Steve Yuzpe: The main driver and the rationale in selling our remaining gold holdings was to improve our financial flexibility. Recent volatility in the gold price was making it challenging for us to maintain a capital plan that allowed us to support our existing portfolio companies and also make new investments. Now, we have about $24M in net cash, which we'll use to pursue investments and support our investees. We see precious metals, energy and agriculture as the key themes at Sprott Resource Corp. that we want to pursue.
TMR: What will those investments look like and what will they have in common?
SY: It doesn't matter whether its energy, agriculture or precious metals, we look to partner with proven and successful management teams. We want to operate in geopolitically safe and mining-friendly jurisdictions. We want to work on projects that will have something unique about the actual deposit or geological resource, whether it's world-class scale or a low-cost producer and of course, we need to acquire the company at the right valuation.
TMR: Are energy equities perhaps borrowing the spotlight that once belonged to gold and silver at Sprott?
SY: Not necessarily. Today we have a large concentration in the energy sector and no exposure to the precious metals sector. That isn't the way we expect to be positioned over the long term. It just happens to be where we are right now. I'd like to see Sprott Resource Corp. with a more balanced portfolio in the three sectors.
TMR: Are you bullish on precious metals in the long term?
TMR: One of Sprott Resource Corp.'s four core beliefs is that peak oil is real and that we're on the downward side of that equation. Is that still the case despite all the success that fracking has had in the U.S.?
SY: Peak oil is still real because there's a finite amount of everything. The success of fracking unconventional deposits and finding new hydrocarbon deposits in places that were unimaginable five years ago, like off the coast of Brazil underneath a mile of water and half a mile of salt, is certainly amazing. Peak oil will be, in all likelihood, pushed out on the timeline, but the era of cheap energy is receding. That's changing the economics of the energy sector. It makes it all the more challenging to navigate as an asset class. But where there are challenges, there are investment opportunities with the potential to deliver good returns.
TMR: What percentage of Sprott Resource Corp.'s assets is in the energy space?
SY: If I include actual exploration and production companies (E&Ps), as well as the energy services sector, it's about 60%. Our investments in the energy sector are primarily in light and heavy oil and natural gas, uranium and the services sector. We buy when commodities are cheap and we see opportunities over the next few years, meaning the commodity is likely to move back to its mean price or beyond and has the potential to create good returns. Those areas are natural gas, metallurgical coal and uranium. Those are the places where we see a lot of value right now.
TMR: Sprott has a 19.9% ownership stake in Virginia Energy Resources Inc. (VUI:TSX.V; VEGYF:OTCQX), which is developing the Coles Hills project in southern Virginia. But there's a moratorium on uranium mining there. Why would you take such a large stake in a junior with that much risk?
SY: Due to the moratorium, we were able to buy a stake in a large uranium deposit at a huge discount to the project's estimated net asset value (NAV). We believe that the U.S. is going to have to, at some point, develop domestic supplies of uranium. The U.S. already imports 90% of its uranium today and 20% of its energy is derived from nuclear power. Something's got to give there. Buying into a deposit at a huge discount gives us the opportunity to make an outsized return as it goes through the stages of development. Obviously, if the mining law doesn't change, we won't make any money on the investment. But, if the mining law does change, I believe that Virginia Energy will get rerated. We can take a very long-term view in the development of these assets. The risk/reward was absolutely in our favor.
TMR: The Coles Hill project has 133 million pound (133 Mlb) Indicated resource. That makes it among the largest undeveloped uranium resources in the U.S. If that law changes, is it a takeover target?
SY: It's more likely to be a takeover target if it can take the next step, which is getting permitted.
TMR: Should investors expect a dramatically different market environment for resource equities in the coming year?
SY: Our outlook is that it's going to continue to be a tough market. We believe that will create opportunities for us to deploy capital into undervalued assets that will benefit when the various sectors recover.
TMR: When you became president of Sprott Resource Corp., Rick Rule became a managing director. What does someone like Rule add to the firm's perspective on mining and resource equities?
SY: Rick is a gifted and brilliant investor who has seen hundreds, if not thousands, of transactions. He brings an enormous wealth of experience, not just in finding value, but in executing transactions. Rick is also plugged into the junior markets and deal flow, which will lead to better outcomes for our shareholders, junior resource companies and the Sprott group.
TMR: Is he involved in specific investments?
Maria Smirnova: Yes. Rick is very much involved. We interact on specific stocks on a regular basis. He's very hands on.
TMR: Since the crash in 2008, Sprott Asset Management has participated in dozens of financings in junior precious metals companies. Some created shareholder value while others have fallen victim to the bear market. How has the investment strategy during this tumultuous market informed your investment strategy heading into 2014?
MS: In the mining sector specifically, we've become more focused on what we call "survivability." We're in a tough market environment. It's tough for juniors to raise money. I specifically focus on companies that I think will survive the tough times.
In other words, we look at financial strength. We look at management teams and their ability to allocate capital. Have they cut costs? Have they rationalized production? Can they make the tough decisions to protect their shareholders? Our focus is on quality projects with higher grades and strong economics that will allow the company to succeed through this tough environment.
TMR: Do you expect another rise in all-in sustaining costs for gold producers?
MS: All the companies I look at are trying to reduce those costs. In the good times, people just looked at cash operating costs and didn't pay much attention to the other costs that go on top of it, such as the sustaining development, exploration and so on. Now, because the gold price has come off, people have started focusing on these all-in sustaining costs. Yes, costs have risen in step with the gold price, but we're hoping that going forward they will actually start to reduce as companies try to rationalize their cost structures, reduce exploration expenditures and ice unprofitable projects.
TMR: One of the other core beliefs at Sprott is that governments will continue to print money. Yet investors seem to dismiss the thesis that gold and silver will eventually rise given the proliferation of paper currencies. How do you respond to that?
SY: It's hard for people to move beyond the current market dynamics and see the underlying structural weakness in global economies. At some point, the impacts of all this accommodative monetary policy, printing and quantitative easing (QE) are going to become evident through inflation. Once that happens, people will place their faith in gold and silver as stores of value and their value will rise. That's why this is the right market to start making investments and for Sprott Resource Corp. to position our portfolio into undervalued asset classes so that when the markets change, be it one, three or five years, we'll be positioned to take advantage of it.
TMR: Do you believe it will be closer to one or five years?
SY: My best guess would be in the middle. The price of gold and silver could start really moving up in three years. But I know that Maria will have a very different view on that.
MS: I actually agree. There's been a lot of debating about QE and when or if the Federal Reserve will start tapering. We saw in the summer what happened at the mere mention of tapering—it sent markets into a tailspin.
We actually don't believe that the Fed has a lot of room to taper. All this QE has not translated into expectations for higher inflation, but eventually, as this is worked through the system, it will happen. That's when precious metals will benefit.
TMR: You've said before that you believe in investing in equities as a way to play a given commodity. What would your top-of-mind commodities be at this stage?
MS: We're still bullish on precious metals—gold and silver—and we're quite bullish on platinum and palladium.
TMR: Eric Sprott has said that some of the numbers being bandied about by gold prognosticators are flawed. He's very bullish on gold and sees it going to above $2,000 per ounce ($2,000/oz). What's your forecast for 2014?
MS: I don't forecast specific prices. When I look at specific companies and forecast their earnings and cash flows, I use the spot price at the time. If today gold is at $1,230/oz, I will use that price for the next several years. That allows me to compare equities across the board on an equal footing without making assumptions on the gold price.
The case for gold remains one of fundamentals. Despite all the tapering and QE debates, certain areas of the world are still strong buyers. China has been an unbelievably strong buyer of the metal. India's actually imposed import tariffs to try to reduce imports of gold, so a large portion of the demand has moved to silver, which does not carry the same import restrictions as gold.
TMR: Two examples of companies involved in the gold and silver space, respectively, are Unigold Inc. (UGD:TSX.V) and Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ). Can you comment on these stories?
MS: Of course. Unigold is an exploration story with a project in the Dominican Republic. The company has been active in the Dominican Republic for a decade now. It has just released a new resource estimate for part of its Neita concession, which came in at 2 million ounces (2 Moz) at 1.6 grams per ton. The market capitalization of the company is quite small at $15M, so it makes for an interesting exploration story.
Silver Standard Resources is focused on developing silver assets in the Americas. The company is currently operating a mine in Argentina with production north of 8 Moz per year. It also has a number of development projects in Mexico, Peru, Argentina and other countries. With over 1 billion ounces in resources, the company is trading at approximately $0.25 enterprise value per ounce in the ground.
TMR: What about platinum and palladium?
MS: Platinum and palladium is a two-prong story. Demand is being driven by their use in automobile catalytic converters. Countries like China and Europe are introducing progressively stronger environmental laws with higher emission standards that are prompting more use of the metals in cars. Supply, however, is being disrupted. South Africa is a big producer of platinum and palladium, but it is experiencing strikes and an inability to increase supply. The supply and demand picture in both platinum and palladium is quite strong. In fact, we project substantial market deficits in both metals for several years to come, which will be supportive of the metal prices.
TMR: You often deliver some compelling narratives on the commodity space. What trends to you expect to see unfold in 2014?
SY: I think resource investors will see 2014 as a tough year—a continuation of the very difficult market in 2013. But it's also going to be a great opportunity to set yourself up and take positions that will lead to very compelling opportunities for strong returns beyond 2014.
MS: I actually think we might be surprised by what happens in 2014. Everyone is so negative on the equities and on these metals that we might be surprised by what a strong year it turns out to be. The equities have been beaten down. Some of them offer significant value and investors will step in and start buying them.
TMR: Which segments offer the best hope for investors?
MS: The midcaps—companies with production and growth—are the best bets. They will not necessarily require financing. They already have development projects that they're building. They're growing, whereas the large caps don't necessarily offer growth. If investors return to the sector, it might be the midcaps that benefit the most.
TMR: Thanks for sharing your insights with us today, Maria and Steve.
MS: Thanks for having us.
SY: Yes. Thanks, Brian.
Steve Yuzpe was named President and Chief Executive Officer of Sprott Resource Corp. in 2013. He has over 15 years of executive and financial management experience with public and private corporations. Over his career, Yuzpe has developed specific expertise in financings, restructurings, financial and internal reporting, strategic development and business planning, corporate governance, investor relations, regulatory compliance and treasury management. Prior to being appointed President and Chief Executive Officer, he served as the Chief Financial Officer of Sprott Resource Corp. Yuzpe holds a Bachelor of Science in mechanical engineering from Queen's University along with the Professional Engineering designation (P.Eng.) and a Masters in Business Administration from the Richard Ivey School of Business in London, Ontario. He is a CFA charter holder.
Maria Smirnova joined Sprott Asset Management as a research associate in May 2005, and was appointed associate portfolio manager in February 2010. She currently co-manages the Sprott Silver Equities Class with Eric Sprott and Charles Oliver. She is also responsible for supporting the portfolio management team in the precious metals and mining space. Smirnova has over 12 years of experience in the financial services industry; she began her career at Excel Funds Management as operations manager, and subsequently worked in product development at Fidelity Investments. Smirnova graduated with distinction from the University of Toronto with a Bachelor of Commerce degree and obtained her CFA charter in 2002. She graduated as a Bregman Scholar from the University of Toronto's MBA program in 2005.
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1) Brian Sylvester conducted this interview for The Mining Report and provides services to The Mining Report as an independent contractor. He 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 Mining Report: Virginia Energy Resources Inc., Silver Standard Resources Inc. and Unigold Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Steve Yuzpe: I or my family own shares of the following companies mentioned in this interview: Sprott Resource Corp. and Sprott Inc. I personally am or my family is paid by the following companies mentioned in this interview: Sprott Resource Corp. and Sprott Inc. My company has a financial relationship with the following companies mentioned in this interview: Sprott Resource Corp., Sprott Inc. and Virginia Energy Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Maria Smirnova: I or my family own shares of the following companies mentioned in this interview: Sprott Inc. I personally am or my family is paid by the following companies mentioned in this interview: Sprott Asset Management. My company has a financial relationship with the following companies mentioned in this interview: Silver Standard Resources Inc. and Unigold Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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