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Siddharth "Sid" Rajeev isn't a miner. But in his search for value, Sid, head of research for Fundamental Research Corp. in Vancouver, digs
deep into the world of small- and micro-cap stocks to find
undiscovered gems. In this exclusive interview with The
Energy Report, Sid drills down on some relatively unknown resource stocks he has uncovered.
Companies Mentioned: Compliance Energy Corporation Copper Mountain Mining Corp.
Mesa
Exploration Passport Potash Inc.
Plains Creek Phosphate Corp. Rock Tech
Lithium Inc. Strathmore Minerals Corp.
Western Potash Corp.
The Energy
Report: Sid, you're an electrical engineer by training. How did you end up the head of research at your
boutique investment bank?
Sid Rajeev: I initially worked
for an engineering firm for a few years. I developed a strong interest in finance and investment analysis in those years, so I decided to pursue an MBA degree. Soon after I got my degree,
I joined Fundamental Research and it's my sixth year
here. At Fundamental, we have a team of analysts, including financial analysts and geologists. We cover about 150 companies, three-quarters of which are in the natural resource sector. The rest are from agriculture, technology, aerospace and other industries.
TER: Instead of putting target
prices on stocks, your firm uses a fair-value metric. Does that imply perfect
pricing, a theoretical
point at which there's no upside or downside?
SR: Fair value, basically,
is the intrinsic value of
a stock on a particular day,
which is calculated based on the stock's fundamentals. And you're right, essentially, it's the point at which there's no upside or downside.
TER: When shares reach fair value, do you recommend them as momentum plays?
SR: No, our valuation
methodology is always based on fundamentals—we will not give a buy recommendation on a stock
if its share price is higher
than its intrinsic value. We tend to evaluate or review our valuations on a particular company every three to four months—sooner if some significant news develops.
TER: With a fundamental
theory, you recommend taking money off the
table when a company achieves fair value and seeking fair value in another company's shares.
SR: Exactly.
TER: What are you trying to achieve for your clientele through your general investment theory?
SR: Our main goal at Fundamental
is to bring out those underexposed small- to mid-cap companies that no one really follows—those are the companies most likely to be undervalued. Our geologists look at the technical aspects. They work in conjunction with our financial
analysts to come up with
the intrinsic value and a recommendation.
TER: Are you generally
bullish on commodities
right now and, if so, which ones?
SR: Our favorite now is
uranium. We've been bullish
on uranium for the past couple of years. Yes, the incident in Japan caused uranium to take a huge hit, along with the companies that follow or track uranium, but we believe the fundamentals of uranium are still
intact. It's still one of
the cheapest and cleanest
sources of power out there. Particularly
when fossil fuels are at extremely high prices, we need sources like uranium going forward. Having said that, I don't think we
are going to see any spike but rather a slow and gradual recovery in uranium prices and,
therefore, we believe uranium is very attractive for investors with a longer time horizon (at least 12 months).
TER: Where should investors be deploying capital?
SR: Our three top picks
are Western
Potash Corp. (TSX.V:WPX), Compliance Energy Corp.
(TSX.V:CEC), a coal company,
and Strathmore Minerals Corp.
(TSX:STM; OTCQX:STHJF), a uranium company.
Western Potash is an advanced-stage exploration company
with potash in
Saskatchewan. We think it's a good acquisition target.
We picked up Strathmore Minerals when it was
at $0.57. It traded as high as $1.60 but, after the disaster in Japan, the stock dropped significantly and now is sitting
at about $0.62. We believe uranium companies with quality assets, like Strathmore, should do well going forward.
Compliance Energy recently announced a positive feasibility study, and it should go into production in the next
24–36 months. It has a quality
management team, strong cash and investments—especially its significant position in Copper Mountain Mining Corp. (TSX:CUM).
TER: Great. Any others?
SR: Rock Tech Lithium Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA) is a very interesting company under our coverage. Its main focus is on the
Georgia Lake lithium project in the Thunder Bay Mining
District in Ontario. That project has a historic resource of 9.8
million tons (Mt.) at 1.18% lithium oxide. We like
this company particularly because it is expected
to complete several milestones in the next
6–12 months. Number
one, Rock Tech is expecting
to convert its historic resource to an NI
43-101-compliant resource in the next month or so. Second, the company is awaiting metallurgical
test results on a 1-ton bulk
sample, which will determine the recovery rates for different separation methods and also evaluate the potential to produce battery-quality lithium carbonate. Third,
in addition to Georgia Lake, the company also plans to advance its recently acquired projects in Quebec, which are located close to some well-known lithium projects.
The Kapiwak project
(James Bay area in Northern
Quebec) is located close to a new discovery and the Lacorne project (Val d'Or) is close to
a near-term producer
(18–24 months). We expect this stock to move closer to our fair value estimate of $0.55
per share if these developments turn out to be positive. The current share price is
$0.25.
TER: The main driver here is the growing popularity of electric cars?
SR: Exactly. We think lithium is attractive for
use in electronic devices
and vehicle batteries because
lithium is the lightest metal in the periodic table.
Lithium has the highest specific
heat of any solid element. Lithium
batteries also hold a
charge for a long time and could be utilized to store energy from alternate
sources, such as wind and
solar, as the electricity
production from these
sources is variable.
TER: What else can we look forward
to from Fundamental Research?
SR: Another company
that is worth tracking is Mesa Exploration (TSX.V:MSA). It's
exploring for lithium, potash
and uranium in Utah and Arizona. All the projects
are in proven mining
districts with accessibility
and infrastructure. The company recently
released an NI 43-101 technical
report for its flagship
Green Energy Lithium Project in Utah, where drilling is expected to begin this spring
once the permits are received.
Mesa also has a joint venture
(JV) partnership with Passport Potash Inc.
(TSX.V:PPI, OTCQX:PPRTF) on its Holbrook Basin Potash Project.
We recently picked Plains Creek Phosphate Corp. (TSX.V:PCP) and will be initiating
coverage on the company shortly. It has an advanced-stage
phosphate project in Guinea-Bissau
in West Africa. A bankable
feasibility study is expected in Q411. The company has already received a production license,
and production is expected
to commence in 2013. Our recommendation
and rating on the company should
follow in the next few weeks.
TER: Do you believe
a phosphate company can grow due to the success in potash, and that it might be
time for phosphate to catch up?
SR: Exactly, phosphate has the same drivers as potash. The
main idea behind
phosphate and potash is increasing demand for food, increasing population and
diet improvement in developing economies. Also, meat consumption
in developing countries is
expected to significantly
increase in the future, which
would drive up demand for
grains to be used as livestock feed. All this requires fertilizers, and that's where potash and phosphate come
in.
TER: Got it. I've enjoyed meeting you very much
Sid. Thank you for your time today.
At Fundamental Research
Corp., Sid Rajeev heads the research department, which covers over 150 small- and micro-cap companies
and 15 exempt market/private
issues from a broad array of industries including energy, mining, real estate and technology. He also manages the FRC list of
Top Picks, which are the
stocks under coverage that he has the highest conviction level about.
These picks have historically helped the firm finish strong in various third party analyst performance rankings.
Sid holds a bachelor of technology degree in electronics
engineering from Cochin University
of Science & Technology and an MBA in finance from the University of British
Columbia. He is a CFA Charterholder
and has completed studies
in exploration and prospecting at
the British Columbia Institute of Technology.
The
Energy Report
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