Cambridge House
International Mining Investment Conference
May 15-16, 2018
Vancouver Convention Centre
Vancouver, British Columbia, Canada
Chris Thompson moderated a panel discussing “Where is the Mining Capital Going in 2018/19” with:
Ralph Aldis – Senior Analyst, US Global Investors
Brett Heath – President & CEO, Metalla Royalty & Streaming
Matt Zabloski – Founder & Lead Portfolio Manager, Delbrook Capital
Transcript:
Chris Thompson, Managing Director & Head of Research, Ubika Research
Hi, my name is Chris Thompson. I’m the Head of Research at Ubika Research, it’s a company, part of the Gravitas Financial group of companies. Today we’re going to discuss, where capital is flowing, in 2018 and 2019, and what commodities are active. With me today, I have starting at the far, right is Ralph Aldis who is the Senior Analyst for US Global Investors – trades on the Nasdaq under the symbol (NASDAQ: GROW). US Global Investors is a management firm specializing in actively managing equity and bond funds, specifically in the gold and precious metal space. Ralph has been with US Global since 1989 with a short break in 2000. So he has a lot of experience and is responsible for analyzing gold and precious metal companies. Next to him, is Brett Heath, he is a CEO of Metalla Royalty and Streaming Corporation.
Metalla is a precious metals royalties and streaming company and it engages in the acquisition and management of precious metals royalties and streams. Brett has been, was previously with High Stream Corporation, before Metalla acquired it in 2016 and next to him is Matt Zabloski who was the founder and lead portfolio manager for Delbrook Capitol and Delbrook is a company that specializes in alternative investment strategies and in the metals and mining space, and his flagship fund has returned, (the Resource Opportunities Fund) has returned to an excess of 14% annualized since inception in, December of 2013. And prior to starting Delbrook, Matt served as the portfolio managers with Fidelity Research, and later went on to found CI’s Cambridge Advisors. So, welcome and thank you all for coming. So we’re going to start, I think we’ll start with Ralph on the far right there. Maybe you can give us an idea, in the metals space, where you see a commodities are active these days, in areas that you’re looking at.
Ralph Aldis – Senior Analyst, US Global Investors
I’m predominantly focused on gold and what I sort of see right now that I think is quite interesting, Matthew Scholit at Credit Lyonnais, CLSA, say he put out a report just last week, and it’s talking about inflation and he citied two (2) studies that have recently come out and one of them was looking at all the Bloomberg stories that had been published on Bloomberg that had the word inflation in it and they did like a linguistic analysis of all the words and he found that inflation, looking like a year back window, that inflation was basically being miss-mentioned as the peripheral things. Now the most recent past year, inflation is coming in as the main topic. And what they were sort of stipulating is that, you know when inflation starts to become common knowledge and people start accepting it, then you start getting some more buy in it. And I think we are seeing inflation out there. If you look at the New York Federal Reserve there, they did a study on inflation and they have the what’s called the underlying inflation gauge, there is one with data, one with prices, and one looks just with data and prices. The one that includes data is compounding at about 11% per year. The other one’s only compounding on price at about 2%, inflation is out there. I think that’s going to be positive for gold. I think gold still has a very, some, a lot of room still in front of it.
CT: Even with the recent dip in the price of gold, you still think it’s of positive trends.
RA: That is the trouble I think with what people are focused on – nominal rates and they see the 10 year (rate) go above 3% and they think, this is bad for gold. But if you look at, and all the people that write these stupid stories about inflation, well with the Fed Rate hikes, and “Gold’s gonna go down”, well for the last five times that they’ve raised rates. Gold has gone up right with it.
CT: Brett, where do you see some advantages in the market these days?
Brett Heath – President & CEO, Metalla Royalty & Streaming
Well, on, so we, we look at precious metals, we’re precious metal royalty instrument company. So we don’t look, at the base metals or some of the other commodities that are kind of covered at a conference like this. You know, to add on, on Ralph’s comments on inflation from a macro perspective, looking at this sector on a micro perspective, just on the flip side, one of the metrics that we look at, along with others, but one of the main ones we like to watch is the gold-silver ratio. And in the last 20 years, it’s been over 80, about four times, actually, probably over 25 years. And every single time we’ve seen the gold-silver ratio be over 80, the next, you know, year to 24 months, typically resulted in a very, very big move on the precious metals side of it.
And that doesn’t have anything to do with necessarily the price, but what you see is that silver is just much more volatile than gold. So when Gold is going up, silver is going to go faster and vice versa when it’s going down. And when you see it at these extreme ratios, of over 80 to one, that really means, in general, forget about the price because the price has obviously gone up. But from a micro perspective, it’s telling you that, look, these are actually really cheap right now. And there’s, you know, we think a good probability that we do see around here in the future.
CT: Matt, your comments.
Matt Zabloski – Founder & Lead Portfolio Manager, Delbrook Capital
Yeah. I think for us, most importantly right now we’re looking sort of short term, long term, is really the difference – short term for us, very focused on finding the right nickel assets that are out there. We’re very involved in the base metal space, specifically nickel sulfide assets at the moment. That’s sort of the short term focus for us over the next, what we’ll call it, four to six months. Longer term, 12 to 24 months from now, very bullish on copper. But I think for us the secret is finding the companies that will catch the cycle in time. Very little interest in early stage copper exploration. I’m much more interested in late stage exploration, early stage development, as you know, potential M&A targets or on the senior producers that will get the leverage to a rising copper price. For example, Freeport-McMoRan Inc. (NYSE:FCX), is a big holding of ours right now – a 10 cent move in copper is about $300 million in EBITDA to that company. So catching the right, operating leverage within some of the copper companies.
CT: It is the copper that you’re looking at because if now being sort of grouped with the battery metal space and it is that part of that growth?
MZ: Yeah, I mean it’s to a certain degree that definitely helps. The electrification thesis is there and we believe it’s real. That said we’re not bullish on everything across that basis. I mean, I think the largest commodity short that we have at the moment is within the lithium space, playing on that entire area. So for us, it’s deconstructing the battery and understanding the cycle as it stands in front of us. That leads us to be bullish on copper and on nickel, specifically Class A nickel.
CT: OK, And what about zinc? I mean, there’s a lot of news on zinc in the last couple of years, but it seems that supply and demand curve, has sort of flattened back out again. What do you think, what are your comments on the zinc space?
MZ: Yeah, we were very early to the zinc trade. I think we, we made some good money. We can still see some zinc equities that are trading at one or two times EBITDA. Our analysis points us into basically a balanced market in 2019 but then back in a deficit in 2020. So, from an exposure standpoint, we still have net long exposure to zinc equities, and to Zinc credit. I think the easy money on that trade has been made. And we’ll need to see a move back up in the spot prices to get the market more interested in the underlying equities.
CT: Okay, just switching a little bit, to also included things on country. Brett, why don’t you comment on some of your country focus and, and places where you are investing in these days?
BH: So at Metalla, we’re actually more interested in the management and the counterparties first and we kind of look at from a jurisdictional perspective, second. We found that a rule of thumb for us is, the higher or higher perceived risk, a jurisdiction that we may go into, it needs to be a much stronger operator. Now that being said, our view of some of the peripheral jurisdictions, Argentina, a lot of Africa, a lot of South America, these countries just go in cycles. I mean, that’s, that’s really what it ends up at the end of the day. And, um, you’ll get a period where everyone’s running for the doors and then you’ll get a period where everyone’s trying to run back in.
And for us, that is kind of a countercyclical opportunity where we can pick up royalties that are really cheap. Right? Guatemala for example, is getting a lot of bad press. Tanzania is getting a lot of bad press. There’s a few places that we can see and pick up stuff really cheap, and be able to ride kind of that next wave as the royalty holder. We don’t have that same type of exposure and also costs to maintain either the assets or the properties to do it. So that’s kind of what we look at.
CT: Well yourself, Ralph, where do you see in investing in the various regions of the world?
RA: We kind of go anywhere. It depends on a little bit, just really what the asset is, but we don’t have a focus on, “we won’t go to this place or that place” and necessarily, I mean, obviously we don’t want to go to the worst jurisdiction in the world and do something but we’re not going to look it from a limiting standpoint. We’re trying to find the people and the project and when Aurelian came into existence and bought that property down there, Fruta del Norte Project, at the Ecuadorian border, that was kind of like a no go zone for a while. They were the first in and we were part of that.
CT: And you try to get in early with these companies or where do you find yourself in the investment thesis?
RA: I do try to get in early. We do have a number of companies that are less than $50 million market caps. And even you’ll see even some that are $10 million and the $5 million, but it really is a function of the people that you’re working with and usually, there’s an historic relationship there where they’ve done it before. You do have to be careful about confusing luck with skill, which is a real problem in this industry. When someone does, gets lucky and then they get funded again and it’s not so pretty.
CT: But as an investor, do you see other companies that are investing with you, these companies, are they shying away from any regions in the world right now?
RA: I’m not getting any strong, real strong feedback. I mean, obviously there is, like you mentioned, some hotspots like Tanzania, I don’t see much going on there, but, Acacia Mining plc (LSE:ACA), if they can get that tax thing fixed, that’s probably trading, 10% of the value.
CT: And what about, we briefly talked about, do you see any of the the risk capital right now, flowing into other areas like cannabis and blockchain. Do you see that affecting any of the smaller companies that are trying to raise capital that you may be investing in?
RA: Yeah, that does have a pool. Because if the investors see price action moving quite fast, then that’s a chance to make money quick. Now, for me as a portfolio manager, the biggest impact really hasn’t been the couple of the cannabis stocks and so on. It’s been the, the two big mega ETFs – GDX and GDXJ – and I’ll give you an example, I’m looking at the Bloomberg News Story, $500 million went into the GDX last week, and then that’s a month or so back. But that’s bigger than some of the gold funds that are out there. And money is going into those. It’s dumb money. All they’re doing is playing the Beta of the gold stock to the gold price. And they’re not really getting out, I think the performance they want because there’s so many bad companies that are in there, because they have large market caps for some reason. But, the problem is if the fund managers aren’t getting those flows to the, basically adjudicate value in the market. We have seen some floats, but for the most part, all my peers and I do track their assets. They, in their last year, they’re not seeing the flows.
CT: Matt, you’re sort of in a part of more innovative part of the financing you made some comments on other types of debt that you’re involved with them. What do you look at when you’re looking at a company and what sort of other investments are you making in those companies like in the convertible side, to help them along.
MZ: For us, as we market our funds on shore or off shore, getting into some of the mid caps or small caps, the biggest issue really is the equity volatility of some of the small caps. So you’ll see us, avoid the equity volatility or making a direct equity investment. Instead we’ll do something on the convertible debt side where we’ll end up with, equity-like exposure on the upside, but a bond floor of a convertible debenture. Now obviously the company has to be cash flowing in our mind or we have to be very comfortable with the asset, but trying to be innovative on the financing side, and not just run into a pure equity investment that helps us when we market to our LP’s and I think provides the fund more stability.
CT: And, Brett, when you’re looking at the stage of a company, do you limit yourself to ones that are in production that the way the royalty would be paid soon? Or how do you look at those types of investments?
BH: We look at the investments on really just a return basis. Just last week we picked up a development asset, on the Garrison project, which is an Osisko mining property, which is probably three, four years out, potentially in production. And we’ve also picked up an exploration royalty on a property called the Akasaba West, which is under development by Agnico Eagle. And these are both earlier stage properties than what we’re typically after. But what we’ve seen is that in the royalty streaming sector as a whole, they have been really reaching for cash flow. And I think it’s hurting them. I think it’s hurting a lot of the other royalty and streaming companies. They’ve kind of lived in this world of being untouchables and you can only buy so many assets at a premium to the NAV before you start to pay for it. And, I think because of that, a lot of them are trying to kind of recreate themselves. But for Metalla, we look at everything on a per share basis. So if we can get something on our development asset with a good counter party at a much more attractive price, then we’re okay to kind of wait. Although priority, obviously is cash flow and is a really good metric.
CT: As we wrap up here, I know everyone always looks for a topic or anything. Does anyone, uh, comment on things you’re looking at that you think would, uh, as a topic for some of the investors out there?
RA: Look at my top 10 holdings with the line, first thing, but, but there’s, there’s a lot of good things out there. There’s a Chakana Copper Corp. (TSXV:PERU), it’s very interesting and they presented this morning and that is a top 3-4% holding. So that’s one that I would recommend that, but there’s a number of other ones out there. The trouble in the junior mining space, they’re not, you know, they just, they’re cheap and there’s more than a handful. You could say that these are worth owning.
BH: For full disclosure, I’m a bit biased, but I think we’re (Metalla), we’re a pretty good opportunity here. A lot of these companies here are sitting around waiting for the gold price to go up. We’ve turned this into a real business. That’s the royalty model versus the exploration model, right? We don’t need the gold or silver price to go up to make our share price go up, to make value, to pay dividends, to do all the things that we’re doing. Yet, when the price does go up, you have a vehicle that’s going to give you way more leverage then most of the exploration companies out there. So, that would be my take.
MZ: I’ll be brief. On the long side for us, midcap Tahoe Resources iss a name for us, and, on the short side, a Kirkland Lake.
CT: Thank you. Thank you all.
