-- Posted Sunday, 13 May 2012 | | Disqus
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 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: 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: 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: 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.
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-- Posted Sunday, 13 May 2012 | Digg This Article
| Source: GoldSeek.com
