Finding the golden lining [Nuinsco Resources] – by Thomas Watson (Canadian Business Magazine – October 19, 2011)

Executives from Nuinsco Resources, a Toronto-based mineral exploration company, recently checked in to the Corinthia Hotel in the Sudanese capital of Khartoum. The oval-shaped structure is known locally as Gadhafi’s Egg; its construction was financed by the notorious Libyan leader. The executives were there to pursue mining opportunities in Sudan, a country with a rough reputation in the Canadian business community and where, until recently, only mad dictators would consider investing in real estate.

For more than two decades, Sudan has been ruled by the Islamist government of Omar Hassan Ahmad al-Bashir, who spent decades locked in a brutal civil war with Christian separatists in the south. Accused of genocide in the country’s Darfur region, al-Bashir is officially listed as a sponsor of terror by the United States and wanted by the International Criminal Court for alleged crimes against humanity.

Nevertheless, he earned some credit for allowing the referendum that recently led to an independent South Sudan and effectively ended the country’s war. But Sudan must now confront a severe economic crisis. The country’s annualized rate of inflation was 21% in August, and its division this summer handed the south custody of most oil assets. As a result, the nation is looking to expand its minerals industry. Exploration is being liberalized, which is why Nuinsco executives have been nesting in Gadhafi’s Egg. “It is not like we went looking to do business in Sudan,” says CEO René Galipeau, but a combination of strategy and serendipity led to the company’s African foray.

Formed out of a management takeover of New Insco Mines in 1970, Nuinsco has had considerable success as an exploration outfit. In 1971, it uncovered a million tonne copper-rich deposit in Noranda, Que. During the mid-1990s, company geologists uncovered gold and other minerals in northern Ontario. In 1999, they discovered the Lac Rocher nickel deposit in Quebec, which was eventually spun off into a separate mining operating company eight years later.

Over the years, Nuinsco made at least half a dozen significant discoveries. But operations were strictly Canadian until 2005, when new executives with connections to Noranda agreed to a joint venture with the former Canadian mining giant in Turkey—which was liberalizing its mining industry as part of ongoing efforts to join the European Union. Six years later, Turkey accounts for about 25% of the company’s projects.

Nuinsco’s next bout of foreign expansion came through a fortuitous series of near-random connections. A pharmaceutical businessman in Egypt asked a Libyan jeweler to recommend a Canadian exploration company that could help him pursue mining opportunities opening up in his homeland. The Libyan didn’t know anything about mining, so he asked an Italian gold supplier for a contact. The Italian didn’t have any mining connections, but he knew a New York metals guy, who has a relationship with Nuinsco.

Once the Canadian firm was actively bidding on two gold concessions in Egypt, word of mouth brought forth a flood of other overseas opportunities. “We were approached by a group [from the United Arab Emirates] with rights to the Sudanese J. Tobrar gold concession, which is on the same mineral belt we are looking at in Egypt, so it made sense to explore the opportunity,” Galipeau says.

Company officials noted the area for exploration is located in the most stable part of the country. They also saw the riches coming out of the Sudan’s Hassai gold mine, which is run in partnership with Montreal’s La Mancha Resources and expected to produce between 60,000–70,000 ounces of the yellow metal this year. Nuinsco officials talked to people willing to invest in Sudan. And they talked to people who aren’t. Galipeau ultimately decided the project could benefit his company and bolster the country’s stability. “Keep in mind,” he says. “We are talking about an option. We have six months to determine if we are comfortable with it.”

Operating in Sudan has proven distinctly uncomfortable for Canadian companies in the past. Between 1998 and 2003, Calgary-based Talisman Energy held a 25% stake in a Sudanese petroleum exploration and production outfit. By all accounts, the operation was profitable, helping Talisman pump more oil and gas than any other Canadian competitor in 2000. But investors lost money because the company was seen as a financier of al-Bashir. Talisman’s shares were priced at a 10% to 20% discount during the period Talisman was in Sudan, according to a case study by Wharton School management professor Stephen Kobrin.

Compounding the potential PR issues are logistical ones. “There is obviously a learning curve,” admits Paul Jones, Nuinsco’s president. “At this point, we just have an idea of what the lay of the land looks like. We now have to build on that, moving forward in a rational way. We have to figure out everything, ranging from simple stuff, like where to buy a generator and an air conditioner—because you have to have an air conditioner if you want to have any Canadian or European geologists on site—to where to find a backhoe, a backhoe operator and fuel for the backhoe, not to mention a diamond drill.”

Nuinsco will deploy about 10 geologists, along with a supporting cast of drivers, cooks and labourers, housed at a base camp near its targeted belt of rocks. The first act involves producing exposures with backhoes and bulldozers. The next step may or may not include diamond drilling. “If everything goes very well,” Jones says, “we’ll discover some sort of mineral resource and a decision will be made as to whether it is worthwhile to exploit.”

For the rest of this article, please go to Canadian Business Magazine website:–finding-the-golden-lining