The Gold Report: Welcome, Paul. Would you tell us a little
about Montreal-based BT Global Growth and your investing philosophy?
Paul Beattie: BT Global Growth is a hedge fund that I cofounded 10
years ago. We're focused on the Canadian capital markets, especially
international companies listed on Canadian exchanges. The business is abroad,
but the company may be listed here. We find this to be the most inefficient
part of the Canadian market.
We are long and short on all sorts of things and we don't use leverage. We
look for companies that are trading three and four times cash flow and have
enterprise value:earnings before interest, tax, depreciation and amortization
(EV:EBITDA) as low as three times or four times, if we're lucky and find
these opportunities. Then, of course, there are stocks in the same sector
that have monumental valuations and trade at 50 times or 35 times cash flow,
and it makes no sense. We short one against the other, and over time it
works.
And on top of that, we short other things. The Japanese government wants
the yen much lower, so we short the yen against the U.S. dollar. We've been
doing it for years, and we'll probably continue to do it for years.
We have macroeconomic views that tie into a lot of the main themes. They
work as good hedges on the existing portfolio. We've been compounding at 10+%
a year, year-in and year-out, and the stock markets have been doing about
half that. We're never fully exposed to the market, but we manage to do
almost twice the return.
We're very proud of the fact that we survived the disastrous year of 2008
when financial markets imploded, and the commodity bust three or four years
later. We wouldn't have made money if we weren't on the short side. In fact,
we're the only fund in Canada that from the day Lehman Brothers declared
bankruptcy; we were up every single month for the next 20 straight months.
That's through the worst of the worst.
And then stocks got so cheap in March of 2009 that we were sitting around
asking, What on earth are we going to short now because there's value
everywhere? It didn't take long to switch.
TGR: Investing in Canada-listed companies, you must be active in
commodities.
PB: The extraction business is a great industry with lots of great
opportunities. We think that the cheapest stocks in the world are often
listed in Canada, but their operations are abroad.
Take a look at some of our favorite companies-Parex
Resources Inc. (PXT:TSX.V), which is in Colombia. It's a good-sized
business, a $2.25 billion company, with great growth and great cash flow. It
has a relatively cheap valuation, around five or six or seven times EBITDA.
It offers huge growth and good management. The stock has been doing great.
And if it were a Canadian operation and not in Colombia, it would trade at
probably twice the multiples. Colombia, in fact, is a great place to invest.
That's where the oil is, and that's where the growth is. So we own Parex.
Red
Eagle Mining Corp. (R:TSX; RDEMF:OTCQX; R:BVL) is an absolutely terrific
story. It went from drilling the very first exploratory drill hole to test
for gold to producing gold in five years. In this industry, that is a record.
It did it on budget and on schedule. That's very impressive. Red Eagle says
it is going to announce commercial production sometime in the next few
months, but it could be as soon as in the next few weeks. We think it's going
to be a very profitable mine.
We focus on the cash flow. We think Red Eagle trades at a tremendously
cheap cash flow multiple. The EV:EBITDA is less than 3. Next year in 2018
it'll be less than 2, which is just too low for any company anywhere. So it
has a great future, and the valuation is very compelling.
One criticism everybody has is when starting up the mine there are lots of
risks. We went down and met with the construction people and mining
engineers. Plants like this have been built all over Latin America, and it's
actually not that complicated. The plant is up and running. I think there are
some 15 similar type plants in Latin America, so it's not like Red Eagle is
reinventing the process.
The tricky part will be to get the ore out of the ground and through the
plant. But when you pull it out of the ground and you put it in a plant, it
takes three days to figure out how much gold is coming out the other end.
Three days, not three months. Red Eagle has very smart people and very good
operational people. We think it's all about the input. Red Eagle is going to
ramp up extracting the ore. If the numbers go the way management thinks, this
is among the cheapest mining stocks in the world.
TGR: What other extraction companies are at the top of your list?
PB: We do like the gold space. Since Mr. Trump was elected, gold
has been quite volatile. At one point, everybody said the stock market is
going to rally and gold stocks are not going to do well. Mr. Trump hasn't
addressed anything about the deficits. So when he's talking about cutting
taxes and spending more on infrastructure, this has to be financed one way or
other. We don't see Donald Trump as bad for gold. In fact, we could develop a
very bullish case. Since the election gold came off a little bit, down $150
or so, but the gold stocks, a lot of them just fell in half. It was almost
like panic selling.
One favorite gold company, in addition to Red Eagle, is Kirkland Lake
Gold Inc. (KL:TSX; KLGDF:OTCQX). Kirkland Lake merged with Newmarket Gold
Inc. We loved Newmarket, which is in Australia; Kirkland is in Canada. You
put the two together, but for some reason lots of shareholders were not
happy, so there was this period of uncertainty. The stock fell down to
valuations that just don't match the size of the company. The political risk
is minimal. It has multiple mines in Australia and Canada, and good
management. It just made no sense that it was trading at dramatic discounts
to all the other midsize gold companies.
Our target on Kirkland is much, much higher. I think the stock is good for
30% or 40% upside just to get back to where it should be trading vis-�-vis
its competitors. So it's very compelling. It's one of our biggest holdings
now. Looking at the EV:EBITDA, Kirkland should be trading two full multiples
higher. We think $12 to $13/share is going to happen just based on the comps.
So that's a great company.
TGR: Do you want to discuss any other commodities?
PB: Yes, there is zinc. There's this whole thesis that we are going
to have a global deficit in zinc. People have been talking about that for
three years, and it really wasn't happening. These things take time. But it
sure does look like it's happening now. I think we are in a deficit. And the
beauty of all of that is there are very few ways to play that metal on the
company side. So it doesn't take a lot of work: Buy anything related to zinc
that's producing.
Our favorite zinc producer is Trevali Mining
Corp. (TV:TSX; TV:BVL; TREVF:OTCQX). It's the only pure-play zinc
opportunity listed in Canada. If you like zinc, play this. It's not expensive
at these levels, but if zinc does have a global shortage, then zinc prices
are going to spike. When it spikes, Trevali has to do the same. We own a lot
of Trevali; the stock is not expensive. Trevali offers good management and
good people, and has two operating mines, one in Canada, one in Peru.
TGR: Thanks, Paul for your insights.
Paul Beattie is the cofounder and managing
partner of PT Global Growth Fund LP. From 2000 to 2006, he was the cofounder
and managing partner of a boutique investment bank, Stable Capital Advisors.
He has extensive experience in private equity including raising investment
capital for alternative asset funds from within Canada and abroad. Beattie
was the founding executive of Telesystem International Wireless in 1994 and
its predecessor company in 1992, and was Vice-President, Mergers and
Acquisitions, involved in all aspects of financing activities. Beattie began
his career as investment banker from 1986 to 1991 at Merrill Lynch Canada
Inc., in the position of Vice-President, Corporate Finance, and was involved
in a diverse range of advisory assignments and capital markets activities. He
holds an MBA from INSEAD, France, and a Bachelor of Commerce (Honours) from
Queen's University, Canada.
