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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 Gold Report interview, Sid drills
down on some relatively unknown resource stocks he has uncovered.
Companies Mentioned: Apella Resources Inc. Commerce Resources Corp.
Compliance Energy Corporation Copper Mountain Mining Corp. Fire River Gold Corp.
Hunt Mining Corp. Musgrove Minerals Corp.
Newmont Mining Corp. Pacific North West Capital Corp. Thunder Mountain Gold Inc.
The Gold 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 them are in the
natural resource sector. The rest are from agriculture, technology, aerospace
and other industries.
TGR: 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 is basically the intrinsic value of a stock on a
particular day, which is calculated based on the stock's fundamentals. And
you're right—it's basically the point at which there's no upside or
downside.
TGR: 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.
TGR: 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.
TGR: You cover a lot of metals, from gold and silver to rare earths
and others. Sid, I assume you think of gold as a currency and believe it has
different drivers than the commodity industries you follow. Could you tell me
about the different drivers of these industries?
SR: You're right, we think of gold as a currency simply because most
investors buy gold to preserve their capital. All the other
commodities—except silver—are driven by supply and demand. If a
supply deficit is forecasted, that means prices should go up and vice versa.
Silver is unique because it's priced as a commodity and as a capital
preservation asset.
TGR: Do gold and commodity stocks correlate or do they provide
diversification?
SR: As the drivers of gold and the drivers of the rest of the
commodities are different, I would definitely view a good diversification
strategy as one that includes gold and commodity stocks. Commodities' main
driver is supply and demand. When an economy does well, so do commodities.
But gold, on the other hand, tends to do well when there's uncertainty in the
economy. When the value of paper money is expected to depreciate, gold tends
to do well. It's definitely good to have gold and other commodities in a
portfolio.
TGR: 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 ones
that are 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.
TGR: Are you generally bullish on commodities right now and which
ones?
SR: I've never been a big fan of gold or silver since gold crossed
$1,100 and silver crossed $20. Although I don't see any major upside from
current levels, gold should stay at its current price for the near term. Slow
recovery in the U.S. and the continued weakness in the U.S. dollar should
keep gold high. In the long term, three or four years down the line, we
expect gold and silver to soften from current levels.
In terms of the other commodities, we had predicted a correction when we last
spoke to the Gold
Report early
this year. Although we have experienced some kind of correction since then,
we think there is a little bit more room for downside. If you look at copper,
for example, at $4.11 per lb., most of the projects out there are making a
lot of money. Producing companies and upcoming projects can still make good
margins at lower copper prices.
Even though we don't think there's much upside in the base metal sector in
terms of commodity prices, there are a lot of companies in those sectors that
are very undervalued—companies with quality assets, quality management
teams and solid cash positions.
TGR: Where should investors be deploying capital?
SR: Compliance Energy Corporation
(TSX.V:CEC), a coal company, 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 and a
significant position in Copper Mountain Mining Corp.
(TSX:CUM).
We also like Pacific North West Capital Corp.
(TSX:PFN; OTCQX:PAWEF; Fkft:P7J.F) and Commerce Resources Corp.
(TSX.V:CCE; Fkft:D7H; OTCQX:CMRZF).
TGR: Pacific North West has a gold and polymetallic project. The
company is going to need about $5M to explore its River Valley project this
year, but it only has about $8.4M in cash on the balance sheet. When will
Pacific North West have to go back to the market?
SR: We always look for a strong management team and strong cash
position in juniors, and Pacific has that. Holding $8M-plus in cash is strong
for any junior, especially when that company's market cap is less than $30M.
I think the current cash should easily be enough for the rest of the year.
The company has several projects, but four main assets really contribute to
our fair value of this stock.
First is their 100%-owned River Valley project near Sudbury, Ontario, which
has a measured and indicated resource of 953,000 ounces (953 Koz.) palladium,
330 Koz. platinum and close to 60 Koz. gold. The second project is the
Destiny Gold project in Québec, which also has over 600 Koz. gold in
indicated and inferred resources. The third project is the Rock and Roll
silver-gold rich VMS project. The company recently announced a resource
estimate on that project as well. And, the fourth asset is an 8% ownership in
Fire River Gold Corp. (TSX.V:FAU; OTCQX:FVGCF),
which is focusing on the Nixon project that is expected to be in production
shortly. We think it's a strong buy at this time.
TGR: It sounds like it should not have any problem raising capital.
SR: Yes. The management also has solid experience in raising capital.
We don't see cash as a problem for this company at this time.
TGR: Commerce Resources shares are up 166% over the past 52 weeks, but
you're still very hot on this company?
SR: Right. We've been following Commerce for the last six years, so we
know very well how they have been advancing their main project, the Blue
River project in British Columbia, which is an advanced stage
tantalum-niobium project. The company has recently received a lot of
attention for its rare earth project in Québec, the Eldor project. It
came up with an initial resource estimate that stated 117 Mt grading 1.74%
TREO in the inferred category. We think that resource is one of the world's
largest NI 43-101 or JORC rare earth deposits outside of China. This is a
huge development for the company. Our fair value on this stock is $2.13.
TGR: I'm wondering about industries where the resources are not traded
by open outcry or electronic markets. You follow some markets like that?
SR: Yes. One good example is the vanadium market. We have a long-term
positive outlook on the vanadium segment. One of the best bets for investors
who are looking for pure exposure to vanadium plays is Apella Resources Inc. (TSX.V:APA;
Fkft:NWN) in Vancouver. The company completed a 16-diamond
drill hole program on its Iron-T project in Québec. It also has the
Lac Dore vanadium project, which has a huge historic resource.
TGR: Is that the next market-moving event for Apella?
SR: I would say the results of the current program, if positive, will
be the next catalyst.
TGR: The company won what could be a milestone victory against SOQUEM
Inc. for 18 of 21 claims in the Lac Dore deposit, the world's second-largest
vanadium deposit. I'm wondering how far along this project is from being a
major play for the company?
SR: A lot of work has to be done on it. The numbers that we have seen
so far from this project have been excellent, but a significant amount of
work has to be done before a production decision can be made.
TGR: How do you value a company based on underlying assets that don't
have a published commodity price?
SR: That's a very good question. Investors typically find it easy to
value revenue or cash-flowing companies. Over the last eight years in
business, we have developed a strong expertise in evaluating juniors who have
no revenues. At Fundamental, we use three valuation models, the discounted
cash flow model, real options model and a comparables valuation model. For
comparables, we use a metric called "EV-to-resource," which is
basically enterprise value to resource of a company. When we are valuing a
company like Apella Resources, we look for similar companies focusing on
vanadium. We examine their EV-to-resource ratios and find the average. In the
case of Apella, we found that the average valuation metric was $0.06/lb. and
Apella was trading at $0.01/lb., which shows that Apella was undervalued. Our
fair value for Apella at the time of our last report was $0.65.
TGR: You follow some micro-cap companies where investors can get major
returns if projects pan out. Can you talk about some micro caps that stand
out?
SR: We recently issued coverage on two companies: Musgrove Minerals Corp. (TSX:MGS;
OTCQX:MGSGF) and Hunt Mining Corp. (TSX.V:HMX).
Musgrove Minerals' main focus is gold and polymetallic projects in Idaho. One
of its main assets is the Empire Mine project, a polymetallic project in
Idaho with a historic resource estimate. The company is expecting a
prefeasibility study on that to be completed this year. Its second key asset
is the Musgrove Creek project, which has an NI 43-101 resource. The company
currently has close to 1.5 Moz. gold equivalent in historic and inferred. We
initiated coverage on the company with a fair value of $1.66/share. The
company is trading at just $0.15.
TGR: With a market cap of $5.5M, any kind of resource could vault
these shares up to unbelievable heights. Your implied return is probably
about 1,000%, I'm guessing.
SR: The intrinsic value reflects a return of 1,000+%. These projects
are in Idaho, which is a well-known, mining-friendly community. We know the
management team well. The company also recently announced a financing. We
expect the company's progress at its two main projects should move the stock
price closer to our fair value estimate.
TGR: Hunt Mining is also very small with a $36M market cap. It is up
22% over the last three months, 47% during the past six months, but it's
about flat for the year.
SR: We initiated coverage on the company a few weeks ago with a $0.50
price valuation. At that time, the stock was trading at $0.33. After we
initiated coverage, the company came out with some extremely positive results
and the stock moved up significantly. I think it's close to our fair value
now. We are revising our valuation on the stock and we will be releasing an
updated report on the company with new recommendations soon.
It has a strong management team and a strong cash position. It's located in
Santa Cruz, Argentina, which is a really mining-friendly area with great
infrastructure. There are a lot of other huge players there that are trading
at significantly higher multiples compared to Hunt.
TGR: You've talked about some very interesting plays here.
SR: We also recently initiated coverage on Thunder Mountain Gold Inc.
(TSX.V:THM, OTCBB:THMG), which has made some good
progress over the last 12 months. Its main project is the South Mountain
project in Idaho. That has close to 20 Moz. silver-equivalent resource. It's
a polymetallic deposit. They are currently completing an updated resource
estimate and PEA for this project. Recently the company signed an agreement
with Newmont Mining Corp. (NYSE:NEM) to
advance its Trout Creek project in Nevada. The company just announced a $4.5M
financing. The company should be in a strong cash position after this
financing. Our fair value on this stock is $0.70.
TGR: It's currently trading at about $0.29. That's a more than a 100%
implied return. It's a micro-cap company with about an $8M market cap. Almost
any resource would have a dramatic impact on the share price.
SR: Yes.
TGR: Thanks. I've enjoyed meeting you very much, Sid.
SR: I've enjoyed our discussion as well. Thanks.
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 (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.
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