(IBTimes) -
Gold and Base Metal Plays: Jerome Hass and Jimmy
Chu
Source: Peter Byrne of
The Gold Report
(5/11/12)
http://www.theaureport.com/pub/na/13342
Toronto-based hedge fund managers Jerome Hass and Jimmy Chu of
Lightwater Partners discuss their strategic approach to taking
long positions on gold, zinc and tungsten opportunities around
the world. In an exclusive interview with
The Gold Report
,
the Lightwater principals reveal several precious and base metal
plays in which they have purchased stakes and define their
criteria for limiting risks when taking on junior mining
investments.
The Gold Report:
Does Lightwater Partners have a regional bias when looking at
precious and base metal equities?
Jerome Hass:
Yes, we do have a preference for Canada- or U.S.-based
investments, largely because of the political stability and the
rule of law. By that, we mean a stable legal jurisdiction, which
is important if things go wrong-as investors are discovering
currently in places like Mongolia or Argentina. That said, not
all of the North American states and provinces are equally mining
friendly. We are cautious about gold companies based in British
Columbia or Montana. We look far more positively on projects
located in Ontario, Québec or Nevada.
TGR:
Do you favor junior mining firms that are directly engaged in
exploration and operation, or enterprises that buy and hold
properties until it becomes feasible to sell them to more
practiced developers?
Jimmy Chu:
We rarely look at exploration plays, because we just don't find
the risk-adjusted return to be attractive. We prefer to look at
near-term developers, but not at those that are actually building
a mine. For us, the value-added proposition is in proving up the
economic case for a mine, but not in construction or operation.
However, we will look at a company that has already built a mine,
is operating it and is exhibiting good management skills.
TGR:
How do you assess management skills?
JC:
We meet directly with the managers. We look at management's track
record and at how it has delivered against investor
expectations.
TGR:
Do you have a strategy for hedging on gold and precious metals
and base metals?
JH:
Hedging is tricky for most junior mining or gold companies. There
are a number of options available. One option is to use physical
gold as a means to short a position. The problem with that
strategy is that positions in physical gold and equities rarely
move hand in hand. Another option is to short the equities
themselves. But, this is a real problem when the entire junior
gold industry views itself as a potential takeout. That's a big
risk when you're a short seller.
Large-cap stocks are easier to short as there is less of a
takeout risk. Of course, large-cap and small-cap stocks can react
differently depending on market conditions.
Another option is to use a proxy for junior gold ore on the
Toronto Venture Exchange, such as a Canadian stockbroker, because
a lot of its profitability and revenues come from junior mining
issuance and corporate finance. We tend to use all four
approaches to hedging, although no one of them is perfect.
TGR:
What gold ventures excite you today?
JH:
We rarely look at exploratory ventures. We do focus on companies
with near-term catalysts. For example, we like
Oromin Explorations Ltd. (OLE:TSX;
OLEPF:OTCBB)
. It is more of a developer than an explorer. In fact, we
recently met with Oromin's managers. They said that acquisition
negotiations are ongoing for its joint venture group in
Senegal.
Interestingly, Oromin is only covered by one analyst on the
Street. Its story is not well known. It should receive its
environmental approval in Senegal within the next couple of
weeks. And, once that is done, its project will be
construction-ready. Given that Oromin has access to 3.3 million
ounces (Moz) gold, as indicated in an NI 43-101 compliant
document, we think it's quite attractive.
Also interesting is a nearby property held by
Teranga Gold Corp. (TGZ:TSX; TGZ:ASX)
. Teranga operates a gold mine equipped with an underutilized
mill. There are obvious synergies between Oromin and its
potential mine and Teranga and its existing mill. On top of that,
IAMGOLD Corporation (
TSX
) and Randgold Resources Ltd. (GOLD:NASDAQ) operate gold mines in
the same region.
TGR:
What about Oromin's Canadian ventures?
JHs:
Oromin's main asset is in Senegal. The Canadian operations are
minor, and we attach zero value to them.
TGR:
How do the costs of mining production in Africa, including
environmental and labor costs, compare with those in Canada?
JH:
The operating costs are lower in Africa. Of course, the cost of
capital is the same, given that Canada is the principal financial
center for mining and mining capital.
TGR:
What junior gold mining firms interest you in Canada?
JH:
Auriga Gold Corp. (AIA:TSX.V)
is revving up its Maverick gold project in Manitoba. That is a
very safe jurisdiction-a mining friendly province. Maverick is an
advanced stage project, with infrastructure already in place from
a past-producing mine. Auriga is restarting Maverick's mill,
which is in good condition and worth $25 to $50 million (
M
). That alone translates into $0.50 to $1.00 per share, and
compares to a $0.25 share price.
But even if there were no ore body to exploit, Maverick is
still an attractive deal strictly from the perspective of the
mill. Adding value is a shallow open pit with a very low strip
ratio at surface. The combination of the existing mine and the
very shallow ore body makes Maverick a highly economic project.
It should be up and running by early 2013 at a cost of only
$18M.
I can't think of another project around the world that can get
up and running for only $18M in capital expenditure. The payback
is only 20 months, and the cash flow is projected to be $130M
over the mine's projected life of 7 1/2 years. The internal rate
of return on the initial phase of the project is 88%, which is
extremely nice.
TGR:
Who do you favor among mid-cap gold stocks?
JH:
Looking for near-term catalysts, we like
Seabridge Gold Inc. (SEA:TSX; SA:NYSE.A)
. Surprisingly, it has an $636 million market cap and 38 Moz gold
in reserves, yet there's not one analyst that covers it on the
Street. The reason for that is the business model: Seabridge
hasn't had to raise equity. Consequently, the Street's not paying
attention to it.
In 1999, when gold was $300/ounce in 1999, the Seabridge
principals saw opportunities where the capital markets just
weren't interested. Seabridge scooped up gold properties knowing
that when gold rose in value it would benefit. The Seabridge
business model is to develop these properties to the stage where
they should be built, but they don't build them out themselves.
What we find attractive is that Seabridge has clearly recognized
its own management strengths: drilling and proving the economics
of a mine.
By way of catalysts, in mid-May, Seabridge is scheduled to
produce an updated pre-feasibility study on its
Kerr-Sulphurets-Mitchell (
KSM
) project in British Columbia. KSM is probably the largest
undeveloped ore body in the world. The study is the second to
last stage before putting the company up for sale. Seabridge
intends to find a joint-venture partner within 12 months of the
release of the updated prefeasibility study. The final catalyst
before going up for sale is approval of the environmental
application. That will probably happen in September. At that
point Seabridge will have a mine plan ready for a major
buyer.
TGR:
What about the local mining infrastructure? Can it handle
KSM?
JH:
KSM is close to cheap power and close to a highway. It has
year-round port access, a very low strip ratio and a projected
long mine life. All the things you want to see in a mine. The
problem is that it's so huge that there are a limited number of
players who are big enough to develop it. Pulling this off will
require a firm along the lines of Barrick Gold Corp. (ABX:NYSE;
ABX:TSX), Newmont Mining Corp. (NEM:NYSE) or Freeport McMoRan
Copper & Gold Inc. (FCX:NYSE).
TGR:
What about base metal mine development? Does that sector fit your
risk-adjusted portfolio?
JC:
We tend to shy away from base metals, with the exception being a
small company that is a pure play on zinc. That's
Tamerlane Ventures Inc. (TAM:TSX.V)
. It owns a zinc-lead mine called Pine Point in the Northwest
Territories. It's a restart of a mine that was operated by
Cominco Ltd., which is now owned by Teck Resources Ltd.
(TCK:NYSE; TCK.A:TSX).
TGR:
Pine Point was closed, but it is now being revitalized? How
so?
JC:
Teck had shut down the mine because it had developed its Red Dog
mine, which is one of the world's most prolific high-grade zinc
mines. There's no question that Red Dog is the better ore body,
but Pine Point is also attractive based on its fundamentals and
valuations. It will provide an independent source of zinc
concentrate, which is very much in global demand by both smelters
and traders.
TGR:
Does Lightwater invest in other metal commodities?
JH:
We like tungsten. Its fundamentals are attractive from a supply
and demand point of view. China stopped exporting tungsten
concentrate in 2000; at the same time demand for tungsten
increased. The tungsten fundamentals have improved for
non-Chinese producers globally.
Tungsten is used as a composite material because of its
hardness-it is second only to diamonds. Because tungsten is heat
resistant, it's used in high-speed cutting tools, jet engines and
light bulb filaments, as well as a replacement for lead in
certain applications. Overall, there is a nice combination of
increasing demand and tightening supply.
It is worth mentioning that Warren Buffet's Berkshire Hathaway
has recently invested in the tungsten space. That has focused
investor attention onto this rather obscure market.
TGR:
Are there any companies that you're attracted to in tungsten?
JH:
We like a pure play on tungsten through a company called
North American Tungsten Corporation Ltd. (
TSX
)
. It has the Cantung mine in the Northwest Territories. It's
small, but it accounts for 4% of world tungsten production. Its
output is improving due to the purchase of Caterpillar equipment,
which has really helped operational reliability because it is
located in a remote region, and temperatures can plunge to minus
40 degrees.
TGR:
What is the quality of the Cantung tungsten?
JH:
The Cantung grade is very high by global standards: about 1.1% on
average. The global average is about 0.3%. American Tungsten
tested the mine's old tailings and found a grade of about 0.3%.
That means that the company can enhance Cantung's mine life by
processing those tailings. But, what's even more exciting is
North American Tungsten's new development project called the
Mactung deposit. It's one of the world's largest undeveloped
high-grade tungsten deposits. Permitting is ongoing.
TGR:
That's all good information. Do you have any names to add,
Jimmy?
JC:
A company called
Orbite Aluminae Inc. (
TSX
)
has patented a new technology to extract alumina from aluminous
clay deposits. There was a lot of controversy surrounding certain
overstated claims in Orbite's preliminary economic assessment in
late March and trading was briefly suspended. But those issues
seem to have been resolved. We have met with Orbite management on
numerous occasions and we flew out to Gaspé, Québec, to see their
pilot plant. It's potentially a game changer.
TGR:
Thank you for your time.
JH:
Thank you.
Based in Toronto, Canada, Lightwater Partners is an asset
management firm specializing in alternative investments.
Partner
Jerome Hass
has 16 years of experience in the financial industry. He joined
Lightwater from Epic Capital Management. Previously, he was a
portfolio manager and head of international equities at
Montrusco Bolton Investments, where he managed $450 million
directly, co-managed large global funds and oversaw $1 billion
in private wealth. Partner
Jimmy Chu
has 10 years of experience in hedge and investment funds. At
Lightwater he focuses on developing detailed financial models
for existing and potential equity investments, which are used
as a tool for making investment decisions.
Want to read more exclusive
Gold Report
interviews like this?
Sign up
for our free e-newsletter, and you'll learn when new articles
have been published. To see a list of recent interviews with
industry analysts and commentators, visit our
Exclusive Interviews
page.
Disclosure:
1) Peter Byrne 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:
None. Streetwise Reports does not accept stock in exchange for
services.
3) Jerome Hass: I personally and/or my family own shares of the
following companies mentioned in this interview: Orbite Aluminae
Inc., North American Tungsten Corporation Ltd., Auriga Gold Corp.
and Oromin Explorations Ltd. I personally and/or my family am
paid by the following companies mentioned in this interview:
None. I was not paid by Streetwise Reports for participating in
this story.
4) Jimmy Chu: I personally and/or my family own shares of 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. I was not paid by Streetwise
Reports for participating in this story.
Streetwise -
The Gold Report
is Copyright © 2012 by Streetwise Reports LLC. All rights are
reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only
in whole (and always including this disclaimer), but (ii) never
in part.
The Gold Report
does not render general or specific investment advice and does
not endorse or recommend the business, products, services or
securities of any industry or company mentioned in this
report.
From time to time, Streetwise Reports LLC and its
directors, officers, employees or members of their families, as
well as persons interviewed for articles on the site, may have a
long or short position in securities mentioned and may make
purchases and/or sales of those securities in the open market or
otherwise.
Streetwise Reports LLC does not guarantee the accuracy or
thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are
listed on the home page in the In This Issue section. Their
sponsor pages may be considered advertising for the purposes of
18 U.S.C. 1734.
Participating companies provide the logos used in
The Gold Report
. These logos are trademarks and are the property of the
individual companies.
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8999
Fax: (707) 981-8998
Email:
jluther@streetwisereports.com
Original Source:
http://www.ibtimes.com/articles/340244/20120511/gold-canada-base-metals-precious-metals-tungsten-large-cap-smal-cap-mid-cap-junior.htm
For more information, go to
www.ibtimes.com