-- Posted Monday, 19 November 2012 | | Disqus
Source: Brian Sylvester of The Gold Report
With money rushing out of the junior resource space, Charlie Brookes, investment director at Arlington Group Asset Management and investment manager at Praetorian Resources, is rushing in—thoughtfully. In this Gold Report interview, he says now is the time to buy and hold, but it is crucial that investors do their homework before investing.
The Gold Report: What approach has Praetorian Resources Ltd. taken toward resource equities at this point?
Charlie Brooks: Praetorian Resources is focusing its attention on scalable and quality assets run by experienced management teams and wherever possible is trying to reduce its exposure to high levels of financing risk.
TGR: Can you explain what Praetorian is?
CB: Praetorian Resources operates exactly like a fund but is actually structured as an investment holding company. We hold 15 investments at the moment, a variety of junior resource companies.
TGR: What are some things you look for in a jurisdiction?
CB: One, a sensible mining code; two, a sensible fiscal regime; and three, a history of sensible practice. Chile, where Polar Star is, has a fantastic mining code and no history of exploitation of mining companies. Companies operate there very happily. Botswana is a very safe country, as is Morocco, although it is fair that recent moves by several African countries have increased the risk perception for the continent as a whole.
TGR: But these things are somewhat dynamic. Not too long ago, many people would have put Peru among the safest and most opportune places to invest. But now there are some question marks around Peru. Are you constantly monitoring that?
CB: This is true not just for developing countries. You can say the same thing for Australia and the tax changes there. Whenever you invest in a foreign country, you are taking a degree of sovereign risk. We do as much research as we can, but risk cannot be completely eradicated.
TGR: There's very little history to go on as far as mining in Morocco. Do you think this adds to the risk of companies who have assets there?
CB: Any company with assets in a single country brings with it more risk than a company with assets in many jurisdictions. But when you invest in the junior mining space, do you want a company with assets all in a number of different jurisdictions with the logistical challenges and the costs that entails? Junior mining companies inherently tend to have one principal asset in one country where the majority of their value is based.
To be fair, we like Morocco as a country for investment and Morocco does have a mining history. A lot of phosphate has been mined there for many years. Morocco also has one of the largest silver mines in the world today (Imiter). The mining code is clear, the political landscape is stable and fiscally Morocco is internationally competitive. There's a corporation tax rate of 35% in Morocco and for mining companies that export their product there is a five-year tax holiday in place and a 50% discount on taxes thereafter.
TGR: Are there are certain commodities that you consider hot or that could become more in demand?
CB: We like to take a contrarian view, so I'm not always looking at those commodities that are in fashion. Uranium is one we talk about internally as improving over the medium term. It is down in the dumps at the moment, totally unloved—with some justification—after the recent disasters. But over a medium or long term, $40/pound (lb) uranium is not sustainable. Most companies in uranium processing and development will need a considerably higher price than $40/lb to develop those assets.
TGR: Are there certain commodities you're avoiding?
CB: There isn't any commodity that we would avoid. If the project stacks up, we will look at it. However, at different stages of the cycle some investments are more appealing than others. Right now, for instance, high capital expenditure plays such as bauxite and low-grade iron ore projects are less interesting to us because capital is so tight and therefore raising the necessary sums of debt and equity is just not realistic. You have to be pragmatic and realize when you have a $50M market-cap company, it is going to be unable in today's market and for the foreseeable future to raise hundreds of millions of dollars of construction expenditure.
TGR: We've seen gold rebound since the outcome of the U.S. election. At what trading range do you see gold in throughout 2013?
CB: I think it will be well underpinned in the short term, and we're certainly bullish on it. I don't think we're going to see any significant rebasement from these levels. High levels of continued political unrest and currency debasement makes gold an appealing option.
TGR: Could you outline some of the selection criteria your company uses when choosing which resource companies to invest in?
CB: We're looking for the assets that in tough markets can get funded, and those are ideally $40/lb to develop those assets.
TGR: Could you outline some of the selection criteria your company uses when choosing which resource companies to invest in?
CB: We're looking for the assets that in tough markets can get funded, and those are ideally $40/lb to develop those assets.
TGR: Would you prefer to see a geologist or someone with a financial background as CEO or managing director?
CB: As long as the overall team has the skills to succeed, that's enough. In today's world CEOs need to be more investor focused than ever. There are so many companies out there; it's extremely important that the CEO has the enthusiasm, drive and air miles to get around and tell the story to the institutional and retail markets because otherwise companies just disappear.
TGR: How long do you usually remain in your positions?
CB: When we invest, we intend to take a long-term view. We're investing in the smaller end of the market, which is illiquid. Some people would say it is private equity investment because there is no secondary market when you're buying 5%, 10%, 15%, 20% stakes in companies. We work with management teams. We sometimes go on the board; I'm on the board of Polar Star. We try to do everything we can to assist them and make sure that they understand our views on corporate governance and the need to minimize central office costs during these tough times, and hopefully we all agree.
TGR: Is buy and hold dead?
CB: I don't think so because especially in this type of market and this time in the cycle, if we're buying positions at these kinds of levels, there are a lot of companies whose share prices are down 50–75%. Good and bad companies alike are being sold off.
I think it's an excellent time to be investing with a buy-and-hold strategy in companies. You can buy significant stakes from distressed sellers in a number of companies. We're looking at a couple of examples of that at this very moment—funds in liquidation, large private investors looking to get out of the sector. We're very happy to be contrarian, buy into the bottom of the cycle when things are unloved and the share prices are down, and adopt a buy-and-hold strategy. That's the way you can make multi-times returns.
TGR: Do you generally see more opportunities in explorers, developers or mine producers?
CB: It depends. If you're going for the explorers, you've got to be aware of how much capital they're going to suck up. If it's an explorer with a very large balance sheet, that is fine. We might take a position on the secondary market but certainly are cautious if the model is to constantly dilute the equity to fund exploration spend.
TGR: Could you give us some insight into the appetite for junior resource equities among London's institutional investors?
CB: Most of the larger institutional investors are getting out of junior resource equities at the moment. Raising equity capital, even debt capital, is extremely difficult at the moment, and unless the companies have a proper control of costs, corporate governance and a strong asset base, they will struggle to raise capital over the short to medium term.
TGR: Barack Obama's re-election win seems to have soured the investment market in the U.S. Do you believe that's a buying opportunity, or do you believe investors should steer clear until the dust settles and perhaps even until this "fiscal cliff" problem seems to have ended?
CB: There's a lot of risk in the market. The junior resource market is tough at the moment, and anybody who thinks there's going to be a quick rebound is going to be mistaken. The retail investor needs to be extremely careful before throwing money into the market because a lot of institutions are getting hit with redemptions or are just fed up with losing money in the junior resource space, so there is a momentum away from it. Money is coming out of the sector and not into it at the moment. That, for a long-term buy-and-hold investor, provides a lot of opportunities. But you need to do your due diligence before investing in what is a high-risk and specialized area.
TGR: Thank you so much for your insights.
Charles Cannon-Brookes is the investment director of FSA regulated Arlington Group Asset Management Limited and the investment manager of Praetorian Resources Limited, an AIM listed closed ended investment company focused on the natural resources sector.
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-- Posted Monday, 19 November 2012 | Digg This Article
| Source: GoldSeek.com
