Bharti explains success of Forbes & Manhattan

Hitting it big with just one or two mining companies over a decades-long career is certainly commendable. When the winning streak extends to three or more, however, success starts being more forcefully attributed to the individual or organization instead of the assets, and such is the case with Stan Bharti and his Forbes & Manhattan group.

Forbes now controls more than two dozen publicly traded companies focused on the resource sector, with these companies having a combined market capitalization of several billion dollars. The group employs some 50 mining engineers and geologists, 40 financial professionals and four full-time securities lawyers. It has raised at least $3 billion for exploration and development over the past four years, all the while exploring for mineral deposits at 40 projects in 22 countries.

From precious metals producers to base metals explorers, from energy ventures to fertilizer companies to commodity traders, the Forbes group has had more than its fair share of successes recently, as well as a few letdowns.

In a telephone interview from the group’s head office in Toronto, Forbes’ founder and executive chairman, Stan Bharti, explains the reasons behind his company’s relatively high rate of success and what it takes to run one of Canada’s largest resource groups.

“We’ve been able to hire very good people, that’s been a key part,” Bharti says. “I tell people, we don’t trade stocks – we build assets. When I get involved in a deal, I know it’s three to five years before I’ll unlock the value and sell the stock, because that’s how long it takes.”

Born in India and raised there until he was 16, Bharti left to complete a mining engineering degree in Moscow and later a master’s degree in London. He found a job with Falconbridge in Sudbury, Ont., and made the move to Canada in the 1970s.

After more than a decade working as an engineer, Bharti co-started a successful mining consulting and contracting firm in the late 1980s called Bharti Laamanen Mining, or BLM, which also acquired struggling mining assets and tried to turn them around. The business essentially went public in 1994 when it was acquired by Toronto Stock Exchange-listed William Resources, with Bharti becoming president.

“We did a lot of acquisitions,” recalls Bharti, who led William Resources to projects in South America, Mexico, Australia and Scandinavia, including the Jacobina gold mine in Brazil and the Bjorkdal gold mine in Sweden.

By 1997 the company was producing more than 200,000 oz. gold per year, but a series of debt-laden, share-dilutive acquisitions proved to be its downfall when commodity prices plummeted at the end of the decade.

Bjorkdal went into receivership, Jacobina was shut down, and William was forced to restructure about $70 million of debt. The stock fell to a few pennies before the company reorganized itself as William Multi-Tech, a “technology incubator,” amid the 2000-2001 internet bubble.

That didn’t amount to much, however, and by 2003 William had rolled back its shares 1:100 and changed its name to Valencia Ventures (VVI-V), how it remains today. (Remarkably, it is still controlled by Forbes & Manhattan, though it trades for around 8¢ a share and is currently run more or less as a shell.)

As Bharti tells it, when the resource sector started to bottom out at the end of 2001, he and his team thought of a better business model than that of William Resources.

“What we recognized was that the biggest value proposition is in junior stocks.” Bharti says. “The challenges and difficulties with junior stocks are that most junior companies don’t have the financial and technical know-how, and cannot hire the technical and financial expertise to build these companies to where they should go, to unlock the value of the asset.”

For juniors, Bharti says, this unlocking “isn’t a two-month process, it’s a three- to five-year process. You have to take a good asset, put a good management team around it, support it with financial and technical backup, and then unlock the value slowly by taking a project from advanced exploration through to feasibility and production. So we said let’s create a model that allows us to do that.”

Bharti started the family-owned merchant bank Forbes & Manhattan in 2001 to invest in junior exploration companies and their assets. He brought in lawyers, accountants, engineers, geologists and investor-relations people. It was, he says, “the total depth, so that it could operate like a major, like a Barrick without the overhead of a Barrick.”

Forbes started initially with two or three companies, and it’s now grown to about 25 companies within the group.

“But the model is the same,” Bharti says. “We will either find an asset, put it into a shell, put our own capital into it and then build it over three to five years, or look for an undervalued asset that is in a public company, invest in the public company – and that way take control of it and then unlock the value.”

Forbes’ first success came in the form of Desert Sun Mining, which optioned the mothballed Jacobina gold mine from a restructuring William Multi-Tech in early 2002. Three years’ worth of exploration, infill drilling, metallurgical testwork, advanced modelling and construction brought Jacobina back to production at a rate of around 100,000 oz. gold per year in 2005. Major gold miner Yamana Gold (YRI-T, AUY-N, YAU-L) then picked up the company in 2006 for $450 million, or around $7.50 a share.

A more recent, even bigger winner for Forbes was Consolidated Thompson Iron Mines. On May 12, 2011, resource giant Cliffs Natural Resources (CLF-N) closed its acquisition of the Quebec-focused iron ore producer for $4.9 billion. 

Along the way, Forbes has carved out a reputation in the mining industry for bringing mid-sized, advanced-stage mineral projects to production quickly.

Typically, the projects will be in districts which are difficult for juniors to work in or projects that are deeply discounted by the market for a variety of reasons: the group’s Peruvian explorer Sulliden Gold (SUE-T) suffered for almost a decade from land claim problems and overbearing locals before Forbes came in and brokered a deal in 2009; its Avion Gold (AVR-T) was transformed with the 2008 acquisition of the Tabakoto gold mine in Mali from a formerly beleaguered Nevsun Resources (NSU-T, NSU-N); Allana Potash (AAA-V) picked up a past-producing potash project in Ethiopia; Apogee Silver (APE-V) operates in troubled Bolivia; and Vast Exploration (VST-V) acquired a block of oil claims in northern Iraq’s Kurdistan region. The list goes on.

Bharti attributes the usually accretive acquisitions to his large network of contacts and the even-larger network of his international advisory board. The board is comprised of five retired military generals (Jay Garner, Ron Hite and John Abizaid from the U.S.; Lewis MacKenzie from Canada; and Michael Rose from the U.K.), former Canadian Minister of Foreign Affairs Pierre Pettigrew, financial markets expert Peter Boot, and former CNN talk show host Larry King. 

“These advisers help you open doors in developing countries,” Bharti explains. “I sometimes tell people you can either buy political insurance, or you can have a good adviser that’s connected in the country.”

He points out Vast Exploration’s acquisition of its Iraqi oil claims, in which General Garner, the man who first governed Iraq after the 2003 U.S.-led invasion, helped introduce Forbes to the right people and sign a deal. 

According to Simon Marcotte, Forbes’ vice-president of corporate development, Larry King has even helped the company arrange a meeting with Russia’s current Prime Minister Vladi
mir Putin.

And while this extensive network has helped Forbes obtain potentially valuable, formerly troubled assets, it has not always led to a smooth ride for shareholders afterward. Several recent Forbes ventures have ended up as underachievers lately as they struggle with production issues, notwithstanding their impressively quick construction times.

Forbes’ Crocodile Gold (CRK-T), for example, hit a high a $2.40 in early 2010 after Bharti and his team put the company’s Australian gold mines into production within a year of taking control.

Crocodile has since slumped to a more than one-and-a-half year low at 75¢ after a series of problems hampered production, such as monsoonal rainfall, maintenance issues and lower-than-expected grades. After originally forecasting 2010 production targets of 120,000 oz. gold, it poured just 81,800 oz. at an average cash cost of US$1,109 per oz. during the year. For 2011, it predicts similar production in the range of 85,000 oz. to 100,000 oz., much less than the original forecasts of 200,000 oz.

At Alexis Minerals‘ (AMC-V) Lac Herbin gold mine in Val d’Or, Que., the company produced 22,600 gold oz. in 2010 at an average cash cost of US$1,261 per oz. (this ballooned to US$2,020 per oz. in the fourth quarter). The company’s average realized gold price: US$1,215. Shares of Alexis are down from 20¢ at the start of 2011 and from around 50¢ the year before; they currently trade around 9¢ apiece. Nevertheless, Forbes still hopes to turn both the mine and the company around. It raised $17.5 million this month for Alexis in order to advance its Snow Lake gold project in Manitoba toward production as well as lower costs at Lac Herbin.

“Some assets we have just not been able to unlock the value,” Bharti admits. He points to what happened at Crowflight Minerals (CML-T) last year as one example. After facing mining difficulties and financing issues at the company’s Bucko Lake underground nickel mine in northern Manitoba, Forbes lost control of the company to its current Chinese backers, the Hebei Wenfeng Industrial Group.

“Don’t forget, some of the assets that we acquire, sometimes they take some time. The market sometimes doesn’t have the patience. Our goal is always to take the project to the final degree. That’s the way you unlock the value.”

And like any good parent with a houseful of children to choose from, Bharti cannot quite be persuaded to name just one as his favourite. “I really only get involved in projects that I’m passionate about and really believe in. These are all projects that I think have a lot of potential, especially in a bull market for commodities.”