Jared Sturdivant: Distressed Companies Offer Gold
Source: George Mack of
Jared Sturdivant, portfolio manager and managing partner of
O-Cap Management, LP, likes to find special-situation investment
opportunities, which include companies that have "good assets and
bad balance sheets." When he finds them, he digs deep to
ascertain their value and looks for the catalyst that will turn
them into attractive investment opportunities. In this exclusive
The Gold Report,
Jared talks about which companies in the metals sector look
good to him now.
The Gold Report:
Jared, welcome to your first interview with
The Gold Report.
Could you share how O-Cap Management works?
We are an investment fund, really a hybrid between private equity
and a traditional hedge fund. We take a long-term approach to
investing in public equities and pre-IPO private situations, as
well as distressed debt or structured financings. Our investors
have to be qualified.
Because you delve into private equity, do investors have to
commit for a predefined period of time?
Yes, we basically have a three- and five-year class. Generally,
anything we own that is private is on its way to becoming public
within 12 months or so; or in the case that it's a debt security,
matures within roughly 24 months.
So, you don't commit to liquidate the fund at some future
No. It's an open-ended fund structure.
How did you get interested in private equity?
My background is in bankruptcy and distressed investments. When
the world started melting down in 2008 and 2009, we saw a real
opportunity to buy great assets ahead of what we thought would be
the perfect storm for an inflationary environment down the road.
We decided to focus on hard, tangible assets-metals and mining,
energy, real estate and infrastructure.
A lot of the traditional folks who invest in public markets
typically can't do illiquid investments. We wanted to structure a
fund that could capture what we saw as a big part of the value
chain, which is to own something that may be a little illiquid
(quasi-private) or pre-IPO.
We also structure credit investments. A lot of times that
involves structured, one-off financing that requires the ability
to hold something illiquid. That's really how O-Cap has gotten to
my areas of interest. I've always had a fascination with
investing and kind of cut my teeth on the distressed side, where
we looked at companies that may have great assets but a bad
One more question about private equity before we move on. Is the
main advantage the fact that these firms don't have to report to
investors every 12-13 weeks?
Yes, it's a big advantage. When a company is public-for better or
worse-Wall Street's always knocking on the door. It always has to
be aware of what Wall Street is saying. They have to hold
conference calls. Some public companies take on the burden of
giving guidance, which is a bit of a distraction when it comes to
running a business. We like it when we have great management
teams that can really focus on operating assets instead of
meeting the latest Wall Street estimates.
As I understand it, distressed opportunities could appear either
as private or public equity. Do you have a favorite type of
We love what we call "good assets, bad balance sheets" companies.
When you restructure or recapitalize these companies, you can
really garner a lot of value. You can right-size the company's
balance sheet with its assets. We've seen, over time, that you
can create a lot of economic value for shareholders. Part of it
has to do with timing. We really like to be the last dollar or
financing before a mining company moves from exploration to
production and, therefore, self-funding.
Those are stories where you have to go in and create the value.
Is that right?
Yes. You buy deep-value assets that wouldn't have value if you
weren't restructuring the balance sheet. But a big part of the
value-creation process is how the debt is restructured.
Do you short stocks?
We do short stocks. I'd say the predominance of what we do is
Do you use derivatives?
We do a little bit. Not a whole lot.
What's the first thing you do when you're beginning to perform
due diligence on a new company?
When we come across a company that we think is interesting, we do
a data dive. We read the 10K and the Q and read as much as we can
about the company. We read all the analyst reports, and then we
set up a call with the management team. That's our basic
How often do you get to that point and realize you'd like to
replace a company's management?
Unfortunately, we do come to those situations. I'd say 10%-15% of
the time you come across situations where management is sort of
the issue. From that point, you have to decide whether to go
ahead with a bad management team, try to effectuate change or
For the rest of our conversation, I'd like to talk about public
companies because those could be of value to our readers. Do you
have examples of companies that meet your criteria that you've
taken a chance on?
Sure. We look for two underlying components in an investment:
Value and a catalyst. Typically, the catalyst is a restructuring
of some sort. One company on the gold-/silver-mining side is
Comstock Mining Inc. (
. What was interesting about Comstock (formerly known as
GoldSpring) is that it had assembled a large area of land around
the historic Comstock Lode Mining District in Nevada. Since the
1800s, that district has produced 8 million ounces (Moz.) of gold
and 190 Moz. silver. Comstock put this big property together
through debt financing. However, it was a penny stock and it was
headed for bankruptcy.
Then, an investor by the name of John Winfield bought up a lot
of the debt, consolidated and converted it into a preferred
structure. He could've filed bankruptcy for Comstock but
restructured the company and kept it public instead. He
effectively transitioned that debt to a preferred stock, which
prevented a Chapter 11 process. Shortly thereafter, the company
did a major refinancing. It financed US$35M of new convertible
preferred stock to outside investors. This, along with hiring new
CEO Corrado De Gasperis, was a major game-changer. It saved the
company from bankruptcy.
Corrado laid out three aggressive targets, which we thought
were very attractive. The first was to increase the
gold-equivalent ounces (Au Eq.) from 1 Moz. to +3 Moz. The second
was to enter production in the second half of 2011. And, the
third was to get 2012 production up to 24 Moz. Au Eq.
What we really like about the situation is that you're buying
an exploration company that is converting to a producing company
that's growing resources substantially. We think it will have
cash costs of $450-$500/oz., so Comstock could do US$20M in cash
flow next year very easily. And, the company's got two projects.
The Dayton Phase 1 drilling program is now hitting bonanza-type
grades, so there's a lot of resource upside as the property
continues to get drilled.
We looked at this and said, "Wow this is interesting." Not
only do you have a company going from an explorer to a producer,
but also you have a new management team with great plans for a
resource upgrade. Comstock also has an AMEX listing coming in
May, which is another tangible catalyst.
When you look at the valuation, if Comstock gets valued like a
producer, you've got multiple upsides from here. If the company
continues to grow the resource base, once it starts producing 3,
4 or 5 Moz., Comstock really starts showing up on the radar of
acquirers. We think that's attractive.
Will Comstock have to go back to the market for financing?
No, the company is fully financed. Its last financing for US$35M
provided all the financing it'll need to take Comstock through
production and even provides another US$15M for additional
exploration. If this company gets valued at US$200/oz., which is
pretty conservative, and gets to its 3.25-Moz. target that
Corrado set, you're talking about a US$7 stock.
And that would be before a takeout premium.
Right, that's not a takeout premium. What we saw is a situation
wherein a company was transitioning from an exploration to a
production company and had restructured its balance sheet with no
further capital needs. That gives you a chance to be the last
dollar in before it makes that transition. We think Comstock will
be valued like a production company, eventually, and you're going
to get that upside. So, we're pretty happy with that
Is there any significant risk?
Anytime you're with a resource company, it's probably not a good
thing if the commodity price goes down. We think this project has
been derisked. It is in a historic mining district that has
produced a lot of resource, and recent drilling has firmed up the
resource base. We don't think there's a lot of risk to the
resource per se, but commodities always carry risk.
Assuming, for the sake of argument, that gold could slide to
US$1,000/oz., could Comstock still have upside?
Yes. When your cash costs are US$450, you've got a big margin and
you're a relatively low-cost producer.
Very good. Can you tell us about another opportunity that meets
Sure. One company that's a bit of a complicated situation is
Palladon Ventures Ltd. (TSX.V:PLL)
. This is an iron ore holding company that owns a minority
position in CML Metals, Inc. (a private company). CML Metals has
the largest and highest-grade iron ore deposit west of the
Mississippi. Its Iron Mountain project is located west of Cedar
City, Utah. Again, it's another historic mining district that
used to be controlled by
U.S. Steel Corp. (
and the Geneva Steel Mill. Since 1869, 80 million metric tons
(Mt.) of iron ore have been pulled out of this project. It has a
great asset base. Palladon has resources of 40 Mt., grading 45%
iron at its Mountain Lion deposit. The company has an even larger
+100 Mt. resource at some contiguous deposits.
Up until March 2010, this was a bankruptcy candidate. It had
great assets but, due to a previous CEO who had a habit of
overpromising and under-delivering, the company took on debt and
didn't execute on the logistics to get the ore moving.
Eventually, it defaulted under its term loan. The term-loan owner
did a debt-for-equity exchange, which diluted the public
shareholders. Now, the original shareholders own a minority
piece-roughly 18% of the actual assets.
This is quite diluted. So, the only way to play it is to own the
That is correct. You need to own the holding company. So now,
Palladon has no debt because the exchange took care of it.
I should say that the company is shipping run-of-mine ore.
It's just pulling it out of the ground and shipping 2 Mt./year
and making a little money on that. Palladon also has first-class
partners; it ships to Chinese counterparts that market to Chinese
steel companies. And it ships out of the West Coast, using Union
Pacific as its rail line-all top-notch partners.
Recently, the company announced new financing by Credit Suisse
to build a concentrate plant onsite. When it gets this asset in
place by the first quarter of 2012, it should have positive cash
flow and will make a margin of US$60 -$80/ton. With that kind of
margin on 2 Mt., you have a company doing US$120M-$160M of EBITDA
(earnings before interest, taxes, depreciation and
Even when you adjust for today's ownership of just 18% of
that, you're buying in at about 1.5x EBITDA. This is for a
company that we think is highly attractive as an acquisition
candidate, as well. If you look at
Cliffs Natural Resources Inc. (
, which recently announced the acquisition of Consolidated
Thompson Iron Mines, Ltd., another iron ore company, for about
6.5x EBITDA, we think there's tremendous upside here.
So, how much will its margins increase by owning more of its own
Currently, the company's margins are roughly US$5-US$10 per ton.
That will go to US$60-$80/t by owning the concentrate
Very interesting. Any other names you'd like to mention?
For those who are willing to look at pure exploration companies,
Paramount Gold and Silver Corp. (TSX:PZG; NYSE.A:PZG)
is attractive. Last year, the company bought X-Cal Resources,
which brought it the historic Sleeper Gold Project in Nevada. Its
other asset is the San Miguel Project, in about 465,697 acres in
the Sierra Madre Occidental Gold and Silver Belt in Mexico. San
Miguel has a resource of about 2.6 Moz. of gold.
Coeur d'Alene Mines Corp. (TSX:CDM; NYSE:CDE)
is developing a contiguous property with 3 Moz.
We think the Sleeper Project has a lot of blue-sky potential
and has the potential to hit real bonanza grades. An interesting
little tidbit is that the Sleeper Project owns the water rights
Fronteer Gold Inc.'s (TSX:FRG; NYSE.A:FRG)
Sandman Project, which
Newmont Mining Corp. (
just bought. When you look at the total combined resource of
nearly 5 Moz., we think Paramount will make a nice takeout
candidate for Newmont, Coeur d'Alene or another company down the
So, Paramount has the geographic tie-in. . .
Right. It's in the mining-friendly districts of Nevada and the
San Miguel district of Mexico. The properties are contiguous to
two large companies that we think would consider the company an
attractive acquisition. We're seeing that big companies like
Newmont need to feed their mills. They have to do acquisitions to
keep their mills active. It's a big operating cost to have a mill
that's not running at full capacity. That is one of the reasons
we think Newmont bought Fronteer's Sandman Project. Paramount is
a little more speculative, but we think it has a lot of potential
as an exploration-upside takeout candidate.
Why do you consider Paramount more speculative?
Paramount will need another financing round, at some point. It's
a pure exploration company, and exploration companies have a
habit of spending cash and needing more.
You have a very interesting business model, Jared. I hope we get
another opportunity to speak with you in the future.
Jared Sturdivant is portfolio manager and managing partner of
O-Cap Management, LP, an opportunistic investment vehicle focused
on special situations investing in both public and private
markets. The firm has ownership interests in the U.S., Canada,
Brazil and Western Europe, with a particular focus on hard-asset
industries, including energy, metals and mining, infrastructure
and real estate. Previously, Mr. Sturdivant was a managing
director at JANA Partners, a multibillion-dollar investment fund,
where he focused on global special situations and distressed
investing. He graduated with a BA in finance from the University
of Texas at Austin
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1) George Mack of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
3) Jared Sturdivant: I personally and/or my family own shares of
the following companies mentioned in this interview: Comstock,
Palladon and Cliffs Natural Resources. I personally and/or my
family am paid by the following companies mentioned in this
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