Veteran miner Kerry Knoll bets on moly renaissance

Since leaving his job as a journalist at The Northern Miner in 1987, Kerry Knoll has co-founded four companies and built four mines with his business partner Ian McDonald.

Their first company, Glencairn Gold, went on to become Central Sun Mining before getting snapped up by B2Gold (TSX: BTO; NYSE-MKT: BTG). Their second company, Wheaton River Minerals, was eventually taken over by Goldcorp (TSX: G; NYSE: GG), and their third, Blue Pearl Mining, is now known as Thompson Creek Metals (TSX: TCM).

Today the entrepreneurs are still involved in projects together, such as the Paris Hills phosphate property in Idaho, owned by Stonegate Agricom (TSX: ST), a company they set up in 2006 and took public in 2010. McDonald serves as chairman of the board and CEO, and Knoll is a director.

Lately, however, Knoll has become enamoured once again with molybdenum — a metal that he and McDonald profited from handsomely during their stewardship of Blue Pearl Mining.

Within three months of acquiring the Davidson property near Smithers, B.C., in late 2004, the price of molybdenum oxide doubled from US$6–7 per lb. to US$14 per lb. moly. The company’s shares soared from 6¢ at the time of optioning Davidson to $3 — a “50-bagger,” in the industry lingo.

“Our timing was fortunate,” Knoll recalls in an interview during a recent business trip to Toronto. “Suddenly we were the hot stock on the street.”

Knoll says the timing could be right for a spike in molybdenum prices once again, and in March, Darnley Bay Resources (TSXV: DBL), a junior exploration company where he serves on the board of directors, optioned the same Davidson project that Blue Pearl owned a decade ago.

To support his instincts, Knoll likes to point to a research report Roskill Consulting released on March 1 that forecasts rising demand for molybdenum-bearing steel and chemicals will support a recovery in ferro molybdenum prices to US$13 to $US15 per lb., starting from 2017. Prices for ferro molybdenum plunged from US$35.39 per lb. in June 2014 to US$4.70 per lb. in November 2015, and sit at US$5.50 per lb. ferro molybdenum.

“That’s a big, bold prediction,” Knoll says. “That’s not saying it is going up 20%, that’s saying it’s going to go up two and a half times … we know Davidson is not economic at US$5.50 per lb., but at US$15 per lb., it probably is.”

Under the Davidson option agreement, Darnley Bay made an initial payment of $50,000 to Roda Holdings in April. Subsequent payments of $100,000 are due on the anniversary of the agreement until the project starts commercial production — defined as a minimum 500,000 tonnes of molybdenum over 12 months.

“It’s really rare that you can buy something this cheap — our down payment is the cost of one drill hole,” Knoll says, adding that when Blue Pearl owned Davidson and molybdenum prices were at their peak, the project was probably worth $250 million.

Darnley Bay is also getting a project that has had quite a lot of work done already. Previous owners completed 62,000 metres of diamond drilling from surface and underground. It also undertook 2,600 metres of underground excavation, primarily a 2 km long exploration adit driven into the heart of Hudson Bay Mountain, where the deposit lies.

After Thompson Creek Metals optioned the Davidson property in 2005, it completed another 12,000 metres of diamond drilling from surface and underground, as well as some metallurgical test work.

In 2006, Blue Pearl raised $700 million ($400 million in debt and $300 million in equity) to acquire Thompson Creek Metals, which at the time was the largest privately owned mining company in the United States.

“I’m not positive, but that’s the largest raise by a junior mining company ever,” Knoll says. “When I say a ‘junior mining company,’ I am referring to a company with no actual production. That was Ian — he did it. I was busy running Glencairn at the time.”

In 2007, Blue Pearl changed its name to Thompson Creek Mining.

McDonald, Blue Pearl’s co-founder and Knoll’s long-time business partner, reminisces in a telephone interview from the Bahamas that “the stars and the moon were aligned with Blue Pearl.”

The valuations were certainly sky-high. When Blue Pearl bought Thompson Creek, it was making a million-dollar-a-day profit at US$30 per lb. moly. “But the street valued it at US$2 billion, and that is where our market cap went, and the shares reached $24 by 2007 — by now a 400-bagger — and again we were the best performing stock on the TSX,” Knoll says. “Just raising the $700 million made us heroes again. But the fact that we accomplished something most junior companies could only dream of doing was the true success story.”

Thompson Creek disposed of the Davidson project in 2013 when it got out of the molybdenum business — giving Knoll the opportunity to jump back into the project.

“They were closing their moly mines,” Knoll says, adding that Thompson Creek is “in difficult straits right now because of their debt.”

Now Darnley Bay has access to the Davidson drill core, which has been preserved in Smithers.

“We’re getting a property at exactly the point I like a property to be — it’s at the stage where you can do a feasibility study,” Knoll says, adding that Thompson Creek Metals did a feasibility study on Davidson in 2008, but never filed it on SEDAR.

(The study envisioned moving the ore 200 km by truck to the privately owned Endako mill. The trip alone accounted for half the production costs of US$9.46 per lb. molybdenum — and was a non-starter.)

If the numbers in Darnley Bay’s upcoming feasibility study on Davidson look good, the company would consider building a stand-alone mill for the project.

For Knoll, the downturn in the commodities market and the fact that so many companies are staggering under piles of debt and, like Thompson Creek, have had to shed assets, makes it the perfect time for lucrative deals.

“This is the best time in the history of our business to get involved in a deal, and that’s why we’re doing it,” he says of Darnley Bay’s Davidson option. “But we’re not going to stick with just this one property. We want to get three or four properties and different commodities.”

His first preference is for projects in British Columbia.

“We still think B.C. is one of the best places to be,” he says. “It has never ranked high on the Fraser Institute’s lists, but there have been more mines built there over the last 20 years than any other province or state.”

One of those was Canada’s first heap-leach operation at the Golden Bear mine, 145 km west of Dease Lake.

Knoll and McDonald acquired Golden Bear in 1997 and turned it into a heap-leach operation. (The mine eventually ended up in the hands of Goldcorp after its merger with Wheaton River.)

Knoll says he became fascinated by heap-leach mines while covering  them as a reporter at The Northern Miner.

“I wrote a long article about heap leaching and I started asking why there weren’t any heap leach mines in Canada, and everybody had their reasons, but none of them added up,” he recalls.

“One theory reasoned that it was because of Canada’s cold temperatures. I called up a company called ‘Pegasus,’ which operated five heap-leach mines in Montana, which is as cold as Canada, and they said the cold wasn’t a problem at all. They said all it does is slow down the leaching process a little bit. So I thought, I’m going to leave The Northern Miner, and I’m going to find a heap-leach deposit in Canada and be the first. Well, we were the first.”

Knoll estimates that the Golden Bear mine had about a year left of reserves when the company he co-founded with McDonald, called “Wheaton River,” bought it for $500,000 from Homestake, a large mining company in the U.S. (Homestake merged with Barrick Gold in December 2001.)

“Homestake also posted a bond to pay off all the severance and clean up all the environmental stuff, so we got it in pretty good shape for next to nothing,” Knoll says. “We started drilling and found two deposits and switched it to a heap-leach mine. Even though gold was US$275 per oz. at the time, we were able to produce gold for US$125 per oz., so we were pretty profitable.”

McDonald adds that “we mined the whole thing out at sub-US$300 per oz. gold, so it was only a five-year mine life. We learned how risky mining is, but how rewarding it can be too. The stock went from 20¢ to $5, twice — all within two years.”

After Wheaton River finished mining out Golden Bear in 2002, Knoll was approached by a group of people led by Frank Giustra that included Pierre Lassonde and Ian Telfer, who wanted to buy the company and use it as a vehicle to buy gold assets. After turning the keys over to them, Knoll stayed on for another year or so, before leaving permanently.

Telfer took over as president and embarked on an acquisition spree. “Their timing was brilliant,” Knoll recalls. “Telfer was able to raise a lot of money and his timing was great … so Wheaton River turned out well. Then they spun off the concept with Silver Wheaton. It worked out very well for me.”

Indeed, when the first company Knoll co-founded with McDonald, Glencairn Gold, sold its shares of Wheaton River, the profits allowed management to turn Glencairn into an operating company. By the mid-2000s, Glencairn had built three mines in Central America: El Limon and La Libertad in Nicaragua, now owned by B2Gold, and the Bellavista mine in Costa Rica.

Unfortunately, Bellavista was not a success. After entering production in December 2005, the troubled mine was shut down in May 2007 when cracks were found in corners of the leach pad, which contained cyanide, and an avalanche of waste slid down a hill. Knoll recounts that period of his career as “stressful,” although he had left Glencairn at that point. (Litigation on the waste spill continues.)

Ironically, it was also Glencairn that ended up acquiring a nickel mine in Lynn Lake, Man., formerly owned by Sherritt Gordon, where Knoll had worked doing odd jobs one summer as a 20-year-old.

One of his memories from that summer was playing baseball for one of the teams at the mine. “The playing field was on one of the original tailings deposits, and you couldn’t get the muck out of your clothing at the laundry,” he recalls. “I looked around one day thinking, ‘I can’t believe they are allowed to make such a mess.’ Then 30 years later my company Glencairn owned it and was expected to clean it up, which we helped to do.”

The summer job at the nickel mine was just one of 55 jobs Knoll held before joining The Northern Miner in 1981 at the age of 26.

The first was a paper route in Edmonton. (He was 10 years old, and perhaps one of the youngest in Albertan history to develop frostbite delivering newspapers at 42 degrees below zero.) Subsequent jobs (often as many as three at a time) included flipping burgers, pumping gas, packing groceries, delivering pizza, paving roads, driving a food truck to construction sites, cleaning industrial waste out of steel drums, guiding fish tours north of the Arctic Circle, driving a backhoe at a National Park, and painting houses in the Northwest Territories.

But The Northern Miner, he says, was “the best job I ever had,” and still jokes that after leaving the newspaper, it took him six years before he managed to get his income back up to the $36,000 a year he made as a salaried reporter.

Among the most exciting stories he covered for the newspaper was the Hemlo discovery. After interviewing David Bell, the geologist credited with finding the deposit, Knoll called McDonald (a stockbroker at the time whom he had met by chance in an elevator while covering an event for the newspaper) and bought 200 shares on his credit card at $1 apiece.

By the time he got back to the office, the price had doubled. McDonald advised him to sell it and take the profit, which he did. Shortly afterward, the stock jumped to $32 per share. “I thought, ‘Well, I won’t be keeping him as a client anymore,’” McDonald says.

Looking back, Knoll and McDonald are the first to admit that not every company they have created or been involved with has done well.

In 2006, Knoll and McDonald founded Stonegate Agricom, which has invested $42 million developing a phosphate project in Idaho. The company has lost 99% of its value since going public six years ago and is trading at 1¢ per share.

“Phosphate prices are low, so we can’t do anything with that one,” Knoll says.

Among their worst experiences, however, was Canada Lithium, which Knoll describes as a “spectacular” failure. “It was disappointing and a failure, and we lost a lot of money personally,” he says.

Knoll didn’t create the company, but he was a fairly large shareholder and joined management as interim president in 2009. After bringing in Peter Secker as president, Knoll became chairman of the board, and together they raised $250 million in debt and equity to build the mine, mill and a hydromet plant. Initial capex was set at $209 million, but it ran slightly over that before commissioning began.

The mine and mill were pretty straightforward, though there were some problems with having the crusher outdoors in the winter, Knoll says. It was the hydromet plant, however, that the company had problems with. (Hydromet plants are used to convert concentrate into nearly pure lithium carbonate for batteries.) The plant had to operate continuously in order to function, so every time one of its components went offline, the whole plant would have to shut down and it took several days to restore production, Knoll says.

“There were many operating and maintenance issues, probably poor training, and especially the roaster presented a lot of problems,” he says. “Initially the CSA wouldn’t certify the roaster, and when they finally did, it broke down frequently — all of this with a full payroll and consultants everywhere.”

The company brought in new management, former managers from FMC Lithium in North Carolina, raised more money to keep going, but in the end just couldn’t raise any more. Canada Lithium then merged with a Lundin company to form RB Energy, and their management took over. But it encountered more of the same problems until it ran out of money, too.

“In the end it cost well over $300 million,” Knoll says. “The RB Energy guys [under the leadership of Rick Clark, who was part of the management team at Lundin Group’s Red Back Mining Inc., which sold to Kinross in 2010 for US$7.1 billion] got the plant operating for a few days and produced some remarkably good product — better than expected. There have only been two such plants of this size ever built in the world, Canada Lithium’s, and one in China, by Galaxy, an Australian company, which had pretty much the same problems and was eventually sold to a Chinese company.”

McDonald is philosophical about the failures. “They can’t all be winners, and as for the timing — no one has a crystal ball or the bell doesn’t ring when you’re at the top or the bottom of the market. It isn’t for the faint of heart.”

Still, McDonald has no regrets. “It’s been fantastic,” he says. “The reason I love this business is that I’m not smart enough to invent a new vaccine or an app that everyone has to buy, but you can create wealth where there wasn’t any before. If a mine gets built, you’ve got governments getting taxes, shareholders making money on successful building and you’ve got all these employees who get jobs, and locals do all the contracting living in the community. It’s a win-win situation.”

Knoll makes the point that every company the pair have founded has built a mine, which is no small feat in an industry where only a small fraction of projects make it into production.

He says the thrill of success outweighs the disappointment over the failures, and he is thankful he found his way into the industry.

“There have been such huge ups and downs — you need to fasten a seatbelt sometimes,” he says. “The downs are hard on you and hard on your friends and family, who are likely invested as well, hard on the workers — and even the towns that the mines support.

“But there is little in life comparable to having a stock go from a few cents to $5 or $24, as it did in the case of Thompson Creek, and building a mine, or pulling 15 metres of core grading half an ounce of gold,” he continues. “The people you meet and work with are often sheer entertainment and brilliant as well. The travel is phenomenal, whether you are in a mosquito-infested tent above the treeline or the Ritz in Paris, you go to so many places hardly anybody ever sees. I don’t think I could have picked a better career than this one.”

These days, Knoll divides his time between a home in Florida on the Gulf of Mexico, a cottage in Muskoka, Ont., wine country north of Kelowna, B.C., where he is building a place, and a condo in downtown Toronto. He and his wife bought the condo in Toronto to be close to family. His wife has three children and he has two, and they all live in the heart of the city.

He’s also channelling much of his time and energy into reviving the fortunes of Darnley Bay, a company in which he first became a shareholder in 2009.

The company’s early claim to fame was a huge gravity anomaly in the Northwest Territories near Paulatuk, a hamlet along the shores of Darnley Bay in the Inuvialuit Settlement Region. The company was founded by Leon LaPrairie, one of Knoll’s early acquaintances. (It was LaPrairie who encouraged Knoll to consider working for The Northern Miner after he graduated from Ryerson University’s journalism program, and after Knoll completed an internship at the Globe and Mail.)

Darnley Bay’s early exploration program in the Arctic was a failure because none of the holes were drilled deep enough to test key targets. Knoll hopes to revive the company and has hired Toronto financier Jamie Levy as president and CEO to get Darnley Bay back on its feet by doing more work on the anomaly, advancing the Davidson project and looking at new acquisitions. Currently the company is evaluating projects across Canada.

Knoll is confident that commodity prices will turn, and when they do, he says Davidson could become one of the success stories of his career.

“There have been two events over the course of history that have kick-started the mining business into high gear,” he says. “One thing that can do it is a big discovery — like a Hemlo or a Voisey’s Bay — but that’s pretty hard to predict. The other is an increase in commodity prices, and that happens in cycles … it’s imminent … within the next year or two, I can see that happening.

“People keep buying cars and houses and computers, and at some point things will turn, and we want Darnley Bay ready to turn when they do,” he continues. “You also need some luck on timing — there’s no substitute for that.”