent 20 years exploring for gold deposits focused on the Paleocene belt of Chile, and also served as head of production at Chile’s Penon mine, the lowest-cost gold producer in the country.

Austral Gold eventually poured its first gold doré bar at Guanaco in October 2010, and last year the mine produced 46,254 oz. gold and 41,233 oz. silver at an average cash operating cost of US$626 per equivalent oz. gold — its fourth straight year of positive cash flow. “This company was tiny, but it kept producing positive cash flow with low costs,” Elsztain says.

Since 2012, Austral Gold has used that cash flow to internally fund the company’s consolidation and growth strategy in Chile and Argentina, and acquire assets in sound jurisdictions and at different stages of development — production, advanced exploration and pre-construction.

In July 2014, the company acquired Yamana Gold’s Amancaya project — a low-sulphidation, epithermal deposit, 60 km southwest of Guanaco — for US$12 million in cash and a 2.3% net smelter return royalty, as part of its consolidation strategy in the region within the Paleocene-Eocene belt.

According to a 2008 report by Yamana Gold, Amancaya at that time hosted an inferred resource of 1.4 million tonnes grading 7.9 grams gold per tonne and 73 grams silver per tonne for 407,000 equivalent oz. gold.

Austral Gold’s focus at Amancaya has been to finish an environmental impact statement and evaluate  scenarios on how to consolidate the project with Guanaco. The company says there are many synergies between the two Chilean properties, and that Amancaya could increase the company’s production profile.

A field crew channel-sampling at Argentex Mining’s Pinguino silver-gold project in Santa Cruz, Argentina.  Credit: Argentex Mining.

The miner is following a similar consolidation strategy in Argentina in three main regions: the north, central west and southern regions of the country. More recently, Austral Gold has ramped up its investments in Argentina and its platform for more asset consolidation after last year’s election of pro-business president Mauricio Macri.

In February, Austral Gold made a splash in Canadian mining circles when it entered into a definitive agreement to acquire Argentex Mining (TSXV: ATX; US-OTC: AGXMF) and its Pinguino silver-gold project in Argentina’s southern Santa Cruz province in a $5.8-million, all-share deal. Argentex shareholders voted in favour of the acquisition on May 17. (Austral Gold bought its first 19.9% stake in the company in March 2013 for $5 million.)

The 100 sq. km, advanced silver-gold exploration project has an indicated resource of 5.6 million tonnes grading 102.8 grams silver per tonne and 0.59 gram gold per tonne for 23.6 million equivalent oz. silver, and an inferred resource of 1.5 million tonnes averaging 58 grams silver and 0.74 gram gold for 4.67 million equivalent oz. silver.

Mineralization starts at surface, improving the prospects for an open-pit operation.

Polymetallic mineralization on the property also provides potential for more economic upside.

In light of the transaction with Argentex, Austral seeks to dual-list its shares on the TSX Venture Exchange, which will expose the company to North American markets. Elsztain owns 94% of Austral Gold. After the merger with Argentex, this shareholding will fall to 87%.

Elsewhere in Santa Cruz province, Austral Gold has owned 100% of the 8 de Julio project since 2008. The project consists of more than 670 sq. km in the Deseado Massif corridor controlled by Elsztain’s agricultural company, Cresud.

Goldrock Mines’ Lindero gold project in northern Argentina’s Salta province.  Credit: Goldrock Mines.

In the central western region of San Juan province, Austral Gold announced an agreement in March with Troy Resources (ASX: TRY) to acquire a 70% stake in the Casposo gold-silver mine, 150 km from the city of San Juan, in San Juan province. Casposo will become Austral’s first production platform in Argentina, after implementing a re-engineering plan for the mine to achieve a profitable operation within 12 months.

Under the agreement, Austral acquired an initial 51% stake in the project for US$1 million and could buy another 19% for US$1 million within 12 months. The company could then buy the remaining 30% stake in increments over the next five years (10% for US$1.5 million in three years, 10% for US$2.5 million in four years and the last 10% for US$3 million in five years).

Meanwhile, in northern Argentina’s Salta province, the junior miner has taken an 11% stake in Goldrock Mines (TSXV: GRM), which is developing its wholly owned Lindero property, an open-pit, heap-leach gold project. (Austral Gold first bought a 15% stake in Goldrock in October 2013 in a cash-and-share deal worth $9.3 million.)

Elsztain believes in the value of hard assets and holds a positive long-term view on gold. This view has been bolstered by the global financial crisis in 2008, and massive rounds of quantitative easing by governments from Washington to Tokyo.

“We are in a period of monetization that has been exponential, and the biggest we have ever seen in economic history,” Elsztain says. “You can’t print gold, because nobody has a machine to print gold.”

He also believes in Argentina’s geological potential.

“We share half the Andes with Chile, but Argentina hasn’t had the best environment, and that’s basically why it was not exploited as it was by our neighbours,” he says. “But the potential of Argentina’s mining sector is enormous,  and it’s one of the sectors that I am more bullish about these days … we have the reserves, good companies and good discoveries.”