The Morro do Ouro Saga, part 1
by Elpídio Reis

The year was 1978. Billiton Metals, a subsidiary of the Royal Dutch Shell, was entering its sixth year as a hopeful exploration and mining company. Early in 1972 Shell, following the move of other oil companies, decided to enter the mining industry and acquired a miniscule company named Billiton, also a Dutch enterprise, with interests in tin in the islands of Indonesia.

Billiton was to become the arm of Shell in the mining sector, initially concentrating in tin where it had expertise, later moving to base metals, coal and aluminum. In Brazil it acquired the Rondônia tin producer Ferusa, then moving to bauxite in partnership with Alcoa, base metals in the Bambuí basin for lead and zinc and Rio Grande do Sul and Bahia for copper and zinc.

Like other oil companies, Shell had plenty of money and truly believed that expertise in mining could be easily bought.

Late in 1978 I was the exploration manager at Bahia project, got a call from Jean-Marie Conne, a Swiss geologist that was responsible for the Bambui lead/zinc program. Jean Marie was one of the few geologists in the world that could estimate a zinc grade to the first decimal point, just by looking at the core. Jean was detailing his discovery: very large gold workings dated early XVIII century, 1722 to be precise. He concluded that the old workings indicated a large volume of ore, still to be mined, in an area known as Morro do Ouro, near Paracatu in northern Minas Gerais.

Morro do Ouro was not new to many companies. Vale geologist Pedro Jacobi visited the workings back in 1972, but then the price of gold was not an incentive. In 1978 the price was higher but both Jean-Marie and I knew they had a problem: Shell-Billiton was not interested in gold. So the decision was simple, the area was to be staked under one of Billiton Metais subsidiaries... but for zinc.

Early in 1979 I went to Australia, while Jean-Marie later moved on to another company. Morro do Ouro was nursed as an ugly duckling and finally somebody in Billiton decided to divest passing the “problem” to Rio Tinto.

Early in 1984, I came back from my assignment in Australia, bringing a MSc from Queens University, Canada. My thesis was "Gold Exploration and Mining in Brazil".

By then I knew Rio Tinto was the operator of the joint-venture but Morro do Ouro was still in Billiton's books.

With the return to Holland of Ken McKechnie, the position of Billiton Exploration Manager in Brazil was given to me. Billiton had expanding interests in gold exploration in the Amazon under the command of Pedro Jacobi and Morro do Ouro. The fact that Billiton’s participation in the joint-venture was only 13.5% indicated the low interest that the company had in the project.

By contrast Morro do Ouro was salvation for Rio Tinto. The company had had some rough times exploring for gold in the Amazon and base metals near Rio de Janeiro, and now finally a project with relevant potential was emerging.

Billiton's vice-president, and responsible for the day-to-day activities of Billiton in Brazil, was as a chemist named Richard De Vries, who was not famous for understanding or liking mineral exploration. He was busy nursing the aluminum contracts that Billiton had with Alcoa, MRN and Valesul. Exploration and gold was just a bad distraction he had to manage.

Rio Tinto had two excellent geologists, Rubem Forlin and the late Paulo Andreazza, who believed in the property potential. So it was not difficult for me to be convinced that Billiton had not only to stay with the project, but also use the claw back clause which allowed Billiton to buy back 49%. By investing in exploration in the ground about US$ 1 million, Billiton would buy back its 49%. A bargain price!

A very conservative cash flow of Morro Do Ouro on a 40 Mt at 0.75g/tAu resource carried an NPV discounted at 12% of US$ 22 million. It had additional 50 Mt of ore at slightly less grade but open to the NW. The true potential was widely open. But Rio Tinto wanted to start the operation small, with smaller Capex, while the whole project was to be developed to its true value. It was a winning strategy!

But I was going for a rough ride. After spending time in preparing the data and later promoting Morro do Ouro on a one-to-one meeting with Richard De Vries, I completed the talk with a cash flow. It was a conservative one, I noted, but with a tremendous upside, since mineralization was totally open to the NW.

Richard looked at the cash flow, divided the NPV by 4 and stated:

"- This is your selling price! And if it is as good as you say, you will have no problem in selling it!"

The meeting was over. Richard had no interest in keeping Morro do Ouro.

For me, this was outrageous. Richard was supposed to be looking after the company’s interest. Protecting shareholder value. How could he give such a discount on a conservative cash flow that only reflected a small part of the potential? No premium, nothing? Just a giveaway?

Although still fighting a sense of loss I phoned my good friend, geologist José Leal, then director of exploration at Multiplic Bank. I had to offer Morro do Ouro to someone that could really value it. Later on the same day, I came back from a meeting with Jose Leal, where Ronaldo Cesar Coelho, the owner of Multiplic, was very happy to sign a check for US$ 750,000 for its 13.5% share.

On the same day Richard De Vries had the check on his desk. And he was not happy but surprised. He questioned how could I sell anything without an approval from the board at head office? I just said:

"- I did what you told me to do. Now it is your move. If the board does not approve it, I will return the check. This is the deal".

But Multiplic was not to have a share in Morro do Ouro. Frank Fenwick, the president of Rio Tinto Brasil, had other plans. By contract Rio Tinto had the right of first refusal, and after losing Billiton´s participation Frank would have to justify the departure of an important partner to London. But Frank was a resourceful man and he had no trouble convincing London that paying US$ 750,000 for a 13.5% of a potential world-class deposit was dirt-cheap.

Rio Tinto had now 100% of Morro do Ouro.

This was to be the first chapter of a mine that would become the largest gold mine in Brazil (the in situ value of the resource exceeds US$ 10 billion). Today, Morro do Ouro is owned 100% by Kinross, who bought the producing mine from Rio Tinto (7.5t of gold every year) for another bargain price US$ 280 million in 2006. The mine is expanding now to 35 Mt/y capacity with resources that exceeds 1.2 billion tons of ore! What was really the starting tonnage back in 1984?

What went wrong? How could Billiton divested it so cheaply and Rio Tinto later after 22 years of very profitable operation, making the same mistake? Who is protecting the shareholder? Where have all the leaders of these companies gone?

Maybe Lee Iacocca, of Chrysler fame, has the answer! You should read his latest book!