Are junior resource stocks the investment equivalent
of a game of blackjack? It depends on the investor as much as it does on the
company. Sid Rajeev of Fundamental Research Corp. has come to expect
stability from his picks. How? By using fair-value metrics and a longer-term
timeline. In this exclusive interview with The
Energy Report, learn how this pragmatic analyst plays a
speculative market for reliable returns
Energy
Report: In your
last interview with us, you talked about your firm's fair-value metric
philosophy for evaluating which stocks look like good investment candidates.
How has that worked out over the past year and a half?
Sid
Rajeev: We are
strong believers in fundamentals analysis. Short-term price movements are
typically controlled by speculation and a lot of hearsay. It's easier to
identify good investment opportunities through fundamentals analysis,
especially with a one-year minimum investment time horizon.
TER: How does the current global economic picture
influence your decision-making for resource investments into the foreseeable
future?
"Short-term
price movements are typically controlled by speculation and hearsay. It's easier to identify good investment opportunities through
fundamentals analysis."
SR: We have seen a lot of good developments in the
overall market in the past few months. First of all, the TSX Venture Index is
up 10%. Moody's rating agency decided to maintain its rating on Spain. The
U.S. economy continues to grow gradually. These are good developments that
could result in a sentiment shift. We do see continued improvement, but it's
going to be gradual. There are still a lot of extremely undervalued
opportunities in this market that can provide high returns over the next 12
months.
TER: Demand projections for China and other developing
countries are shifting. How is this going to affect the fertilizer and potash
markets?
SR: Potash was trading above $800/ton in 2008. Prices
then crashed to just over $300/ton in 2009. They picked up after and went
above $500/t. Prices however dropped by about 10% in the past few months.
Now, it's around $460–480/t. Our long-term potash price since last year
has been $425/t. While many analysts and investors had to reassess their
potash targets, because they were valuing those targets at extremely high
potash prices, we did not have to make any significant changes. We continue
to be strongly bullish on the segment in the long term, especially because
the rationale is very simple. Developing economies need more and better food,
and most importantly, the supply of arable land has been stable or
decreasing, creating a huge need for fertilizers like potash.
"Many
investors had to reassess their potash targets because they were using
extremely high potash prices, but we did not have to make any significant
changes. We continue to be strongly bullish on the segment in the long
term."
We are
bullish on the commodity and even more bullish on advanced junior
North American potash companies. Remember that the potash segment is an
oligopoly that is currently controlled by a few major producers. India and
China are big consumers and need long-term, stable supply at reasonable
prices. We think that they would make a move to assure that they can control
some advanced-stage potash projects, which are now trading at extremely low
levels. We expect to see some kind of joint venture or merger and acquisition
(M&A) activity in the advanced junior space in the next 6–12
months.
TER: Which North American projects are looking good?
SR: Two companies that we actually follow and like are Western Potash Corp. (WPX:TSX.V) and Passport Potash Inc. (PPI:TSX.V;
PPRTF:OTCQX). Western
Potash has been a Top Pick for over 12 months. It's still one of our
favorites. This company is one of the very few advanced-stage projects in
Saskatchewan that has yet to be acquired or form a JV. Most of the projects
around it have already been acquired. The company is going to come out with a
feasibility study by late November. Most of the neighboring projects that
have been acquired in the past were all at post-feasibility stage. So we think
the next six months is going to be extremely exciting and crucial for the
company because, if the feasibility study is positive, as we expect, it
should open more doors to some kind of joint venture or M&A activity.
I think an
ideal acquirer or JV partner would be a state-owned fertilizer company in
India or China. One of the largest Indian fertilizer companies, Rashtriya Chemicals & Fertilizers Ltd., is looking to
invest close to $1 billion in potash projects in Canada. I think they have
already talked to most of the potash players in the space. A positive
feasibility study could trigger some developments for Western Potash Corp.
TER: What's the story on Passport Potash?
SR: Passport Potash is another interesting story, but a
more early-stage play. The project is in Arizona. Passport has dominant land
acreage in the Holbrook basin. The company came out with an updated resource
estimate last month. Its scoping study is expected in Q1/13. The main
difference between Passport's project and Saskatchewan projects is that it is
shallower. But size-wise, it's going to be significantly smaller. It's still
early and there is still a lot of exploration going on in the region.
Passport also recently signed a Letter of Intent with the Hopi Indian Tribe,
which has allowed the company to include the Hopi lands in the upcoming
Preliminary Economic Assessment (PEA). Passport has quite a few catalysts
coming up, including a scoping study. It is also in discussions for
financing, so we could see some kind of activity with this company over the
next few months. It's currently trading at $0.20. Our fair value is $0.81.
TER: How does the uranium sector look to you?
SR: We have a long-term bullish outlook on uranium.
Prices have dropped significantly over the last year to around $43–44
per pound (lb). Our long-term outlook on uranium is
$70/lb. There are a few good uranium stories we cover. One of our favorites
is a company called Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX). It has two advanced-stage projects in the U.S.,
one in New Mexico and one in Wyoming. The company recently signed a joint
venture agreement with Korea Electric Power Corp. (KEPCO) to help advance its
Gas Hills project. It also announced a positive PEA on its Roca Honda
project.
TER: What about coal?
SR: Coal is another commodity we are bullish on. There
is a company called Compliance Energy Corp.
(CEC:TSX.V), which
has five properties on Vancouver Island. It is focused on semi-soft
metallurgical (met) coal. Coal comes in two types: met coal and thermal coal.
Met coal has a higher value than thermal coal; prices of met coal have not
dropped as much as thermal coal. Compliance Energy is now working on its
environmental processing. The neighboring community has been extremely vocal
against having a mine in the neighborhood, but we have not come across any
major concerns. Progress is going to be slow and it is hard to predict an
outcome, but we believe it is a good time for investors to get in if they
want to speculate on a positive outcome on the environmental assessment.
Right now, shares are at $0.09. Our last valuation in July was $0.85.
TER: That's a pretty wide spread. Are there any other
interesting possibilities or developments out there that you want to mention?
SR: During a slowdown, investors typically look for
safer assets. The junior mining segment is a highly speculative market.
Within that sector, the safe assets, we believe, are the companies that are
near-term producers or those that just started production with known
exploration or production upside. We have been recommending such stories over
the past year and most have done extremely well. The majority are in the
precious metals sector.
Names on
our coverage list that have done extremely well in the last year include Anaconda Mining Inc. (ANX:TSX). Anaconda is a gold producer in Newfoundland; shares are up 56% YOY.
The company has been extremely successful in ramping up production and
cleaning up its balance sheet. The second one is SilverCrest Mines Inc. (SVL:TSX.V;
SVLC:NYSE.MKT), which is
a silver producer in Mexico with significant exploration upside. SilverCrest shares are up 56% YOY as well. The third
company is Diamcor
Mining Inc. (DMI:TSX.V; DMIFF:OTCQX). This has been our best performer in the past year;
shares are up 269%. The company and its partner Tiffany & Co. have a
diamond project in South Africa that it acquired from De Beers; commissioning
and testing activities are ongoing. The last one is Banks Island Gold Ltd. (BOZ:TSX.V); shares are up 14% since we initiated coverage last
month. It has two advanced projects in British Columbia.
Just to
close, remember that the junior mining market has always been a highly
speculative one; it's mostly seen as a way to gamble. Here at Fundamental, we
think it's easier to identify winners if you do fundamental analysis, proper
due diligence, question the management team, ask them hard questions and see
if the company has catalysts coming up in the next 6–12 months. If you
do that, then you have a better chance of finding a winner.
TER: Thanks for speaking with us today, Sid.
SR: My pleasure.
Sid Rajeev heads the research department at Fundamental
Research Corp., which covers over 150 small- and micro-cap companies and 15
exempt market/private issues in industries including energy, mining, real
estate and technology. He also manages the company's list of Top Picks, which
have historically helped the firm finish strong in third-party analyst
performance rankings. Rajeev holds a Bachelor of Technology degree from
Cochin University of Science and Technology, and a Master of Business
Administration from The University of British Columbia. He is a CFA Charterholder.
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DISCLOSURE:
1) Zig Lambo of The
Energy 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
Energy Report or The Gold Report: Strathmore Minerals Corp.,
Passport Potash Inc. and SilverCrest Minerals Inc.
Interviews are edited for clarity.
3) Siddharth Rajeev: 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 this interview. Fundamental Research Corp.
provides fee-based coverage on companies mentioned in this article.
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