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-- Posted Monday, 25 April 2011 | | Source: GoldSeek.com
Dramatic rises in metals prices over the past 2 years could bring 10 or more past-producing mining camps back to life. In this Gold Report exclusive, MineralFields Group's Engineer and Investment Analyst Ron Wortel shares how he finds promising gold juniors working these mines and structures tax-advantaged, flow-through investments to finance Canadian resource development. The Gold Report: Ron, can you give us a little background on your company, MineralFields Group, and what it'll be looking at in the future?
Ron Wortel: MineralFields was founded 10 years ago and just recently surpassed the $1-billion mark raised from our Canadian investors looking for substantial income tax breaks, along with the ability to enjoy absolute returns on the flow-through investments we offer them. MineralFields is the most consistent, top-performing fund among the flow-through limited partnerships. We have a unique, multilayered due diligence team that includes two senior mining analysts, of which I'm one, a senior technical analyst, two great portfolio managers, an in-house legal team and an association with the geological consulting firm of Watts, Griffis & McOuat Ltd.
TGR: How did your company get into this area of flow throughs?
RW: Our principals were looking at ways to reduce taxes for their accounting clients, and one of the best ways to do that in Canada is by using these flow-through deductions and tax credits to offset income. They present the opportunity to invest in somewhat early stage exploration companies while reducing income taxes. It has just grown from there.
TGR: Can you explain how flow-through financings work and what the advantages would be for the companies receiving the financings and for the investors?
RW: This is strictly related to Canadian investors who invest in Canadian properties and pass on Canadian tax credits. For decades, the Canadian government has allowed junior miners, which need to spend lots of money on exploration before they achieve success, the ability to pass their exploration-expense tax credits through to the investors who then purchase flow-through shares from the miners.
These investors can use the flow-through tax credits against their income, thereby lowering their taxes. Flow-through financings are unique to Canada and have allowed it to become the world's largest mining nation. We Canadians spend more on mining exploration than any other country. Without the government's support for junior miners through this tax system there would be a lot less mining exploration taking place in Canada. Because junior mining stocks are more risky, fewer mining investors would be buying them without the incentive of these flow-through tax breaks. The result is more access to capital for junior exploration companies.
TGR: I understand there is some controversy about continuing the flow-through exploration tax credit. What changes are being considered?
RW: Every year there is a federal budget wherein an extra federal 15% tax credit for exploration companies is included. These are called the "super flow-through credits." They also were included in the past budget, which was put forward in March, but the government was defeated on this budget vote. We are in the middle of an election campaign now, so it's in limbo pending who comes back into power and decides if this extra 15% will be renewed. But the standard 100% deduction is still in place.
The budget also called for the elimination of the charitable donation of flow-through shares. In this case, investors would purchase flow-through shares for their tax credits, and then immediately donate them to a registered charity for additional tax reductions. This change is also now in limbo with the defeat of the budget. We are in favor of this change, as we felt it distorted the market for flow-through shares with significant premiums paid by investors who were using this tax reduction opportunity.
TGR: Are the projects concentrated more in certain provinces?
RW: No, we invest throughout the country. We look at each company and project individually to see if it merits an investment.
TGR: What does MineralFields look for when it's deciding whether to sponsor a company?
RW: We have a full team of due diligence people looking at each company and project before we do any investing. Basically, we're looking for a credible management team with a successful track record and a good project. We also look for diversification across commodities and locations. As for the company itself, we have to see a good share structure and the company's ability to get its message out to the market so we can see some share appreciation when it does get results.
TGR: In the past, it seems that most resource stocks tended to float up with a rising market. Now we have record gold and metals prices and things seem a little different in that a lot of the smaller companies don't seem to be participating. Would you agree with that?
RW: I generally do because the Canadian junior resource sector is still a small part of the overall investment market. There's significant competition for these scarce dollars by the more than 1,000 junior companies. With strong commodity prices, there is increased interest in this market sector. But the reasons for the high gold price, such as overall market insecurity and an increase in perceived investment risk, run counter to investing in junior explorers that are more risky. The stocks that are developing significant resource assets and making big discoveries are rewarded with price appreciation and good liquidity.
Sometimes commodity prices lead stock prices, and other times the mining stocks appreciate faster than the underlying commodities. With gold rising quite significantly in a relatively short time, some senior gold equities have seen a lot of gains and might be a little overbought. The juniors may still be lagging, and there's still an opportunity there for investors.
TGR: Considering how many former mines are being reopened, are we in another Golden Age for gold due to price or technology? What macrotrend are you seeing that makes these projects viable again?
RW: Yes, it is a macrotrend. The cliché is: "The best place to find a new mine is in the shadow of the head frame of an old mine." So, the price appreciation is the ticket here. A lot of these old mines were being mined on the narrow vein, high-grade concept in the 1920s and 1930s when gold was $20/oz., and then moved up to $35/oz. So, at the time, it could go for narrow-vein, high-grade material only. Now, gold is at $1,500/oz.—that's a quantum leap in price, and you might also consider it a quantum leap in costs. Costs have increased significantly but not so much that it's stopped the company from looking at this new bulk-tonnage model. New technology, in the sense of bigger trucks and machines to get more tonnage, gets the costs down. And better recovery processes can handle lower grades; so, it's a blend of price appreciation and technology.
TGR: Over the next three to five years, how many of these smaller, high-grade underground mines do you think might be operating in Quebec, Ontario and Eastern Canada?
RW: It's hard to say. There could be 10, maybe a few more. It is capital intensive and you have to get through the regulatory regime to get these things back into production. It's still risky capital even in a high-price market but there certainly is a prize because there is good money to be made. That's something we hope the general market will understand—that there are significant cash flows associated with these mining companies.
TGR: Why are many investors still reluctant to enter this sector, considering some of the phenomenal price increases?
RW: Well, not everything is going up. We think it's a healthy sign for the junior market that the mining stocks are not in a bubble because most investors probably have just a tiny percentage of their portfolio in them; so, it's a matter of educating people in the opportunities available in these stocks.
TGR: Just to clarify, you're saying that, because all of these juniors haven't appreciated, it means we're not in a bubble and that it's a good sign?
RW: That's correct. Last fall, there was a bit of a run where more of the stories were gaining momentum. Right now, some market and world events have created more risk. So, we're back to more of a story-specific than a general uptrend for everybody while still in a high-price environment.
TGR: Do you believe small investors aren't in this market to the extent they were in past market cycles?
RW: Yes. Many of these small investors got hurt in the 2008–2009 meltdown; so, they're arriving late to this next party. But the 'smart money' like John Paulson, George Soros and MineralFields saw 2008 and 2009 as a great opportunity to get in again. Soon small investors will realize that we're only in the early to mid part of this historic commodities supercycle and we should still see significant appreciation for these juniors and near-term producers.
TGR: So, hopefully, we're still far from the peak of the market as far as you can see?
RW: Yes, I do believe so. All of the people on the other side of the world, who want to live something close to the life we live in North America, are creating demand for commodities, which should translate into price appreciation for the companies looking for them.
TGR: Thank you for taking the time to share your insights with us today, Ron.
RW: Thank you.
Ronald J. Wortel joined MineralFields' associated financial intermediary in the Toronto office as the executive vice president of mining investments in June 2006. He joined MineralFields after two-and-a-half years with Northern Securities as its senior mining and metals analyst, where he provided equity research on 22 junior and intermediate TSX-listed mining companies. Ron was one of the first mining analysts to focus exclusively on the large and underserviced Canadian junior mining market. His coverage of this sector includes more than 60 names in the past 10 years. Prior to entering the financial services sector, he worked in the consulting-engineering sector with Golder Associates for seven years. Ron is a professional engineer with a geological engineering degree from the University of Waterloo and an MBA from the Ivey School of Business and the Rotterdam School of Management. 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 Expert Insights page.
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-- Posted Monday, 25 April 2011 | Digg This Article | Source: GoldSeek.com
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