How to Strike It Rich in Mining Without Discovering Anything

This is the amazing story of how a tiny junior stock achieved a 27000% return, soaring from $0.10 to $27 in just 3 years.

The company became so popular that a founder was even approached for autographs in Germany apparently.

But only a few yrs before, the founders were so drained from mining that they relinquished control of a company with $25M in the bank.

In the late 1980s, Ian McDonald, a stockbroker from Toronto, & Kerry Knoll, a reporter for Northern Miner, decided to try their luck in the mining industry. Despite setbacks, they eventually succeeded in building gold mines in Canada & Nicaragua.

After narrowly surviving the late ‘90s mining downturn, McDonald & Knoll controlled a $2 million company called Patent Enforcement & Royalties Ltd or PEARL. In late ‘04, they invested $400K into it at $0.10 per share.

PEARL quickly paid $75K to acquire Davidson, an undeveloped molybdenum deposit near Smithers, BC first discovered in 1944 with high-grade potential. PEARL also agreed to pay $950K within 150 days & a 2.75% royalty to the sellers. 

Molybdenum was once an overlooked metal with prices hovering around $2/lb in ‘02. Most of its supply comes as a byproduct of copper mines, & moly does not have a substitute in its industrial uses. However, by mid-05, prices were nearing $45/lb due to Chinese mine closures & capacity bottlenecks, leading to a frenzy in the market known as "Moly Mania." 

BLE's acquisition of Davidson was timely. The day after PEARL began trading again in early ‘05, it announced a new resource estimate which attracted a $10.3M financing (less 7% broker fee). Investors got a share at $0.60, plus a ½ warrant at $0.70 for 2 years.

Now trading at $0.78, PEARL was worth $31M, & rebranded as Blue Pearl ("BLE"), after moly’s blue-grey colour. Less than a yr later, the stock reached $3.60 following positive drill results. Now Blue Pearl was worth over $120M.

Then came the big moment. On Feb 27, ‘06, BLE made a deal with the privately held Thompson Creek Metals (TCM), North America’s largest moly miner. BLE paid $5M for the rights to use TCM's infrastructure to build a mill. The executives evidently got along well, as they soon began discussing a merger.

On Aug 31, ‘06, BLE informed investors that it was in talks to acquire an operating company, but didn't disclose which one. Even so, BLE's shares doubled to $6.86, valuing the company at $346M.

A day later, BLE announced a US $575 million bid for TCM, which included 2 mines, 2 concentrators, & other assets. UBS orchestrated a US $450M debt deal, while C$230M equity went @ $5.50 per share with a 1 yr ½ warrant at $9.

In an event resembling a minnow swallowing a whale, BLE, a small pre-revenue company with just 3 full-time employees, acquired TCM, with $323 million net income in '05, for less than 2X earnings. McDonald described it as a "transmogrifying" experience for Blue Pearl, which took the name of TCM soon after. 

TCM's stock quickly surpassed $27 per share, putting its valuation over $3B.

As the share price skyrocketed from 10 cents in less than 3 yrs, some insiders began selling their stakes & who could blame them?

  • At $27, every $1 invested in @ $0.10 = $270
  • Every $1 invested @ $0.60 = $64.3 with warrants
  • Every $1 invested @ $5.50 = $6.40 with warrants

But as with many mining companies, TCM's fortunes were cyclical. By 2011, the stock traded at just $6.94 despite earnings of $116.8M in Q2. A heavy debt load & weakening commodity prices took their toll (moly prices fell to $5 /lb in 2015), & the company was eventually acquired by Centerra Gold in 2016 with a share price of $0.64.

But let's not focus on TCM's downfall. Instead, let’s remember what’s possible when skilled, ambitious entrepreneurs seize opportunities in the commodities upswing. McDonald & Knoll's shrewd investment of just $75K in a historic moly project resulted in one of the greatest returns of the cycle, securing their place in mining history.

The Davidson project which launched PEARL has yet to be developed. It’s now owned by Generation Mining, chaired by Knoll. Moly prices are at their highest levels since the Blue Pearl days, & Generation may be in a good position to benefit from this trend as it continues to advance its projects.

And by the way, the firm with the $25M treasury McDonald & Knoll turned over in 2001 was Wheaton River Minerals, which @Frank_Giustra & Ian Telfer transformed into the world’s largest gold miner over the next 9 years. No regrets about that move either.

My name is @TommyHump. I’m dedicated to finding & supporting entrepreneurs in the new commodities super cycle. Follow me for more stories of wealth creation through hard assets.

[Photo: McDonald (left) & Knoll at the Golden Bar mine in ‘93 (K Knoll photo)]

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