Taking Stock 20 January 2022

DESPITE their successes in enabling many powerless groups of people to access justice in the courts, litigation funders still receive mixed reactions in high places.

Some politicians regard them as ambulance-chasers, some in the corporate world have a similar view, and some rather hypocritical lawyers regard litigation funders as pests, annoying their big-time clients.

Having seen the just outcomes litigation funders have enabled, I was a fan, even before the latest display of just how valuable such funders can be, as I will describe now.

Readers may be aware of Dilworth School, a private education facility in Auckland funded by generous people many decades ago, with the aim of providing education and guidance for young men made vulnerable by family deficiencies.

The patrons donated large tracts of Auckland land to the trustees who run the school, just one such piece of land being leased to St Cuthbert's School in Auckland, the rent being paid by the Ministry of Education, a reliable tenant, one would have thought.

So Dilworth today has hundreds of millions of dollars worth of land, and it has tens of millions of income from its donated assets.

It still caters for vulnerable youngsters.

It should be a school that can openly celebrate its achievements, helping disadvantaged people to have better opportunities in life.

Sadly, the school decades ago was allegedly exploiting some of its youngsters, occasionally employing paedophiles, and failing to expel such foul people before they did their damage.

Perhaps scores of youngsters suffered lasting damage as a result of a small number of despicable, exploitative, so-called men, in charge of young boys. That is the allegation.

Many years after those foul years, some of those whose lives have been affected spoke out, bravely making their allegations in the papers and on television, in the past year or so.

They had no resources to embark on a legal fight to gain an apology and some level of financial compensation.

Up stepped a litigation funder, displaying an admirable sense of decency.

The funder agreed to pay the total cost of going to court, without any fees, should the case succeed.

This sort of court case costs real money. Quite possibly the fees might reach a million or two, if the Queen's Counsel and the big law firms price their wares at today's extreme costs.

The litigation funder offered to wear the cost, in the interests of achieving some sort of compensation for what might be 100 or more victims.

If there were 100 victims, and each were paid $100,000, the cost of the compensation would be $10 million.

Possibly, if such an outcome were reached, Dilworth would be instructed to pay all legal costs, meaning the litigation funder's best hope might be that in the interests of justice and decency, his underwriting of the cost might ultimately cost him nothing, though the funder seems relaxed about any cost.

To date, the complaints are allegations. No court hearing has taken place.

My affirmation of the value of litigation funders is even less ambiguous than it was before.

Such funders add immense value by facilitating just outcomes for people who otherwise would not have their cases heard.

When the Supreme Court hears an appeal in March from the Mainzeal directors against a potentially huge award for their incompetence and negligence, and a simultaneous appeal seeking an increase in this potentially huge sum, we might see another outcome that illustrates the merit of litigation funding.

This case, brought by the liquidator of Mainzeal, could not have funded itself.

The Supreme Court will announce a finding that will be of immense relevance to public company and public sector directors in New Zealand, the majority of whom are inexperienced and incompetent, often selected to meet social objectives rather than add value to the process of governance.

Whatever the Supreme Court's decision, and whatever the outcome of the Dilworth case, there can be no logical argument about the value of the role played by litigation funders, in my opinion.

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THE value of producing, or hoarding, gold is the subject of lively debate, though the topic is perhaps not as polarising as the value of investing in cryptocurrencies.

Gold, after all, is a metal used in jewellery and electronics, and is a natural element, whereas cryptocurrency is a fabricated token visible to few.

As he has earlier done, with many new technology companies and more recently with gold, the veteran US investor, Warren Buffet, has shifted his view from mocking to investing in gold.

This suggests either that as he nears 90 he is still able to change his mind, or it suggests he is not above the universal game of talking down prices before he buys, a strategy used by many false prophets.

Buffett has done this with technology shares, and with gold. He is now a multi-billion-dollar investor in gold producers, including a Canadian producer.

Buffet is not the only influencer who knows how to mould market thinking.

Any regular readers of this newsletter often will have read of those who exploit the media, knowing that for many of the public the information that appears in the media is the only available source for information-gathering.

All of us who have been in financial markets will still be shuddering when we recall the exploitation of the public in the 1980s, when the biggest buffoons and charlatans exploited the innocence of the media, and the greed of financial intermediaries, to rip off the public.

Outright lies were presented as facts to enable those running evil companies to sell out to innocent buyers, sometimes manipulating the news by pretending to be enthusiastic, informed buyers while surreptitiously selling as fast as they could. I cannot explain how they avoided jail.

Gold producers are not quite in the same league, their lies having been tied to claimed discoveries, rather than future revenues. No credible gold producer would get away with pretending to know next year's gold prices. Nevertheless, there is price manipulation in many of the global markets, with opaque use of derivatives.

Regular readers will know that I have some optimism that New Zealand may be close to announcing that it has a world-class gold resource that should translate to revenue for the Crown, dividends for shareholders, well-paid, sustainable jobs, and add to our quest to improve productivity.

If we are going to have much lower levels of tourism, and seek to reduce our agricultural productivity, we will need activities to replace those creators of employment, wealth and taxes.

On a world scale, gold production here is tiny.

Yet gold has often been our second biggest export to Australia, it generates billions of revenue each year, and it employs thousands of people. Our giant miner is Macraes, now owned by Oceania, which is Australian based, ASX listed.

Macraes has large projects in central Otago, near Palmerston, and at Waihi, near Tauranga. It produces several hundred thousand ounces each year. Production of 100,000 ounces at today's gold price (NZ$2600) represents $260 million of sales.

Macraes was ''discovered'' 40 or so years ago, the exploration led by Homestake, a giant American gold miner whose head in NZ was for a while Warren Batt, a geologist then in his 30s. Batt sought to prove that there was at least a million ounces of low-grade gold mineralisation at Macraes.

Interestingly, after Batt succeeded, Homestake decided the grades at the gold price of the time were too low to pursue. Of course, since those days, gold prices have risen by a factor of about ten. Instead of Homestake mining Macraes, it sold the licence, Macraes was listed and shareholders are still enjoying dividends

Macraes in the past decades has already produced five million ounces at its Central Otago mine and seems to have a similar amount to be extracted in coming years.

Five million ounces of gold at today's price would be worth around $13 billion.

Our wine and fishing and horticultural sectors produce goods worth around $6 billion per year.

Batt, now in his 70s, linked with another veteran geologist, Kim Bunting, to explore rock formations at Bendigo, about 40km west of Palmerston, on the other side of the ranges, a few years ago.

Bunting was optimistic that a similar resource would be discovered in the bowels of those hills where 150 years ago gold miners, armed with shovels, had found enough gold to encourage a small army of explorers to dig down a few metres, looking for gold.

The Todd family (of course) provided the shovels, the huts, the pubs, and whatever other comforts were needed. The Todds were good at that sort of thing and today are pursuing iron ore in Australia, with great vigour.

Bunting, joined by Batt in the last few years, raised enough millions from personal contacts, from other enthusiasts like me, and from a handful of our clients, to begin exploring at the depths available by modern diamond-drilling plant. The tiny drill hole plunges up to 200 metres through beautiful, marble-like, rock. Assaying each cylinder of rocks tells the geologists how many grams of gold are in the rock extracted.

They wanted to prove there would be at least a million ounces of low-grade recoverable gold.

To date the results have been surprising, their ambition now much greater.

The average grade of gold has been at least twice the figure needed to achieve a return (at today's gold price). The break-even figure required is a bit less than half a gram per tonne of rock.

The assaying has revealed better grades and more gold than expected, the latest published results describing ''bonanza'' results, in rare areas exceeding 40 grams per tonne. Forty is the level at which gold explorers use the word ''bonanza''.

To date independent analysts have calculated that the area drilled, just a tiny fraction of the rocks targeted, imply a resource of around 640,000 ounces.

Drilling continues. It would be remarkable if the next release of an independent estimate forecasts less than a million ounces.

By raising more capital Bunting and Batt intend contracting in two more drilling plants. The three drills, operating double 12-hour shifts, seven days a week, will chew through a million dollars each month, perhaps beginning in March. That will hasten the exploration process and bring forward the day when a mining licence is sought.

If the inferred recoverable gold is confirmed in 2022 at millions of ounces, New Zealand would have a new resource worth many billions.

That is the target. It seems to be on course.

The land being mined is privately-owned, but the Crown will have to approve the project, which will be based in an area of no value to farmers, well out of sight, but of possible interest to cross-country motorcyclists.

In granting consent the Crown would need to know that there would be responsible processes to handle the tailings, and to ensure environmental damage was repaired.

There will be a voice that says mining involves machinery, machines burn fossil fuels, therefore mining of any sort should be banned.

Such a voice would be louder during some eras than others.

The gold find would not disappear if the project was temporarily delayed by the attitudes of those who grant consents.

With any exploration process there are risks.

Will the geologists find the gold they anticipated? That risk has fallen.

Will the project be funded? That risk has been reduced. An Australian ASX-listed miner has succeeded in raising capital when it was required. That company, Santana Minerals (SMI) now owns the project, though there are hundreds of NZ investors on the share register.

Will the gold price remain high enough to make the project economic? So far the gold price far exceeds the production cost.

Will the project be consented, in the years to come? There are no visible barriers currently, but who knows how politicians might behave in the future.

Will the project be able to raise the $100 million or more to convert a find into a working mine? Investors will determine this but in the current environment a consented project addressing a major resource would be a huge boost for NZ, and for the Central Otago area, in particular.

By any standards, the project is exciting, but the project stays under the radar.

It is remarkable to me that our media devotes thousands of words to any company that hopes to build a new computer game for youngsters but is uninterested in a discovery of potential wealth that might create billions of dollars of wealth, hundreds of millions of taxes and royalties, and billions of dollars in exports, as well as hundreds of real jobs.

The media has its own agenda. Who knows how the agenda is set.

Santana Minerals, which owns the project, is carefully remaining silent, releasing its drilling results to the ASX, avoiding any risk of insider trading in the shares.

SMI's care is to be applauded.

The directors who own a big chunk of the company must adhere to protocols. So must I, as a minor (2%) shareholder.

At a time when financial markets face great disruption, and investors have to select companies or projects that would withstand economic downturns, it seems anomalous that even the Central Otago media have not been studying the results, published by the ASX.

Perhaps the media have decided that ambitious mining projects are best ignored until the gold is extracted and sold.

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Seminars

I dread to attract the wrath of Omicron demons, but I plan to present a series of seminars in March.

I would hold one-hour seminars discussing the options available to investors.

Attendances will be restricted by the venues to fully-vaccinated investors, and might be limited to 100 people at each venue. I might hold two seminars in some areas if necessary.

Here is a tentative schedule:

March 3 – Nelson

March 7 – Timaru

March 8 - Christchurch

March 10 – Kapiti

March 14 – Palmerston North

March 15 – Napier

March 17 – Wellington

March 21 – Tauranga

March 22 – Hamilton

March 28 – Whangarei

March 29 – Auckland (North Shore)

March 30 – Auckland (Central)

Please email us if you might attend, with friends or family if you wish, providing numbers, subject to the dates being convenient. The planning of these seminars cannot be casual, given the unusual constraints that might be in place.

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Travel

Michael will be in Christchurch (Russley Golf Club) on Tuesday 15 February.

Michael will also be in Auckland (CBD) on Monday 28 February and then Tauranga and Hamilton in early March. Please let us know if you'd like to arrange a meeting and we'll get back to you once dates and places are booked.

Edward will be in Auckland on Thursday 3 February (Mount Richmond Hotel, Mt Wellington) and on Friday 4 February (Fairview Events Centre, Wairau Valley).

Edward will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and on Friday 18 February (Porters, Havelock North).

Edward and Michael are visiting Christchurch in February because Kevin may be on leave and Johnny is on paternity leave, cuddling my latest grandchild.

Please contact us by email if you would like to arrange an appointment for any of these dates.

Chris Lee

Managing Director

Chris Lee & Partners Limited