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 reveal several precious and base
metal plays in which they have purchased stakes and 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
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
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
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
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: What gold ventures
excite you today?
JH: We rarely look at
exploratory ventures. We do focus on companies with near-term catalysts. For
example, we like Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB). It is more of a
developer than an explorer. In fact, we recently met with Oromin's
managers. They said that acquisition negotiations are ongoing for its joint
venture group in Senegal.
Interestingly, Oromin is only covered by one analyst on the Street. Its
story is not well known. It should receive its environmental approval in
Senegal within the next couple of weeks. And, once that is done, its project
will be construction-ready. Given that Oromin has
access to 3.3 million ounces (Moz) gold, as
indicated in an NI 43-101 compliant document, we think it's quite attractive.
Also interesting is a
nearby property held by Teranga
Gold Corp. (TGZ:TSX; TGZ:ASX). Teranga operates a gold mine
equipped with an underutilized mill. There are obvious synergies between Oromin and its potential mine and Teranga
and its existing mill. On top of that, IAMGOLD Corporation (IMG:TSX) and Randgold Resources
Ltd. (GOLD:NASDAQ) operate gold mines in the same region.
TGR: What about Oromin's Canadian ventures?
JHs: Oromin's main asset is in
Senegal. The Canadian operations are minor, and we attach zero value to them.
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: What junior gold mining
firms interest you in Canada?
JH: Auriga Gold Corp. (AIA:TSX.V) is revving up its
Maverick gold project in Manitoba. That is a very safe jurisdiction—a
mining friendly province. Maverick is an advanced stage project, with
infrastructure already in place from a past-producing mine. Auriga is restarting Maverick's mill, which is in good
condition and worth $25 to $50 million (M). That alone translates into $0.50
to $1.00 per share, and compares to a $0.25 share price.
But even if there were
no ore body to exploit, Maverick is still an attractive deal strictly from
the perspective of the mill. Adding value is a shallow open pit with a very
low strip ratio at surface. The combination of the existing mine and the very
shallow ore body makes Maverick a highly economic project. It should be up
and running by early 2013 at a cost of only $18M.
I can't think of another
project around the world that can get up and running for only $18M in capital
expenditure. The payback is only 20 months, and the cash flow is projected to
be $130M over the mine's projected life of 7 1/2 years. The internal rate of
return on the initial phase of the project is 88%, which is extremely nice.
TGR: Who do you favor among
mid-cap gold stocks?
JH: Looking for near-term
catalysts, we like Seabridge Gold Inc. (SEA:TSX;
SA:NYSE.A). Surprisingly, it has an $636 million market cap and 38 Moz
gold in reserves, yet there's not one analyst that covers it on the Street.
The reason for that is the business model: Seabridge
hasn't had to raise equity. Consequently, the Street's not paying attention
In 1999, when gold was
$300/ounce in 1999, the Seabridge principals saw
opportunities where the capital markets just weren't interested. Seabridge scooped up gold properties knowing that when
gold rose in value it would benefit. The Seabridge
business model is to develop these properties to the stage where they should
be built, but they don't build them out themselves. What we find attractive
is that Seabridge has clearly recognized its own
management strengths: drilling and proving the economics of a mine.
By way of catalysts, in
mid-May, Seabridge is scheduled to produce an
updated pre-feasibility study on its Kerr-Sulphurets-Mitchell
(KSM) project in British Columbia. KSM is probably the largest undeveloped
ore body in the world. The study is the second to last stage before putting
the company up for sale. Seabridge intends to find
a joint-venture partner within 12 months of the release of the updated
prefeasibility study. The final catalyst before going up for sale is approval
of the environmental application. That will probably happen in September. At
that point Seabridge will have a mine plan ready
for a major buyer.
TGR: What about the local
mining infrastructure? Can it handle KSM?
JH: KSM is close to cheap
power and close to a highway. It has year-round port access, a very low strip
ratio and a projected long mine life. All the things you want to see in a
mine. The problem is that it's so huge that there are a limited number of
players who are big enough to develop it. Pulling this off will require a
firm along the lines of Barrick Gold Corp. (ABX:NYSE; ABX:TSX), Newmont Mining Corp. (NEM:NYSE) or
Freeport McMoRan Copper & Gold Inc. (FCX:NYSE).
TGR: What about base metal
mine development? Does that sector fit your risk-adjusted portfolio?
JC: We tend to shy away from
base metals, with the exception being a small company that is a pure play on
zinc. That's Tamerlane Ventures Inc. (TAM:TSX.V). It owns a zinc-lead mine
called Pine Point in the Northwest Territories. It's a restart of a mine that
was operated by Cominco Ltd., which is now owned by Teck
Resources Ltd. (TCK:NYSE; TCK.A:TSX).
TGR: Pine Point was closed,
but it is now being revitalized? How so?
JC: Teck had shut down the mine because it had
developed its Red Dog mine, which is one of the world's most prolific
high-grade zinc mines. There's no question that Red Dog is the better ore
body, but Pine Point is also attractive based on its fundamentals and
valuations. It will provide an independent source of zinc concentrate, which
is very much in global demand by both smelters and traders.
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
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: Are there any companies
that you're attracted to in tungsten?
JH: We like a pure play on
tungsten through a company called North
American Tungsten Corporation Ltd. (NTC:TSX). It has the Cantung mine in the Northwest Territories. It's small,
but it accounts for 4% of world tungsten production. Its output is improving
due to the purchase of Caterpillar equipment, which has really helped
operational reliability because it is located in a remote region, and
temperatures can plunge to minus 40 degrees.
TGR: What is the quality of
the Cantung tungsten?
JH: The Cantung
grade is very high by global standards: about 1.1% on average. The global
average is about 0.3%. American Tungsten tested the mine's old tailings and
found a grade of about 0.3%. That means that the company can enhance Cantung's mine life by processing those tailings. But,
what's even more exciting is North American Tungsten's new development
project called the Mactung deposit. It's one of the
world's largest undeveloped high-grade tungsten deposits. Permitting is
TGR: That's all good information.
Do you have any names to add, Jimmy?
JC: A company called Orbite Aluminae
Inc. (ORT:TSX) has patented a new
technology to extract alumina from aluminous clay deposits. There was a lot
of controversy surrounding certain overstated claims in Orbite's
preliminary economic assessment in late March and trading was briefly
suspended. But those issues seem to have been resolved. We have met with Orbite management on numerous occasions and we flew out
to Gaspé, Québec, to see their pilot
plant. It's potentially a game changer.
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.
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
1) Peter Byrne of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: None. Streetwise Reports does not accept stock in exchange
3) Jerome Hass: I personally and/or my family own shares of the following
companies mentioned in this interview: Orbite Aluminae Inc., North American Tungsten Corporation Ltd., Auriga Gold Corp. and Oromin
Explorations Ltd. I personally and/or my family am
paid by the following companies mentioned in this interview: None. I was not
paid by Streetwise Reports for participating in this story.
4) Jimmy Chu: I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in