Cobb Resources Strikes It Rich
Cobb Resources is not a typical small company -- not with growth of 366,567% during the past five years. That spectacular gain gave Cobb the top spot on the recent INC. 100, this magazine's ranking of the fastest-growing publicly held companies in the United States (INC., May 1981).
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COBB RESOURCES: 366,567% GROWTH DURING THE PAST FIVE YEARS
Years ended December 31
Key factors 1976 1977 1978
Revenues $2,993 $1,394 $3,371,723
Oil & gas
Earnings (40,404) (172,382) 452,281
Uranium (lbs.) 89,930
ended June 30 ended June 30 *
Key factors 1979 1980
Revenues $2,067,060 $11,041,501
Uranium 2,036,286 10,451,684
Oil & gas 563,934
Earnings 11,132 1,190,849
Uranium (lbs.) 54,140 260,950
Oil (barrels) 6,046
Gas (Mcf) 81,214
* Reflects merger with Chase
Cobb's performance is an example of the occasional big wins of companies that gamble in the high-stakes game of mining for minerals, oil, and gas. During its first 10 years, while developing its mining properties, the company made virtually no money. But in 1978, its first year of volume production, Cobb registered $3 million, and by 1980 sales hit $11 million.
Even $11 million is petty cash to most firms in Cobb's major business, uranium mining. Survival in the uranium business is a harsh test of a company's ability to deal with extremes in every phase of its operation. Start-up costs are staggering: Cobb's largest mine took almost two years and over $4 million before it began to produce. Half a dozen state and federal regulatory agencies can claim jurisdiction over a single mine; a permit to begin operation may take two years to obtain. Good miners, when they're to be found, can earn $50,000 to $80,000 a year. Ore prices can drop sharply without warning: Most recently, the Three Mile Island nuclear accident led to a decline of about 45% between December 1979 and December 1980.
As a result, about 90% of the estimated $1 billion in U.S. uranium sales last year went to only a dozen or so companies. All are giants; more and more are multinational oil companies -- Exxon and Atlantic Richfield, for example -- that can tolerate the extremes of the uranium business because it represents a small portion of their revenues.
Those were the odds facing George Lotspeich in 1968 when, at the age of 41, he started Hydro Nuclear -- what is today Cobb Resources -- in Albuquerque, N.Mex. Lotspeich had earned a geology degree from the University of New Mexico, served in the Air Force during World War II, prospected in the jungles of South America, and roamed the Southwest as a geologist, miner, and mining engineer. In the process, he had developed what the old-timers call a "miner's eye" for spotting and analyzing ore the way an ace sleuth might spot clues in the pages of a detective thriller. Says his former banker, Ed Pace: "George had developed an amazing sixth sense. He simply knows more about minerals in this part of the country than anyone I've ever seen."
Uranium was the focus of Lotspeich's sixth sense back in 1968. From its beginnings in the late '40s until the mid-'60s, the uranium business was a captive of the Atomic Energy Commission, which bought ore for its weapons systems. Then, in the early '60s, the government announced its intention to gradually phase out as a major buyer and allow private purchase of uranium. Prices started dropping, and so did most of the smaller operators in the business. But then a few surviving larger companies began to nurture commercial uses of uranium as fuel. By the late 1960s, prices stabilized at about six dollars a pound, based on forecasts that uranium was once again an up-and-coming business.
Given that hint of future glory, George Lotspeich began to think about the potential of the nuclear power industry. But he didn't want to be simply one more of hundreds of exploration firms that prospect for ore, then sell the right to the mine. He knew that the good long-term money -- and the higher risks -- came from being a producer, mining the ore. Lotspeich set out to build a production company.
Getting into mining as a small independent producer is an agonizingly slow process. It means years of combing the geological records, exploring mine sites, and hunting down landowners as large as the Navajo nation or as small as a Denver retiree. It means weeks of negotiating deals at the "right price," based on a best guess of how costly the ore will be to mine and how much it will fetch when it's finally on the market several years later. It means betting on deal after deal, searching for the one in 10 or 20 years that will put you solidly in business.
From 1968 to 1977, George Lotspeich did the legwork, set up the deals, and earned a reputation for having, as one friend puts it, "a ton of tenacity." He certainly wasn't earning much else. But, along the way, he came across a deal at an estate auction that would eventually make him $15 million.
The estate had belonged to a near-legendary figure in New Mexico, Miss Stella Dysart. Dysart had come to Albuquerque in the 1920s with what was then viewed as a revolutionary plan: selling the oil and gas interests on small, one-to-three-acre tracts to individuals, promising them riches when the wells gushed in. Buyers flocked to Dysart, who then purchased thousands of acres northwest of Albuquerque in a region known as Ambrosia Lake. Dysart never struck oil, however. Only later did her lands prove to contain one of the richest reserves of uranium in the United States. Her reward was a permanent place in the miners' lexicon for "dysartized" tracts -- small, individually owned plots broken out of a larger property.
In 1971, George Lotspeich spent $400,000 to acquire an option to purchase all the Ambrosia Lake properties owned by the Dysart estate, plus an option to repurchase adjoining lands that Dysart had sold in the early '60s to a joint uranium venture of two major mining companies, United Nuclear and Homestake Mining Co. Shrewd until the last, Dysart had written into her original sales agreement with the two companies a provision that gave her the right to reacquire her lands after 10 years. The United Nuclear-Homestake Partners didn't balk, certain that they would have the properties mined out before the time elapsed.
Nothing is certain in the uranium business, however. Lower prices led them to mine only the higher-grade ore, leaving large bodies of lower-grade material for later. When George Lotspeich served notice that he had bought the Dysart repurchase option and intended to exercise it, he says, the United Nuclear-Homestake executives first ignored him, assuming he couldn't be serious. When they realized he was very serious, "all hell broke loose, of course," he says, matter-of-factly. Once it broke loose, it lasted for a full 18 months while United Nuclear-Homestake delayed any court action. Again, tenacity paid off. "We finally got them to the courthouse door," says Lotspeich.
On the Sunday night before their Monday morning court date, George Lotspeich got a call: The two companies were willing to settle out of court -- and to meet most of his terms. He had repeatedly turned down offers of cash payment, instead holding out for three key concessions: free and clear rights to the Ambrosia Lake mining properties, the right to use the partners' existing mine shaft in a neighboring mine to enter his newly acquired property, and a contract to process his ore at their Ambrosia Lake mill. The shaft-use agreement was worth $2 million to $3 million in construction costs alone.
The milling contract turned out to be almost priceless. Between 1971, when Lotspeich purchased the Dysart option, and mid-1975, when he won the right to exercise it, the nuclear power industry and the uranium market had gotten redhot -- just as Lotspeich had gambled they would. Demand was far greater than supply; uranium prices were their highest ever -- over $40 a pound for yellow-cake, the marketable form of uranium that is precipitated out after ore is crushed and dissolved in chemical solution. No small operator can afford a mill that does such processing; no larger one wants to give a competitor time at his mill when he's already at full capacity, running his own ore through and selling it at $40 a pound.
At that critical point in time, 10 years of operating on a shoestring paid off in the big break that all miners dream of. "When it's sweet, it is real sweet," says Lotspeich, in his born-and-bred New Mexico drawl. "It's gotta be, because it's just as easy to lose a million in mining as it is to make it."
George Lotspeich, president of a company that had never produced more than a small tonnage of ore a year, marched off to several major utilities with a critical sheaf of papers in his hand: mine consultants' reports estimating that a square mile of his Ambrosia Lake property held at least 300,000 tons of ore containing two pounds of uranium per ton; a detailed plan of operation for how he intended to get the ore out of the ground, including initial use of the United Nuclear-Homestake shaft; and an agreement allowing 18,000 tons of ore to be milled per quarter by the United Nuclear-Homestake partnership on a cost-plus basis.
Utility Fuel in Wichita, Kans., one of those utilities, liked what it saw in the ground, but was worried about Cobb's ability to bring it out. For a full year, Lotspeich negotiated the terms of a contract designed, admits Utility's Bob Hagan, "so that we didn't see any risk for us." They demanded independent checks on everything from land titles to details of the mining plan. They haggled over price, payment schedule, price escalation clauses, and shipment schedules.
"They were tough to deal with," says Lotspeich in another bit of understatement. "I'd come out of those meetings not knowing what to do," he says. "Then I'd call Charlie and he'd say, 'Hell, no, if you don't get what you want, don't do it!"
Charlie is 51-year-old Charles Cobb IV, a man who for 10 years has backed up Lotspeich's mining savvy and personal tenacity with financing. Cobb and Lotspeich met in 1969, the same year Lotspeich took his infant company public and sold 240,000 shares at $1 each, mostly to friends in the Albuquerque area. One of those friends, Horace McKay, introduced Lotspeich to Charlie Cobb when he came into town from Marshall, Tex., where his family owned a lucrative century-old iron foundry and other assorted businesses. Like many other betting Texans, Cobb had invested in a mining deal in New Mexico. It had floundered, and Cobb was in Albuquerque to see if he could save his own $250,000 investment. McKay hoped Lotspeich could offer some advice.
After Lotspeich had looked at the mines, he offered more than advice: a deal in which his small company would take over the mines and try to turn them around. If he succeeded, he won any profits remaining after Cobb's investment was repaid. Cobb agreed, and was soon suitably impressed with Lotspeich and his ability to run a mine leaner than lean, thus regaining Cobb's investment and earning his company a few hundred thousand dollars besides.
Cobb was impressed enough to buy $300,000 worth of reserve stock to fund a small mine Lotspeich had in the works, then $400,000 for a second project, and then, says Cobb, "Well, one thing just kinda led to another." By 1977 Cobb was a major stockholder and Lotspeich changed his company's name from Hydro Nuclear to Cobb.
Direct investments, totaling probably $1 million over 10 years, were only part of Cobb's contribution, and they could not alone have bankrolled the company. His other contribution was the Cobb name, which represented the financial stability of a highly profitable 60-year-old family company; it meant bankers looked more favorably on Lotspeich's requests for items like short-term loans, usually borrowed against the small amounts of ore he mined to keep the company afloat in the early days.
Cobb is also, says one long-time observer of the company, "a very astute businessman, not simply the soft-spoken good ol' boy he appears to be." He acted virtually as a consultant to Lotspeich, bringing the perspective of someone who had been doing business for 30 years in worlds other than mining: investing in real estate and oil, selling brakeshoes to railroads, and fabricating metal parts for oilmen. That back-up role was critical during times like the contract negotiations with Utility Fuel.
In the agreement finally signed in October 1976, Utility agreed to pay the $4.2-million cost of bringing Cobb Resources' first major uranium mine into production, recouping its advance on a prorated basis out of the first 400,000 pounds of a total 500,000-pound order. Lotspeich expanded his field crew to 75 miners and set to work sinking a 665-foot shaft and drilling 600 feet of drifts into the main ore body. By the end of 1978, Cobb Resources had delivered just under 200,000 pounds of yellowcake, at prices ranging from $36 to $39 a pound. After 11 years, the company had its most significant revenues: sales of $3 million, profits of just under $500,000. Sales rose to $5 million in 1979 and $11 million in 1980, almost entirely on the basis of uranium delivered to Utility.
But by 1980, the uranium industry was moving into its most depressed state ever. The March 1979 accident at Three Mile Island triggered a nosedive that took uranium from $43 a pound in 1979 to $25 a pound by January 1981 and halted licensing of nuclear reactors. The existing utilities' total demand for uranium is an estimated 21 million pounds this year, while production is estimated at 35 million to 40 million pounds, according to NUEXCO, a Menlo Park brokerage firm that tracks the industry.
This depression was not a total surprise, although the severity of it was. The antinuclear movement, Carter Administration policies slowing nuclear power development, and more restrictive regulation had put uranium miners on their guard. Besides, as George Lotspeich says, "After 20 years in the business, you just know you've got to expect it."
That's one reason why, in January 1980, Lotspeich and Royce McCary merged their two companies as they'd talked about doing for years. The two first met as young wildcatters prospecting in Honduras. McCary, a Texas-born petroleum geologist, subsequently spent 18 years knocking around the oil fields of the Southwest, first with several major companies, then as an independent consultant. He finally settled in Albuquerque to set up his own oil company in 1972.
The merger brought in Chase Oil as a wholly owned subsidiary of Cobb, with 34 producing oil and gas wells and over half a million dollars in revenues in 1980. But George Lotspeich has been heard to remark that the most critical resource it brought was "Coach," as he calls 62-year-old Royce McCary.
Houston Natural Gas, a $2.4-billion oil and gas company, agrees. Says Otis Bryant, project manager on loan to the firm's special projects subsidiary, HNG Fossil Fuels, "We've seen Royce work over the years, and we've got a lot of respect for him and his judgments." As a result, HNG and Reynolds Metals Co. have joined forces with Chase in a $7.5-million joint venture to explore for oil and gas in New Mexico's San Juan Basin. The first well will be spudded in August; McCary hopes that 8 to 10 new wells a year will bring a third of Cobb's total revenues by 1982.
That is, of course, if Cobb doesn't hit too many dry holes, which, at a drilling cost of about $450,000 per 7,500-foot well, it certainly can't afford. Hedging bets comes naturally to George Lotspeich by now; just in case luck isn't with him on the oil fields, though, he's got a trump card in the Colorado Rockies -- a gold mine that he hopes is almost ready to produce.
The mine, active from 1875 until 1942, sits at 11,000 feet in the middle of a rich gold mining district atop the Continental Divide near Leadville, Colo. It was abandoned partly because of World War II, partly because miners ran into increasing amounts of water and couldn't bring out the gold at a profit when it sold for just over $30 an ounce. Although gold is particularly difficult to predict, Lotspeich estimates that the mine contains large tonnages of high-grade ore containing one-third ounce of gold per ton, and a much larger porphyry, a body where ore is scattered, not concentrated, in amounts between 5/100 and 15/100 ounce per ton. HNG Fossil Fuels is impressed enough with the mine's potential to be part of a joint venture there, too, to fund $2.5 million of the estimated exploration costs. The mine could begin generating revenues in the second half of this year, and Lotspeich hopes it will account for a third of total revenues by 1982.
With oil and gas accounting for one-third of revenues, and gold another third, Lotspeich is still betting on uranium to bring in the rest. "It's sure a risk," he admits. "I probably don't know any more than anybody else does about the future of nuclear power, but I'm betting it'll be back -- not as strong as we once thought, but back anyway." One thing Lotspeich says he does know: The time to buy land is when nobody else wants it. So he's buying up uranium-producing properties at what seem like bargain-basement prices and is prepared to let them sit quietly until uranium prices go up again. Also sitting quietly, waiting for higher prices, are two of his three Ambrosia Lake mines: One is shut down, one is operating at partial capacity, the third is still at normal capacity.
Buying uranium land, even on sale, plus drilling oil wells and exploring gold mines, even with rich venture partners, costs money, and George Lotspeich is spending a lot of it these days -- over $2 million for development work this year. Getting away from a dependence on the boom-and-bust cycle of uranium is worth it to him: "It's sure as hell not worth slowing down now just to make the financials look good," he maintains.
The financials will not look good this year, he concedes. Lotspeich predicts sales will be down, maybe to as low as $7 million or $8 million. He's also betting they'll be way up again in 1982, to the $20-million range.
Those in the mining industry do not look askance at a year, even a few years, of what appears to be a weak performance. They look instead at what's in the ground. Today Cobb Resources has 17,000 acres in the uranium-rich Ambrosia Lake region of New Mexico, complete with three working mines; 37 producing oil and gas wells, plus interest in another 12,000 acres of undeveloped land; 1,800 acres in Colorado gold country, including the gold mine; a working lead and zinc mine in New Mexico's Magdalena District; and interest in a few other smaller mining projects.
Those holdings, and Cobb's simple management structure -- basically Lotspeich and McCary -- could make Cobb an attractive takeover candidate, especially given the current rash of attempted buy-outs of natural resource firms by major oil companies. Lotspeich would not look unkindly at a bid for Cobb Resources, given the right company, the right price, and the right time -- which probably isn't now but after he's hit the $20-million mark.
For now, says Lotspeich, "Royce and Charlie and I are havin' so much fun, we just don't want to stop."