The Appeal of Advanced-Stage Development Assets
Commodities / Gold & Silver 2009 Jul 24, 2009 - 07:50 PM GMTBy: The_Gold_Report
Primevest Capital Corp. President Ryaz Shariff reaffirms his long-held status as a commodity bull in this exclusive interview with The Gold Report, telling us to expect significant upticks in the markets once demand resumes. He also talks about some of the value-creating catalysts he seeks among the investments he makes. High on his list are advanced-stage development explorers that could attract a sensible suitor or two from among the majors.
The Gold Report: When we interviewed you back in December 2007, you mentioned an analytical tool and techniques that you felt would apply not only to small caps but also the international marketplace. Have those served you well since then?
Ryaz Shariff: I don’t think anything really served well in the later part of 2008, unless you were heavily short. We certainly felt the pain by being involved in some of the smaller stories and the hedging vehicles we’d typically used in the past didn’t compensate for the immense erosion of value in the small stories. These analytical tools and techniques have given us long-term opportunities to make significant money. They are intact and will make us money in the future, but last year was definitely an aberration.
TGR: We should note, of course, that as of June 30 this year, your year-to-date was 29.2% return, and 19% since the fund’s inception.
RS: That’s right.
TGR: In reading your online commentaries, you are very bullish on commodities and have been for several years.
RS: I travel the world to solidify my thesis on being long-term commodity bull and I’ve always maintained that this market is really characterized by the lack of supply and the focus should be on the supply side situation and not necessarily the demand side. Where I went wrong last year was in expecting the emerging markets, China in particular, to pick up the slack on the demand side from the Western world. I was clearly wrong on that. But having said that, I still believe strongly that we continue to have a supply-side issue, both from under-investment over the past decade and aging technical expertise on the human resource side, so I expect that when demand returns—which, of course, it will—we will have significant upticks in the commodities.
TGR: Do any particular commodity sectors interest you?
RS: We typically focus on copper, oil and, to a lesser extent, zinc. We have done very well in the oil and gas sector in the last six months or so. I also am reasonably bullish on the uranium sector. There is certainly a case to make for the agricultural commodities as well, but historically we focus most on base metals.
TGR: As a long-term bull on commodities, what do you consider long term?
RS: I’m looking at longer term as two years plus. In the short term, we’re seeing a strong tug-of-war between the bull case and the bear case over the economic situation on a worldwide basis, but when demand returns and the recession is over, the supply-side fundamentals will come into the spotlight. Again, that’s where the real opportunity lies on the commodity front.
TGR: How do you take advantage of that opportunity now, though?
RS: We’ve never been forecasters of where markets go or actual prices of products, but we look and ask how we can make money in a particular time. We’ve been taking a longer-term approach with some of our catalyst-driven situations and then hedging out some of the systematic risk of the markets to receive benefit from those situations if markets go up and when those catalysts are realized, but also protecting downside by eliminating some of the systematic risk in our portfolio.
TGR: So you’re putting hedges into your portfolio.
RS: Absolutely.
TGR: One of your commentaries mentioned that as of May your portfolio was about 25% shorting and in June you felt more comfortable adding positions for a longer-term outlook. What happened that made you willing to put something down for a long term?
RS: We went into second quarter with a 25% short position, intending on keeping that stance for the near future. But when the markets rallied, we adjusted that position upward to about 35%. I felt more comfortable taking longer-term positions because risk tolerances over the last three or four months returned to the markets and we were in a position where—whether the markets were up or down—specific catalysts on the individual companies were being rewarded. So we were out of the panic-selling mode where fundamentals were irrelevant at the end of last year and into an environment where fundamental catalysts were absolutely being realized and reflected in the share prices. That was a big change.
TGR: So you basically returned to a more value-driven investment model, where if something happens, you see an increase in price rather than all up and all down.
RS: Yes, and we do feel comfortable taking positions for a longer-term view. Basically we believe we can get doubles and triples in many of our positions in a six- to eight-month timeframe. But, having said that, we have our hedges in place because those positions might be at risk of loss in the short term. We have to be cautious in this type of environment.
TGR: What are some catalysts you look for that make you feel more comfortable going into a long-term situation?
RS: In the small-cap market, particularly in Canada and in the resource sector, we have great relationships with some of the world-class mining financiers and technical groups, many of which are based in Vancouver. A number of companies are adding some very significant value to their asset base. They could be companies that are coming into production or expanding their deposits to create value; those are the type of catalysts that I think will provide the value over the mid term to be able to make money on, regardless of the markets.
TGR: When you’re looking at small caps, are you primarily looking at near-term and coming into production or are you looking also at exploration?
RS: We typically don’t look at either early-stage explorers or late stage producing assets. We’ve found our risk-to-reward ratios are best in the advanced-stage explorers with world-class assets, where there’s also a likely takeout possibility by some major resource companies.
TGR: When we chatted with you back in 2007, you were already bearish on the U.S. dollar. At that point, you felt gold would be a good place to invest. Is gold a major part of the portfolio now?
RS: At the end of last year, the biggest position in the fund actually was the gold ETF, GLD, in the U.S. It represented the largest percentage holding that the portfolio can hold. We had an intermediate gold producer as well that we were quite familiar with. When the gold price hit $1,000 in January, I made a counterintuitive risk reduction decision. I sold those two securities and bought a couple of catalyst-driven junior gold companies, the thesis being that going forward for 2009, the only visibility we really had was that we were going to have a reasonably good year for gold.
TGR: What did you consider would be reasonably good?
RS: That we would see $800 plus. Anything above that certainly would be a bonus. But more importantly, we saw global cash costs coming down from $475 to $400. In that case, you could theorize that the producers would have reasonably good cash flows and earning shares, but they still have declining reserves.
TGR: And how did you choose your junior golds?
RS: Only a handful of companies that I saw fell within the criteria that would be reasonable acquisitions for major gold companies. These juniors had near-term catalysts so that if the gold price declined (which it did), they wouldn’t be at risk as much because of those near-term catalysts. And if the gold price increased, they may not participate as much as the senior producers, but they would participate to a certain extent, and ultimately we’d be looking for that two- to five-fold return as a result of that potential acquisition within an 18-month time frame.
TGR: Can you share with us which juniors you saw as reasonable acquisition targets?
RS: Sure. One company we bought at the time and have added to is CGA Mining Ltd. (TSX:CGA) (ASX:CGX), which trades in Canada and in Australia. It was a near-term producer then, and has now poured its first gold. It looks as if CGA will declare commercial production in the third quarter of this year. In the first two years of operation the Masbate Gold Project in the Philippines will produce north of 200,000 ounces of gold a year and subsequently should get up to about 250,000 ounces with a mill expansion.
CGA has about a 2.3 million ounce reserve, but their global resource is probably in the range of around 10 million ounces with production cash cost of about $400 an ounce. I think what will happen with this company is that you get a rerating as they move into the producer status and I think it will fit the criteria of an acquisition by a major.
The second company we took on is International International Tower Hill Mines Ltd. (TSX.V:ITH) (NYSE.A:THM). Its Livengood deposit in Alaska is about 60 miles away from the Kinross Gold Corporation (TSX:K) (NYSE:KGC) flagship asset, Fort Knox. I visited both these assets and I think the Livengood deposit probably has north of 10 million ounces of gold and would be a nice tuck-in for Kinross or AngloGold Ashanti Ltd. (NYSE:AU) (LSE:AGD) (JSE:ANG) (ASX:AGG). Anglo already owns about 13% of International Tower Hill.
TGR: Does International Tower Hill share infrastructure with Kinross in Alaska?
RS: This is an interesting point. It looks as if the Fort Knox milling ore may run out over the next four to six years, in which case that mill infrastructure could be available and the Livengood deposit could potentially come online in the same timeframe as Kinross is expiring its ore for milling.
TGR: When you look at potential target companies, do you worry about who the potential takeover person or company is?
RS: No, I think we can identify which majors may have synergies with particular assets. In certain companies those assets and those suitors can be quite obvious, and in this particular situation there are a couple of obvious candidates.
TGR: Is the ability to discern obvious candidates part of what you use to determine whether there’s a catalyst?
RS: We typically like to see the companies have their own catalyst to generate value. If they have the extra optionality of a takeover, that’s icing on the cake, but we generally don’t rely on the asset being taken over. We want them to create the value on their own merits foremost.
TGR: You said a handful of juniors meet your criteria, and you told us about two. Would you share any others with us?
RS: We’ve recently taken a small position in Romarco Minerals (TSX.V:R). It’s in a very politically safe jurisdiction in that it’s in the U.S. It has a previous producing asset and some interesting history. It looks as if they’re expanding their reserve base from 1.5 million ounces to probably double that. We will see 50 or so assays coming out over the next few months, which should reflect that expansion. It could be a near-term producer as early as 2012 at a very low cash cost.
TGR: Ryaz, what advice would you have to individual investors who may want to invest in commodities?
RS: You have to realize that it can be a very volatile investment strategy. You need a long-term vision, back companies that have good assets, and particularly good management teams with track records of creating value. If individual investors can’t stomach that volatility, they should be making sure professionals manage those strategies for them.
TGR: Any other parting words you’d like to give to our readers?
RS: Happy investing.
DISCLOSURE: Ryaz Shariff I personally and/or my family own the following companies mentioned in this interview: None I personally and/or my family am paid by the following companies mentioned in this interview: None
Ryaz Shariff, based in Vancouver, B.C., is President of Primevest Capital Corp. and Portfolio Manager of its Primevestfund, which focuses on catalyst-driven investing. An entrepreneur whose background includes experience in M&A, restructuring, financing and business management, he has held senior management positions in early-stage companies. A graduate of Simon Fraser University and a Chartered Financial Analyst, he also spent part of his career as a broker specializing in retail and institutional sales as well as corporate finance.
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