CA - Massif Capital - Cornerstone Capital Resources: A Timing Misstep

Summary

• We entered Cornerstone Resources in January 2020.
• Our first misstep was the timing of the purchase.
• Our timeline was accurate, and our read on management incentives was roughly correct.
• Cornerstone management, late in 2022, got an opportunity to exit the asset on decent terms.

The following segment was excerpted from this fund letter .

Cornerstone Capital Resources ( CGP:CA )

We entered Cornerstone Capital Resources in January 2020. The firm was an under followed holding company of mineral properties in South America. Our interest in the company was driven by its ownership stake in SolGold ( SOLG:CA ), a London-listed copper and gold developer focused on Ecuador, and the firm's ownership percentage of the land package on which SolGold's crown jewel asset, Cascabel, is located. We owned the stock with an average price of CAD 4.5 and sold out at CAD 3.2 for a loss of 28%.

The investment goal was to benefit from an expected sale of the company, with the value derived from CGP's stake in the Cascabel asset. We expected that the sale would take place within two years. On October 7, 2022, the firm announced it was merging with SolGold. Our timeline proved roughly correct, but we lost money.

Our first misstep was the timing of the purchase. We started accumulating shares in January 2020, expecting SolGold to release an updated technical report on the asset sometime during the first quarter. We expected that the asset would improve with the release of this technical report. Rather than release new technical information, the firm reconfirmed the existing technical report and then delayed the release of a pre-feasibility study that had already been delayed once. As SolGold and Cascabel were the assets on which CGP traded, it fell on this news.

The delays should have been a red flag, and we should have exited, but at the same time, Nick Mather, the CEO of SolGold, stepped down. Nick had been forward-looking in building SolGold, having ventured into Ecuador and staked out large land packages that were highly prospective long before Ecuador became a hot spot for exploration. We are unaware of any shareholders who liked him. Liking management is not necessary as long as they are competent. Still, Nick was sufficiently disliked (in part because of his lack of a particular type of competence) that 44% of shareholders voted against him at the December 2020 AGM.

Nick was hell-bent on building the Cascabel mine. We viewed this as a problem. The deposit is fantastic, but only if you want to build a large, deep block cave mine. Block cave mining is a very complex method of monetizing an asset. It has a substantial upfront cost and requires tremendous expertise, which SolGold did not have. We viewed his departure as a positive, opening the way for the asset to be sold alongside Cornerstone's stake in both the deposit and the SolGold. Within that context, a delay in the PFS release, giving the new management team time to reassess options, was not an obvious red flag.

The new management team that was put in place was headed by Darryl Cuzzubbo, the past president of Olympic Dam and veteran of 24 years at BHP. This seemed an excellent fit for an eventual sale of the asset to BHP, already an owner of 13% of SolGold. It never came to pass, though, and Cuzzubbo was shown the exit in November of 2022. Meanwhile, as the SolGold soap opera played out on the London Stock Exchange, Cornerstone was either range-bound or slowly bleeding, and copper prices were strong. Cornerstone management, late in 2022, got an opportunity to exit the asset on decent terms, and given the drama at SolGold, we can hardly fault them for that. They made a decent profit for the company (and they were all large owners of the company), even if it was not necessarily a good return for Massif Capital. In the end, the Cornerstone management team sold their stake in SolGold and the Cascabala asset for $0.04 per pound of copper in the ground vs. the $0.06 to $0.07 per pound we expected as a result of our review of 21 precedent transactions dating back to 2010.

We were not sure we would have made any different decisions based on our information. Our expectation that Cornerstone was a seller and that SolGold would eventually need/ want to consolidate the asset was correct. Our timeline was accurate, and our read on management incentives was roughly correct. Still, our read on the magnitude of return needed to justify a sale in management's eyes was off by ~50%. We played our hand well, but we should have been playing the management team's hand when we thought through the prices at which the transaction could be acceptably completed in the context of their incentives. If we had done that, we might have been more cautious with our entry point.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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