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With high market volatility, running a small fund like the Magna
Opportunity Fund, which seeks to deliver exceptional returns, requires nimble
management. In this exclusive interview with The Gold Report, Bo
Chew tells us how he does it and what criteria he uses to select his fund's
investments. In the process he drops quite a few names with good upside
potential for investors to consider in the current market environment.
The Gold Report: The
CBOE VIX Volatility Index was all over the map in 2011. Your Magna
Opportunity Fund is capped at only $20 million (M) with a goal of producing
exceptional returns by trying to be nimble within the market. Can you explain
how you plan to achieve this when a lot of the larger and more diversified
funds try to just stay even?
Bo Chew: With this particular fund we expect to deliver very high
returns by being concentrated in about 30 holdings where each position has a
realistic potential to increase 100% within 12 to 24 months. The basic
premise is buying companies that are undervalued, have great people, offer
huge upside and have important catalysts in the next 6 to 12 months. Unlike
large funds, we can take advantage of really beaten down companies or less
liquid opportunities. One example is Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), which recently reached a three-year low at $33/share, down from a
52-week high of $78/share, due to closing Goldex and the challenges
experienced at Meadowbank. With Agnico we bought $35 January 2014 call
options for $6.90.
In 2012 Agnico-Eagle is expected to produce 1 million ounces (Moz) of gold at
$750/oz cost, producing $950M of cash flow, and its market cap is only $6
billion (B). So, over the next two years we see a lot of potential catalysts,
including possible resumption of operations at Goldex, lowering costs at
Meadowbank, advances in Meliadine and La India, plus resumption of growth in
2013. If Agnico-Eagle gets back to $60/share, we've got a gain of 260%, not
counting the value of the options.
TGR: So, you're playing that one through the options and not through
the stock itself.
BC: That's right.
TGR: That certainly gives you plenty of upside leverage if you guess
right. And, it limits your downside to the cost of your options.
BC: Exactly.
TGR: I'm assuming that in most cases you're probably going to be
buying the stocks rather than playing options. Right?
BC: Yes. We have two options currently. The other one is Kinross Gold Corp. (K:TSX;
KGC:NYSE). We try and buy them when we see them, in this case
at multi-year lows, where we believe that the company is strong and its share
price will recover.
TGR: How far out are the options?
BC: Two years.
TGR: Are you also buying physical metals or just equities and options?
BC: Generally we stick with equities and options. We do try to
maintain about 10% cash and also we have the ability to leverage 25%. That
gives us a lot of room to take advantage of opportunities. From time to time,
we'll trade 10% in silver or gold exchange-traded funds.
TGR: Do you have a preference for how you weight your portfolio
between the various sizes of companies?
BC: We tend to prefer the small caps and like the mid caps as well.
The challenge with large caps is that in most cases I can't realistically see
a stock increasing 100% within 12 to 24 months unless it's something that is
really beaten down and misunderstood.
TGR: You can always play the options on the large caps if you can hit
the right timing.
BC: Correct. For example, the other option that we're looking at is on Cameco Corp. (CCO:TSX; CCJ:NYSE), two years out as well.
TGR: You've also made an investment in the Commodity Capital Midas
Letter Opportunity Fund. What do you like about it?
BC: We like the people: James West and Tobias Tretter, whom we had the
opportunity to talk to a number of times and to meet. This particular fund is
unique because approximately 80% of it is in placements, of which 30% is in
seed and pre-IPO. We also get access to some of the placements for our fund.
A huge advantage is we get warrants. On the pre-IPOs, we're getting in at
significant discounts.
TGR: How long do you typically have to wait for a pre-IPO investment
like that to turn liquid?
BC: Often on a pre-IPO you might have to wait two to six months. For
example, there's one we're buying in at about $0.15/share and the discussion
is that within three months the company will do the IPO at $0.35 to
$0.40/share.
TGR: Turning to junior stocks, 2011 was a pretty dismal year. Are you
expecting that 2012 will be a breakout year for them?
BC: That's a good question. The juniors are definitely quite
undervalued. We do expect 2012 to be a good year as merger and acquisition
activity picks up. However, it doesn't really need to be to help our
performance because catalysts in the next 6 to 12 months with our stocks can
push the prices up.
TGR: So, you're looking for specific catalysts that are independent of
what the general market is going to do?
BC: Yes. I'm looking at companies that are advancing projects through
to prefeasibility or feasibility or derisking as they ramp up toward
production. We try to buy at the point in the resource company cycle where
there's less risk. Often, that means buying early while the story is being
formed and there isn't a lot of exposure. We also buy after a company has
largely derisked the project and it's within one or two years of production.
Sometimes we also buy when a company has disappointed but it's still a good
company with an intact story.
TGR: How do you decide when you want to sell?
BC: The sell decision is based on one of the four buying
criteria—value, catalysts, great management and upside
potential—breaking down. Often we'll sell a stock when it's run up
because there's no longer value, or when key people leave and we feel that
materially impacts the ability for the company to move projects forward or
when there's an absence of near-term catalysts.
TGR: Just looking at the price chart will give you a good indication
of how much longer you might want to hang on.
BC: That's true. Often you have to give the markets time to tell you
whether you're right or wrong.
TGR: Can you tell us about some of the companies you particularly like
at this point and what you're expecting from them in the next couple of
years?
BC: One of those would be Barkerville Gold Mines Ltd. (BGM:TSX.V). Barkerville is a $90M
market-cap company with 117,000 hectares in the Cariboo Gold Belt in British
Columbia that has produced 3.8 Moz of gold historically. It has seven
past-producing mines; three gold deposits, including the QR Mine and a
900-ton-per-day (tpd) mill; and recently permitted the Bonanza Ledge Mine. I
like this particular company because there's been a lot of gold produced in
this area. It has really beefed up its advisory team and insiders own about
10%.
In 2012, Barkerville intends to process ore from Bonanza Ledge to produce
about 20–30,000 ounces (20–30 Koz). At $800/oz cash cost and
$1,700/oz gold, operating cash flow will be between $18M and $27M. There is
potential to develop additional mineable reserves at the QR Mine to boost
that production to 50 Koz in 2012. It's waiting for results on 33 more holes.
One hole at Cow Mountain returned 52 meters of 14.2 grams/ton (g/t) gold.
Within 24 months we would expect over 100 Koz of annual production. At a
conservative $3,000/oz, we've got a $300M value to the company, which triples
its $90M market cap.
TGR: Well, those are pretty substantial numbers.
BC: Scorpio Gold
Corp. (SGN:TSX.V) is another one we like.
Scorpio owns 70% of Mineral Ridge in Nevada, which has a history of gold
mining dating back to the mid-1800s. There've been problems with this
particular mine more recently. It sat dormant from 2005 to 2010 until Peter
Hawley, founder of silver producer Scorpio Mining Corp. (SPM:TSX), took over in 2010. Insiders own 38%. Production
started in May 2011 from the Drinkwater pit. Mining at the Mary Zone has just
started increasing the production at Mineral Ridge to about 5 Koz per month.
The ownership increases to 80% after four months of production above 3.5 Koz.
The current resource is only 357 Koz, but it's only from two pits. There are
another eight pits that are defined and another three pits outlined. Drilling
between the pit areas should expand the resource and define a possible super
pit that could be 3–5 Moz. If cash costs decline and production
increases to 80 Koz, and if a super pit is defined, we expect Scorpio Gold to
do very well.
TGR: Definitely has some big upside there too. So, what else do you
like?
BC: MAG Silver Corp. (MAG:TSX; MVG:NYSE) is a company focused on
two large-scale projects within the Mexican silver belt. MAG has a 44% joint
venture with Fresnillo on a 221 Moz silver project called Juanicipio. It's
one of the highest quality silver deposits in the world and borders the
Fresnillo mine, which is the largest primary silver mine in the world. MAG
has a significant land package in the area and we expect it to be taken over
at some point.
TGR: That makes sense. Of course, all these companies that have
something substantial going for them are potential takeover targets.
BC: For sure. We also like Pretium Resources Inc. (PVG:TSX; PVG:NYSE). Pretium is another one
of our mid-cap takeover targets. It owns the advanced stage Brucejack and
Snowfield projects in northern British Columbia with a combined 56 Moz of
gold in all categories. Brucejack is one of the largest high-grade projects
with 5 Moz at 16.9 g/t gold Measured and Indicated and 3.3 Moz at 25.6 g/t
gold Inferred. So, the updated Brucejack preliminary economic assessment
shows a net present value of $2.2B pretax.
TGR: On a per share basis what does that present value work out to?
BC: About $25. I like Pretium because that particular project has a
lot of expansion potential with the large land package.
TGR: It's always nice to have big upside to expand resources.
BC: Another company we like is South American Silver Corp. (SAC:TSX; SOHAF:OTCBB), which has traded at a
significant discount given its 230 Moz Malku Khota silver deposit. There are
two reasons: it's low grade and it's in Bolivia. South American Silver is
given very little value for the new 3.8 billion pound copper deposit in
Chile, which is 35 kilometers (km) from El Teniente, the world's largest
underground copper mine. The in-ground value of this deposit is roughly the
same as the silver deposit. South American Silver is led by Greg Johnson,
co-founder of NovaGold
Resources Inc. (NG:TSX; NG:NYSE.A). Zamin Precious Minerals Ltd., a resource company with operations in
South America, is 19% owner. It has a really strong relationship within the
government of Bolivia, which has confirmed that private investments in mining, and South American Silver in particular, are
welcome and will continue to be respected.
TGR: Apparently, the market hasn't recognized that and is focused on
the political risk more than on the upside potential of the resource.
BC: Yes. Malku Khota makes up for the low grade with its high indium
and gallium value. The preliminary economic assessment (PEA) shows that at
$18/oz silver, there's $704M net present value (NPV) at 5%. And, the cost to
produce net of byproduct is $2.94/oz. The catalysts for South American Silver
are securing offtake agreements for the indium and gallium, completing
prefeasibility and feasibility studies, and likely takeovers or joint
ventures on both projects within 24 months.
TGR: So, that's relatively short-term visibility for upside movement.
BC: That's true. A little smaller company we like is called Metanor Resources Inc. (MTO:TSX.V; MEAOF:OTCPK). It is bringing its
Bachelor Lake mine in Québec into production and has begun milling ore
from a 5,000-ton bulk sample. Metanor is expected to produce 60 Koz of gold
at a cash cost of $464/oz. Some 20% of the gold goes to Sandstorm Gold Ltd.
(SSL:TSX.V) at $500/oz. Metanor has 1.6 Moz of
resources with a fully permitted 1,200 tpd mill and the infrastructure
replacement value is $150M. The huge upside comes from the 781 Koz Barry
deposit, which has the potential to become a significant low-grade,
high-tonnage deposit like Osisko Mining Corp.'s (OSK:TSX) Malartic mine.
Osisko has a $4.5B market cap and will be producing about 610 Koz/year
starting this year. Barry has only had 50km of drilling on a potential 13km
strike, compared to the million meters of drilling at Malartic. If you
multiply the drilling at Barry 20-fold, it could conceivably host a 14 Moz
deposit.
TGR: That's a lot of expensive drilling.
BC: Perhaps, but it should have cash flow to help with the drilling.
Industrial Alliance recently put out an estimate that the 300 Koz resource at Bachelor Lake is estimated to be about 700
Koz, which can extend the mine life to 10 years. So, if we take Bachelor Lake
at 60 Koz/year, Metanor's 80% portion is 48 Koz. If we only assume $1,000 of
operating cash flow per ounce, we've got $48M of cash flow. And, the company
is trading at only about a $68M market cap.
TGR: Any others you'd like to talk about at this point?
BC: Avino Silver & Gold Mines Ltd.
(ASM:TSX.V; ASM:NYSE.A; GV6:FSE), a re-emerging silver producer in Mexico, is expected to produce 1.1
Moz silver equivalent. Avino is in the process of stockpiling ore and will
commence production once it has enough to operate at 250 tpd. It is targeting
3 Moz of silver production from three projects within three years. It does
have a proven resource at San Gonzalo and the Avino vein as well as a
tailings resource. Avino's market cap is only $61M.
Another company we really like is Gran Colombia Gold Corp. (GCM:TSX.V) because it's an extremely undervalued gold producer.
It's taking production from 90 Koz to 540 Koz by 2016. It has total gold
resources of 13 Moz with a market cap of $220M. Its main operating mine,
Segovia, has planned expansion in 2013 to increase production to 200 Koz per
year with cash costs of less than $900/oz by the end of 2013.
Gran Colombia's other project is Marmato, with 12.4 Moz gold and 75 Moz
silver. A PEA done in 2011 shows a mine that's
projected to produce 540 Koz gold and 1.3 Moz silver at $524/oz costs. As it
ramps up production and gets closer to putting Marmato into production, we
expect it to be taken out as well.
Another company that has really been beaten up due to delays is Gryphon Gold Corp. (GGN:TSX; GYPH:OTCBB). It was supposed to be in
production at 43 Koz gold per year this March. It
has about a 2.1 Moz combined resource in Nevada; $1,000/oz of operating cash
flow times 43 Koz is $43M on a market cap of $30M. In addition, there are
three new anomalies that have been identified, each significantly larger and
shallower than the main sulfide resource, which is about 1.1–1.2 Moz.
So, there is potential for Gryphon to get into the 3–5 Moz size.
TGR: Sounds good.
BC: We also see upside in Geologix Explorations Inc. (GIX:TSX), which has a $44M market
cap. Geologix's Tepal project in Mexico shows a PEA with a $412M NPV at 5%.
And, there's a potential for this to continue growing. There's a new resource
estimate expected in March and a prefeasibility study in June. Depending on
how the prefeasibility study goes, it could be in production in 2014.
TGR: Do you see any developing opportunities that are still in the
early and more speculative stages that might be places for people to get into
at this point?
BC: I think there are a couple of areas. One would be commodities that
are less common or less mainstream, like graphite or tungsten. Also,
companies that are less followed could be great opportunities, because with
less news there's very little hype and very little trading, leading to
potentially depressed levels. There are many great opportunities, but you
have to do your research.
In the category of companies that are less followed, one is Xtierra Inc. (XAG:TSX.V), which is a $26M
market-cap company with about $8M in cash. It has $100M of silver equivalent
in Mexico and is advancing the Bilbao project, which is likely to produce 2
Moz silver in Q414. But, it also has a tailings project that could produce 2
Moz silver, which is likely to come onstream earlier than that.
TGR: So, is there anything else you'd like to talk about?
BC: I have one more company in a less mainstream region. This is Minco Gold Corporation (MSV:TSX), which has a $168M market
cap with $70M in cash. It has a 101 Moz silver deposit in China with
significant resource expansion potential and is very close to getting into
production at 5.5 Moz/year at a $5.65/oz cost. There's been very little news
and it's just waiting for the environmental impact assessment to start
construction. It is fully funded to production, which is expected in Q114.
TGR: What would you like to leave with our readers as far as how they
can best profit in the current investment environment?
BC: We have a volatile investment environment so it's important to
keep a certain amount of cash available to take advantage of opportunities.
At the same time you have to take your profits when things do go up. Resource
investing is inherently risky as only a small percentage of deposits ever
become mines. But, you'll have greater success focusing on high-quality
projects with a lot of blue sky run by excellent people who have financed,
built, joint ventured and sold mining operations. These companies can reward
shareholders in today's very difficult environment.
TGR: That's a good investment philosophy with useful guidelines to
follow. Thanks for giving us a nice list of creditable companies with some
great upside potential.
BC: Thank you.
Bo Chew is the
manager of the Magna Opportunity Fund and has been associate portfolio
manager with Chartwell Asset Management since 2010. He is the principal of
Legacies Financial Group and was formerly the trading director for Chartwell
Financial Inc, a mutual fund dealer, from 1994 to 2006. He is a Canadian
Investment Manager (CIM). Chew has successfully managed a stock account since
November 2003 using a similar investment approach as the Fund. He seeks the
highest returns without excess risk and has a significant amount of money in
the Fund.
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DISCLOSURE:
1) Zig Lambo 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: Barkerville Gold Mines Ltd., Scorpio Gold Corp., MAG Silver
Corp., Pretium Resources Inc., South American Silver Corp., NovaGold
Resources Inc., Avino Silver & Gold Mines Ltd., Geologix Explorations
Inc. Streetwise Reports does not accept stock in exchange for services.
3) Bo Chew: I personally and/or my family own shares of the following
companies mentioned in this interview: Agnico-Eagle Mines Ltd., Kinross Gold
Corp., Barkerville Gold Mines Ltd., Scorpio Gold Corp., MAG Silver Corp.,
South American Silver Corp., Metanor Resources Inc., Avino Silver & Gold
Mines Ltd., Gran Colombia Gold Corp., Gryphon Gold Corp., Geologix
Explorations Inc., Xtierra Inc., Minco Silver Corporation. 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.
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