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With money rushing out of the junior resource space, Charlie Brookes,
investment director at Arlington Group Asset Management and investment
manager at Praetorian Resources, is rushing in—thoughtfully. In this Gold Report interview, he says now is the time to buy and hold,
but it is crucial that investors do their homework before investing.
The Gold Report: What approach has
Praetorian Resources Ltd. (PRAE:LSE) taken toward
resource equities at this point?
Charlie Brooks: Praetorian Resources is
focusing its attention on scalable and quality assets run by experienced
management teams and wherever possible is trying to reduce its exposure to
high levels of financing risk.
TGR: Can you explain what
Praetorian is?
CB: Praetorian Resources
operates exactly like a fund but is actually structured as an investment
holding company. We hold 15 investments at the moment, a variety of junior
resource companies. Polar Star Mining Corp. (PSR:TSX.V) and Maya Gold & Silver Inc.
(MYA:TSX.V) are significant
investments for us. We also like A-Cap
Resources Ltd. (ACB:ASX), which is a Botswana coal
and uranium company.
TGR: Why does Praetorian have
two tickers on the website?
CB: One is for the
subscription shares, which is another name for, effectively, a warrant. It's
basically a trading warrant. July 2015 is the expiry date on the 70p warrant
from the IPO. So the PRSS is the warrant and PRAE is the ordinary.
TGR: Why wouldn't an
investor, instead of taking a direct shareholding in either Maya or Polar
Star, just invest in Praetorian and get everything at once?
CB: Investors have to make
their own investing choice. I want to be careful telling investors what they
should or shouldn't do. Praetorian is an investment holding company with a
collection of assets in different jurisdictions.
TGR: What are some things you
look for in a jurisdiction?
CB: One, a sensible mining
code; two, a sensible fiscal regime; and three, a history of sensible
practice. Chile, where Polar Star is, has a fantastic mining code and no
history of exploitation of mining companies. Companies operate there very
happily. Botswana is a very safe country, as is Morocco, although it is fair
that recent moves by several African countries have increased the risk perception
for the continent as a whole.
TGR: But these things are
somewhat dynamic. Not too long ago, many people would have put Peru among the
safest and most opportune places to invest. But now there are some question
marks around Peru. Are you constantly monitoring that?
CB: This is true not just for
developing countries. You can say the same thing for Australia and the tax
changes there. Whenever you invest in a foreign country, you are taking a
degree of sovereign risk. We do as much research as we can, but risk cannot
be completely eradicated.
TGR: You are investing in
Maya, and its assets are listed in Morocco, and there's very little history
to go on as far as mining in that country. Do you think this adds to the risk
of the Maya story?
CB: Any company with assets
in a single country brings with it more risk than a company with assets in
many jurisdictions. But when you invest in the junior mining space, do you
want a company with assets all in a number of different jurisdictions with
the logistical challenges and the costs that entails? Junior mining companies
inherently tend to have one principal asset in one country where the majority
of their value is based and that is the case with Maya.
"Whenever you
invest in a foreign country, you are taking a degree of sovereign risk."
To be fair, we like
Morocco as a country for investment and Morocco does have a mining history. A
lot of phosphate has been mined there for many years. Morocco also has one of
the largest silver mines in the world today (Imiter)
and Kasbah Resources Ltd. (KAS:ASX) is developing a
substantial tin asset there. The mining code is clear, the political
landscape is stable and fiscally Morocco is internationally competitive.
There's a corporation tax rate of 35% in Morocco and for mining companies
that export their product there is a five-year tax holiday in place and a 50%
discount on taxes thereafter. Specifically in the case of Maya and its Zgounder mine there is a 3% royalty rate and ONHYM, a
state owned company, has a 15% free carried interest in the project for the
first 6.5 million ounces silver produced.
One of the great things
about Maya is that its COO, Noureddine Mokaddem, is one of the leading figures in the Moroccan
mining industry. Noureddine has played a key part
in the development of three of the four largest Moroccan mines and worked for
many years at the state owned mining company. His in-country connections and
reputation are excellent.
Along with Maya's CEO,
Guy Goulet, Maya is more than capable of advancing
its primary asset, the Zgounder mine, into
production over the next 12 months. Furthermore, I think there will be a
second material asset brought into the Maya stable soon, at which point Maya
will have an ideal suite of assets—one near-term producing asset, one
material development asset and one exciting exploration asset.
Maya is an early entrant
into the Morocco mining space and investors will see the benefit of that over
the next few years. In short, it is my opinion that you are buying a lot of
company for a market cap of approx $25 million (M).
TGR: Are you trying to get
anybody on board for coverage of this junior?
CB: Praetorian is willing to
look at junior stocks like Maya and invest in them prior to the involvement
of the leading broking houses. However, it is my opinion that in 2013 at
least one more significant institutional investor will get involved with
Maya. As part of that investment, I'm sure we'll see investment banks brought
in, to drive the story forward. I genuinely believe that 2013 will be the
year that Maya matures as a company and becomes properly covered and properly
backed by the institutional market. The future looks bright for this company.
TGR: Are there are certain
commodities that you consider hot or that could become more in demand?
CB: We like to take a
contrarian view, so I'm not always looking at those commodities that are in
fashion. Uranium is one we talk about internally as improving over the medium
term. It is down in the dumps at the moment, totally unloved—with some
justification—after the recent disasters. But over a medium or long
term, $40/pound (lb) uranium is not sustainable.
Most companies in uranium processing and development will need a considerably
higher price than $40/lb to develop those assets.
"High levels of
continued political unrest and currency debasement makes gold an appealing
option."
TGR: Are there certain
commodities you're avoiding?
CB: There isn't any
commodity that we would avoid. If the project stacks up, we will look at it.
However, at different stages of the cycle some investments are more appealing
than others. Right now, for instance, high capital expenditure plays such as
bauxite and low-grade iron ore projects are less interesting to us because
capital is so tight and therefore raising the necessary sums of debt and
equity is just not realistic. You have to be pragmatic and realize when you
have a $50M market-cap company, it is going to be
unable in today's market and for the foreseeable future to raise hundreds of
millions of dollars of construction expenditure.
TGR: We've seen gold rebound
since the outcome of the U.S. election. At what trading range do you see gold
in throughout 2013?
CB: I think it will be well
underpinned in the short term, and we're certainly bullish on it. I don't
think we're going to see any significant rebasement
from these levels. High levels of continued political unrest and currency
debasement makes gold an appealing option.
TGR: Could you outline some
of the selection criteria your company uses when choosing which resource
companies to invest in?
CB: We're looking for the
assets that in tough markets can get funded, and those are ideally $40/lb to develop those assets.
TGR: Could you outline some
of the selection criteria your company uses when choosing which resource
companies to invest in?
CB: We're looking for the
assets that in tough markets can get funded, and those are ideally $40/lb to develop those assets.
TGR: Would you prefer to see
a geologist or someone with a financial background as CEO or managing
director?
CB: As long as the overall
team has the skills to succeed, that's enough. In today's world CEOs need to
be more investor focused than ever. There are so many companies out there;
it's extremely important that the CEO has the enthusiasm, drive and air miles
to get around and tell the story to the institutional and retail markets
because otherwise companies just disappear.
TGR: How long do you usually
remain in your positions?
CB: When we invest, we
intend to take a long-term view. We're investing in the smaller end of the
market, which is illiquid. Some people would say it is private equity
investment because there is no secondary market when you're buying 5%, 10%,
15%, 20% stakes in companies. We work with management teams. We sometimes go
on the board; I'm on the board of Polar Star. We try to do everything we can
to assist them and make sure that they understand our views on corporate
governance and the need to minimize central office costs during these tough
times, and hopefully we all agree.
TGR: Is buy
and hold dead?
CB: I don't think so because
especially in this type of market and this time in the cycle, if we're buying
positions at these kinds of levels, there are a lot of companies whose share
prices are down 50–75%. Good and bad companies alike are being sold off.
I think it's an
excellent time to be investing with a buy-and-hold strategy in companies. You
can buy significant stakes from distressed sellers in a number of companies.
We're looking at a couple of examples of that at this very moment—funds
in liquidation, large private investors looking to get out of the sector.
We're very happy to be contrarian, buy into the bottom of the cycle when
things are unloved and the share prices are down, and adopt a buy-and-hold
strategy. That's the way you can make multi-times returns.
That's what we have
tried to do with Polar Star. This was an opportunity because Polar Star
simply ran out of money when its near-term production asset was just getting
into commercial production, and we came in and provided it a rescue bridge finance
facility followed by a $6.5M equity fundraising.
"It's an excellent
time to be investing with a buy-and-hold strategy in companies. "
Polar Star has an
excellent suite of copper and gold assets in Chile, including Montezuma,
which is 100%-owned by the company, and also a joint venture agreement with
BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK). In
addition, Polar Star has one production asset, the Chépica
mine, which is in the process of ramping up production. Finally, it has a
number of non-core assets that in time could be put together and vended out
into a new company simply because Polar Star doesn't have the balance sheet
or the management time to focus on all of its properties. It's a lot of
company for the $25M market cap.
Praetorian led the refinancing
of Polar Star at a $0.10 issue. It's now the largest investor, owning just
over 10% of the company. Polar Star's shares are currently trading around
$0.15. We are very bullish about the future. We're not buying this for a move
from $0.10/share to $0.15/share. We think there's a considerable amount
further to go. We like it because it has a producing asset that is already
pushing out free cash flow that will be increasing considerably over the next
12–24 months. That will fund—along with the money we raised at
the equity issue, which was $6.5M—the exploration of the Montezuma
project.
TGR: I'm not familiar with
the details of the joint venture with BHP Billiton.
CB: Details of the JV with
BHP Billiton were released to the Toronto Stock Exchange back in April 2012.
In short, the JV encompasses 170,000 hectares of exploration land. Polar Star
doesn't need to make any financial commitments right now. BHP Billiton is
currently investigating the acreage and has until July 2013 to select which
parts it wishes to progress with.
TGR: How long will the money
that Praetorian raised carry the company?
CB: The current aggregate
remuneration for the new board in Polar Star is approximately $100,000/year.
Polar Star's head office costs have been slashed and are in the process of
being cut further. With the recent $6.5M of equity raised and the cash flow
produced by its operating asset at Chépica,
Polar Star should not need to come back to the market for more money unless
we want to significantly accelerate the exploration work being undertaken at
Montezuma.
TGR: So that's basically an
exploration and development play.
CB: And a production story.
Polar Star's Chépica mine is in production.
TGR: What sort of cash flow
is it generating on an annual basis?
CB: I think it is better to
talk about throughput. The mine is currently processing about 170 tons per
day (tpd), going quickly up to 275 tpd in early 2013 and then a decision will be made in
mid-2013 about whether to expand it again to 500 tpd.
The mine only came into production in the middle of 2012.
TGR: Do you generally see
more opportunities in explorers, developers or mine producers?
CB: It depends. If you're
going for the explorers, you've got to be aware of how much capital they're
going to suck up. If it's an explorer with a very large balance sheet, that
is fine. We might take a position on the secondary market but certainly are
cautious if the model is to constantly dilute the equity to fund exploration
spend.
TGR: Could you give us some
insight into the appetite for junior resource equities among London's
institutional investors?
CB: Most of the larger
institutional investors are getting out of junior resource equities at the
moment. Raising equity capital, even debt capital, is extremely difficult at
the moment, and unless the companies have a proper control of costs,
corporate governance and a strong asset base, they will struggle to raise
capital over the short to medium term.
TGR: Barack Obama's
re-election win seems to have soured the investment market in the U.S. Do you
believe that's a buying opportunity, or do you believe investors should steer
clear until the dust settles and perhaps even until this "fiscal
cliff" problem seems to have ended?
CB: There's a lot of risk in
the market. The junior resource market is tough at the moment, and anybody
who thinks there's going to be a quick rebound is going to be mistaken. The
retail investor needs to be extremely careful before throwing money into the
market because a lot of institutions are getting hit with redemptions or are
just fed up with losing money in the junior resource space, so there is a
momentum away from it. Money is coming out of the sector and not into it at
the moment. That, for a long-term buy-and-hold investor, provides a lot of
opportunities. But you need to do your due diligence before investing in what
is a high-risk and specialized area.
TGR: Thank you so much for
your insights.
Charles
Cannon-Brookes is the investment
director of FSA regulated Arlington Group Asset Management Limited and the
investment manager of Praetorian Resources Limited, an AIM listed closed
ended investment company focused on the natural resources sector.
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DISCLOSURE:
1) Brian Sylvester 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: Maya Gold & Silver Inc. Streetwise Reports does not
accept stock in exchange for services. Interviews are edited for clarity.
3) Charlie Brooks: I personally and/or my family own shares of the following
companies mentioned in this interview: Praetorian Resources Ltd. I personally
and/or my family am paid by the following companies
mentioned in this interview: Praetorian Resources Ltd. I was not paid by
Streetwise Reports for participating in this interview.
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