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Follow the Management Names: Taylor MacDonald
Source: Brian Sylvester of The Gold Report (1/6/12)
Well-structured deals, quality assets and high-octane management teams with "enough cash to get through the next year or two" are what Pathfinder Asset Management Limited's Associate Portfolio Manager Taylor MacDonald is looking for. Read more about why he is bullish about the market in the long term in this exclusive Gold Report interview.
Taylor MacDonald: We have come to expect the unpredictability. Since 2008 volatility has become the new norm. You have to learn how to protect yourself in these hazardous times.
TGR: How has 2011 tested your bag of investment tricks?
TM: We focus on the long term, taking large positions in smaller companies. We look for unique assets, strong management teams and structure. In the past couple of years, we have learned to stick to our knitting, to what we do best.
TGR: And what would you say you do best?
TM: Our strength is identifying undervalued opportunities in the precious metals, energy, commodities and technology sectors. We like to find what I call concept companies early on. If necessary, we will provide whatever help we can to management teams as the investment theses unfold.
For example, Ridgeline Energy Services Inc. (RLE:TSX.V) went from a $20–30 million (M) market cap to a $90M valuation this past year. It will probably be one of the darlings of the Toronto Stock Exchange (TSX) over the next two to three years.
TGR: Recently The Gold Report interviewed a former fund manager who cautioned retail investors to stay away from hard assets for at least the next 12 months and sit in cash until the global economic picture becomes clearer. What is your view?
TM: There is some truth to that. However, it is in the times of the greatest uncertainty that the greatest opportunities are created. If you can find well-structured deals, quality assets and high-octane management teams with enough cash to get through the next year or two, I see this as a great buying opportunity. Valuations have been crushed; there are a lot of good buys out there.
The one thing you want to avoid is financing risk. Look for companies that have a nice war chest. Stick with those that will be able to carry out their business plans when everybody else is suffering. There are a lot of companies on the Toronto Stock Exchange Venture board that I don't think will be around a year from now.
TGR: In January, you nailed the call on the combination of the U.S. dollar breaking down and quantitative easing 2, "the perfect storm" that would push gold higher. While the gold price has appreciated considerably since then, it has fallen 15% from its high of $1,920/ounce (oz) in early September. What's your outlook for gold in 2012?
TM: I think 2012 will likely be a flat or somewhat off year. I can see $200–300/oz more downside in gold at most, though.
In 2008 and early 2009 there was a lack of faith in many equities, especially when currencies were failing. With the euro tumbling, the U.S. dollar becomes the go-to currency. Unfortunately, anything that is good for the U.S. dollar is bad for things priced in dollars.
But, looking at the long-term picture, I see a very bullish picture for gold. You can still find a lot of good investments in the gold space and we think that it deserves a space in portfolios from both a valuation perspective and an insurance perspective.
TGR: In late December the European Central Bank (ECB) offered European banks loans totaling the equivalent of $640 billion, the largest infusion of credit by the ECB into the banking system in the history of the euro. What's your perspective on the ECB's action?
TM: Only time will tell. This appears to be another Band-Aid solution. Until countries like Greece and Italy are forced to be more fiscally responsible, these loans are just temporary solutions. Taking from Peter to pay Paul, if you will. The issues in Europe are long term in nature and this is another reason that we have built volatility in as the new normal in our macro thesis.
TGR: Early in 2011, two-thirds of your fund was in resource-based equities: precious and base metals, oil and gas. Has that changed?
TM: Yes. We were fortunate to have pared back our precious metals positions into the bull run on gold. We reduced our exposure in the commodity space and were lucky to get out of some of our positions at or close to their highs.
We are now sitting at roughly half resource and commodity companies as a whole, with the balance in technology, special situations and the like.
TGR: How are you further mitigating risk in your fund?
TM: One way is by refocusing on a list of core names. We are investing in fewer new deals and trying to play them much better; buy once and get as much as you can. We are looking to positions that are much more consolidated and focused, to know the companies better and be much closer to them.
Typically, we look for companies with a fair bit of cash on the balance sheet. The only exception to that would be investing in a company with a really high-torque management team that will be able to raise money irrespective of the markets. There are certain guys I would be confident in even if the treasury is looking a little skinny.
TGR: Do you follow certain people in terms of management?
TM: We are trying to figure out whom the next mining industry "rock stars" will be. So far, I would name Amir Adnani, Ian Slater and Nolan Watson.
Amir is the co-founder of Uranium Energy Corp. (UEC:NYSE.A), North America's most widely followed new uranium producer. The company is about to turn the key on its Goliad In-Situ Recovery project in Texas.
Amir also recently founded a new company called Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX). It has a stellar management team. The CEO, Stephen Swatton, was head of business development and exploration for BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK). The management team also includes the former head of exploration for Kinross Gold Corp. (K:TSX; KGC:NYSE) in Brazil and Herb Dhaliwal, who was Canada's Minister of Natural Resources. In all, this team has been involved in discovering 10 million ounces (Moz) gold in Brazil. The company is looking for large, district-scale opportunities. Brazil Resources also has a strategic partnership with the Brasilinvest Group, Brazil's first and best-recognized merchant bank. Brazilinvest bought 10% of the company and is using its considerable local network to bring in gold projects.
This company has a very tight share structure with only 35M shares out. It just closed a $4.8M private placement at $1.10/share. All told, the company has over $10M in cash on hand.
TGR: And Ian Slater?
TM: Ian, who used to work with the Lundin Group, now runs three companies. Red Eagle Mining Corp. (RD:TSX.V) is based in Colombia. That company has two projects, Santa Rosa and Pavo Real, as well as a brownfield copper project called Mina Vieja.
He also runs Slater Mining (SLM:TSX.V) and a private company called Black Eagle Mining, which owns a metallurgical coal deposit in Alberta. Black Eagle should be going public in 2012, and I would definitely watch for that.
TGR: Red Eagle's Santa Rosa project is developing into a low-grade, bulk tonnage project. What are your thoughts on the initial drill results that came out on Santa Rosa in late November?
TM: Well, those results were low grade and didn't get the market excited.
TGR: Nothing seems to get the market excited right now.
TM: True. But Red Eagle has a great geological team and a good property package. The company has drilled 18 holes in the shear zone and has assays on five of them. We should see the rest in January. The preponderance of geological evidence tells us to expect some decent results going forward.
The company has drilled over a kilometer and a half, consistently returning 15 to 55 meters (m) of 1 gram per ton gold (g/t) with some high-grade veins. There is good potential for an open pit, heap-leach mine with a 1 Moz-plus gold deposit.
Red Eagle has also put two holes into Pavo Real, with the assays expected in January. The geo-chemical surveys on Pavo Real lit up like a Christmas tree. There were multiple trenches of 4 g/t and adits of 2.3 g/t over 27m and very significant gold and silver anomalies.
TGR: Red Eagle is trading at $0.75/share. Is that a good entry point?
TM: I believe so. We bought it privately at $0.75/share before it went public. We've made significant advances since then. Lumina Capital has come in as a strong supporter, which is good validation. I think it's tough to get hurt here.
TGR: You also mentioned Nolan Watson?
TM: Yes. Nolan is the former CFO of Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) and holds the record for being the youngest CFO of a NYSE-listed company ever. He currently sits at the helm of Sandstorm Gold Ltd. (SSL:TSX.V) and Sandstorm Metals & Energy Ltd. (SND:TSX.V). The companies provide non-dilutive financing alternatives to companies looking to put mines into production and provide investors with lower risk alternatives for mining investment. Nolan has been a true innovator in mining finance and I'd encourage people to follow him as he executes on his vision.
TGR: Which other equity positions made the cut when you pared your resource-based holdings?
TM: Our best pick remains Confederation Minerals Ltd. (CFM:TSX.V). It is earning a 70% stake in the Newman Todd gold project in the western portion of Northern Ontario's Red Lake Camp. The company has drilled over 60 holes on the property, with multiple intercepts returning several ounces per ton. The company has hit on almost every hole it has drilled. CEO Dr. Lawrence Dick has four major discoveries to his credit including Collahuasi and Can Can in Chile, Golden Bear in British Columbia and the San Jose silver deposit in Mexico. We are hoping this will be his fifth.
Confederation has $9M in cash and a $17M market cap. Newman Todd has multi-million ounce potential. I'd caution that there are some 9.6M $0.45 warrants that expire mid-January 2012, which is partly to blame for the depressed share price of late. Once these expire, I'd expect to see a lot of selling pressure evaporate.
It also owns half of a potash asset in Utah that it is combining with a company called Magna Resources Ltd. (MNA:CNX), which owns the other half of the asset. Confederation is putting $2M into Magna at $0.30/share. In a year or so from now, shareholders will get a distribution of roughly two-thirds a share of Magna for every share of Confederation they own. Notionally, that is worth up to $0.21/share and likely a whole lot more.
TGR: Where is Confederation at in terms of its earn-in agreement? Are you concerned that the company does not own that project outright?
TM: In terms of the earn-in, the company is on schedule. It has to spend $5M on exploration, issue 500,000 shares to Redstar Gold Corp. (RGC:TSX.V) and make a $250,000 cash payment to earn an initial 50%. It has to fund a preliminary assessment of the property, issue another 500,000 shares and pay another $250,000 by November 2015 to fully vest the earn-in. By our math, that means Confederation will have to spend another $12–15M, likely involving some underground exploration work. While it has until 2015 to do this, we believe this will be completed by the end of 2013.
TGR: What are some other names you are interested in?
TM: We like North Country Gold Corp. (NCG:TSX.V). The company is developing its Three Bluffs gold project, a large, open-pittable, multi-million ounce potential deposit, in Nunavut. It recently closed a $12M bought deal, which gives the company enough cash to continue drilling through 2012. There is massive potential for very high-grade gold from surface.
The concerns are infrastructure, given its location, and drilling expense. There is certainly consolidation in the region and a number of developing mines. But, I caution investors because it is expensive to operate up there and the exploration season is very short. At $0.75/share, down from just over $2/share, there is a lot of value in North Country Gold. And, there aren't a lot of higher-grade open-pittable deposits in the world.
The management team includes John Williamson, who is part of the Discovery Group, the same group that spawned Kaminak Gold Corporation (KAM:TSX.V). North Country is following a similar model to Cumberland, which owned the Meadowbank gold deposit. That was purchased by Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) for about $710M back in February 2007. A more recent yardstick transaction was Agnico's purchase of Comaplex for its Meliadine project for $739M in April 2010. Agnico is actively consolidating the gold space in Nunavut and I'd expect North Country to eventually be a target for them.
TGR: Perhaps one or two more names?
TM: I am a big fan of Trevali Mining Corporation (TV:TSX; TREVF:OTCQX). This is a silver-lead-zinc producer or near-term producer that has fallen slightly out of favor. The company has two mines, one in New Brunswick, Canada, which should be flipping the switch on production right about now. The other is the Santander mine in Peru.
My numbers say we are looking at $30M+ in cash flow next year and $80–90M cash flow in fiscal 2013 from Trevali.
Zinc has been trading at depressed prices relative to most of its peers. A lot of production comes from China and India, and a lot of production is too expensive to bring on-line given the current price environment. However, a lot of people are forecasting supply shortages in 2014.
Trevali operates the Santander mine with Glencore International A.G. and Xstrata (XTA:LSE), neither of which took an equity interest in the company. From what I can see, Santander will be in the top quartile of production costs, at less than $0.30/pound of zinc equivalent. I see this as a no-brainer takeout candidate.
TGR: And a last name?
TM: I would end with Cream Minerals Ltd. (CMA:TSX.V), which is one of the exceptions to my cash-position rule. It does not have a huge cash position, but I like its flagship asset—the Nuevo Milenio mine in Nayarit, Mexico. The company has great infrastructure and a really good management team. This project has a 54 Moz silver equivalent resource. The average grades are around 250 g/t silver and 1.7 g/t gold.
We expect a new resource estimate this quarter at about twice the current resource and the company has just completed a 20,000m drill program. It has very strong institutional shareholders in Sprott and Pinetree.
We got involved because this is one of the cheapest advanced exploration silver stories out there. It is trading at roughly $0.60/oz silver equivalent in the ground versus about $1.50/oz for its peer group, and this is before the resource upgrade. Some early takeout bids were blocked by shareholders. Endeavour Silver Corp (EDR:TSX; EXK:NYSE) tried two unsuccessful hostile bids last year. Minco Silver Corp (MSV:TSX) tried to ink a joint venture for 70% of the project, which shareholders refused.
There also are a number of $0.24 warrants, largely owned by Sprott and Pinetree. According to management, some of those warrants have been getting exercised. If they all are exercised, it will fully fund the company for the foreseeable future. That may be what is happening. Although the share structure is among the worst in our portfolio—I think there are 230M shares out there—if you look at it on a dollars-per-ounce basis, it is extremely attractive.
TGR: Are you happy to see 2011 in the rearview mirror?
TM: Absolutely. While there is more turbulence to come—the proverbial black swans getting sucked into jet engines—overall I am optimistic. I think the long-term, bullish picture for commodities in general is still intact.
TGR: Taylor, thank you for your insights.
Taylor MacDonald is an associate portfolio manager at Pathfinder Asset Management Limited. He graduated from the Wharton School, University of Pennsylvania, with a bachelor's in economics in 2004. Prior to Pathfinder, he worked in equity research at Raymond James Ltd. in Vancouver, investment banking with Haywood Securities (UK) Ltd. in London, England, and institutional equity sales at RenCap Securities in New York. He has been a CFA Charterholder since 2009 and is a Level II CAIA candidate.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Red Eagle Mining Corp. and of The Energy Report: Uranium Energy Corp. Streetwise Reports does not accept stock in exchange for services.
3) Taylor MacDonald: I personally and/or my family own shares of the following companies mentioned in this interview: Ridgeline Energy Services Inc. I own shares in the fund, which owns Confederation Minerals Ltd., Cream Minerals Ltd. and Trevali Mining Corporation. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.