The Gold Report: Please sum up your current view of the gold
equities market as gold hovers above $1,100/ounce.
Andrew Pullar: To come to terms with what has happened in the gold
equities market, you have to understand what has happened to gold itself. The
overwhelming contributor to a softer market is really a stronger U.S. dollar
environment because that's not good for gold; the threat of higher rates in
the U.S. will probably keep gold subdued for some time. The U.S. Federal
Reserve indicates that even an uncertain global outlook won't delay a rate
hike for much longer, so we see gold as a real asset that is behaving like a
currency that pays zero interest. The big positive for gold is that you can't
print it, so the price over the long term should correlate well to the
increase in money supply. In other words, it should go higher.
TGR: Could raising interest rates hold any positives for gold?
AP: Raising rates may have one benefit for gold in that it could
cause unexpected market turmoil, which is risky for investors. And investors
don't like risk. But gold equities are hurting in anticipation of a softer
gold market. Gold producers have had a couple of years to focus on cost
cutting. The prospect of further low gold prices is keeping discretionary
investors sidelined.
We're also seeing that there is little capital available for resource
sector companies, which makes it tough for these businesses to implement
operational improvements, and that causes a further drag on their share
prices. It's not a great environment, but we think that over the medium to
long term, there is light at the end of the tunnel.
TGR: Does that provide greater opportunity for The Sentient Group,
given that there is less capital available and you have capital to deploy?
AP: It does. There are a lot of opportunities out there. I wouldn't
classify all of those as investment-grade opportunities, though. Many of them
don't meet our long-life, low-cost, world-class asset style of project that
we're looking to invest in. Sentient is a private equity company that focuses
on investing in and building companies in the natural resources sector. It's
something that we've done successfully since 2001, and we don't do anything
else.
TGR: You had success at Baker Steel Capital Managers as a portfolio
manager. How has your approach changed with The Sentient Group?
AP: We still use some of the underlying fundamentals of company
valuation. Baker Steel has a dynamic team of market experts who are very good
at picking stocks and trading around a core position. Baker Steel took
positions in a lot more companies than Sentient does, and it took smaller
positions. Sentient, being a private equity fund, has the mindset of a
business builder, so we take much bigger positions in companies. Sometimes we
own the whole company, both public and private, and we don't have the luxury
of trading away from a position if things don't go according to plan.
TGR: How do you justify such large ownership interests?
AP: It's about identifying something up front, making a judgment
and then backing that judgment. Because we're a private equity fund, we have
the luxury of having a much longer timeline. We make an investment with a
view to being there for 5 to 10 years, almost a complete cycle in the mining
industry. If that company keeps meeting the goals being set for it over time,
then we are going to keep supporting it. Once again, our mindset is as
business builders. You don't have much influence when you're a 5%
shareholder. With a 20% stake, you can get a board seat and start to
influence the direction of a company.
TGR: You talked earlier about investments that meet your investment
hurdles. Let's talk about some. What are your preferred jurisdictions?
AP: Essentially, those would be Australia, Brazil and Argentina
because that is where we have deployed the most capital. We have a big office
in Sydney and a number of people from Australia, so that has been a logical
place for us to go. Brazil is one of those jurisdictions where you can find a
new district or a new basin, and those are opportunities you don't often find
in countries that are considered more stable jurisdictions. Although Brazil
has had highs and lows, it is a country that is supportive of the mining
industry. These countries have an incredible mineral endowment. We look at
geology first to establish whether there is potential to have a long-life,
low-cost, world-class asset. These don't come along very often. When they do,
they deserve capital.
TGR: What are some other ways that you support your investments?
AP: The due diligence we do up front is based on a risk matrix that
is really quite complex. At every point, at every stage through the
development cycle, we will reassess whether or not an asset is meeting its
goals. We provide technical and financial expertise and, most importantly, we
provide capital. At each stage, though, we'll be expecting at least a two
times return.
TGR: At what point in the investment cycle are you typically
exiting your position?
AP: In a perfect world, we would exit a position when it first
comes into production. We have to be cognizant that the new investor also
wants to make a return on capital, so the point at which the development
capital has been deployed and the company is now entering into a cash flow
position suits a certain kind of investor. That is a good time for us to
exit. In a down cycle, it's not as easy because companies generally aren't
getting taken out early for a premium. So in the down cycle we just keep
ticking off the goals, and we're making sure that the companies are meeting
their development expectations. If they are achieving what they are meant to
be achieving, then as we move through into a better market, we should be able
to start exiting some of these companies close to the point at which they are
reaching production.
TGR: Tell us about some companies in which The Sentient Group has
positions?
AP: We own 100% of Enirgi Group Corp., our largest holding. It's a
company with six divisions that own and operate world-class assets throughout
the world. One area of focus is the development of a lithium resource at
Salar de Rincon in Salta province, Argentina. Internal combustion engines are
far more complicated and far less efficient than electric engines, which run
on lithium-ion batteries; therefore, there's a real future for this industry.
Enirgi plans to be a meaningful supplier of lithium to the automotive sector.
We believe the recent shenanigans from Volkswagen AG (VLKAY:OTC) will only
accelerate the transition away from internal combustion engines to electric
in coming years. We have invested a lot of capital in Enirgi. It's still private,
but we think it's going to be a real success.
TGR: Any others?
AP: Ferrometals BV is an earlier-stage version of Enirgi. It's in
joint venture with Cancana Resources Corp. (CNY:TSX.V), and it's using the
intelligent application of geology and innovation to explore for and develop
a manganese project that we think has the potential to become a world-class
manganese mine. It is early stage, but the grades are some of the highest
anywhere in the world. We're excited about it.
TGR: You essentially structured Ferrometals as a vehicle to support
Cancana. Is that correct?
AP: Cancana had an interesting opportunity, and we really liked
that asset, so Ferrometals was established to enter a joint venture with
Cancana. We have a position in Cancana, and we have a direct position in the
project through Ferrometals.
TGR: What do you see in the BMC manganese project in Brazil that
made you basically build a company in order to shape its development?
AP: If you look at the global consumption of manganese, the vast
majority goes into making steel. There is, however, a niche market in the
fertilizer sector that is not widely known. You need a specific, high-grade,
high-purity product for use in the agricultural sector, and Cancana has that.
The ore grade is higher than anything else we've seen. That led us to believe
that this asset could help supply the fertilizer sector in Brazil. As you
know, Brazil is an agriculture powerhouse that depends heavily on its
micronutrients to support the sector. Manganese is an important part of that.
The second thing is that our experienced geologists identified a large
exploration target in and around the existing tenements at BMC that could
contain a large, high-grade manganese resource. That means it could become a
long-life, low-cost, world-class asset. In addition, it's situated in an area
that is central to the distribution of fertilizers in Brazil, so we can see
other avenues of the business potentially opening up with time. We
essentially funded a drill program and that's looking promising.
TGR: What's the timeline to profitability there?
AP: At the moment, a small amount of manganese ore is being mined
daily, which then gets shipped to market. In the next couple of years the
idea is to essentially prove up a large resource. An Inferred resource should
be published sometime next year, and then that resource is going to have to
be upgraded, at which point there will be a feasibility study. The big
deposit has not been discovered yet—we have discovered areas of it—but we
think that the really big one has yet to be unearthed. At the moment, we have
an operational mine on site, which will be used to complement any financing
that the company needs.
TGR: Manganese is not Sentient's only agricultural interest in
Brazil.
AP: Yes. Before we made the investment in Ferrometals and Cancana,
we had a private company called Brazil Potash Corp., which essentially
controls most of a potash basin in the northern part of Brazil. You really
can't find an opportunity like that elsewhere in the world. Brazil Potash is
one of the companies that is going to be feeding the potash sector. Brazil
imports 90% of its potash, which is ridiculous given the potash endowment in
the northern part of the country. So, we believe we're onto something very
good there. We completed a feasibility study on that asset, and it looks very
promising.
TGR: What are some other positions you could tell us about?
AP: North
American Nickel Inc. (NAN:TSX.V) is a company that has the Maniitsoq
nickel-copper-cobalt-PGM sulphide project in southwest Greenland. It is
district scale. Recent drill results showed an intersection of 23.7 meters at
1.98% nickel with 0.62% copper and 0.19% precious metals. You don't often get
mineralized intercepts for nickel like that. Maniitsoq is a sulphide resource
over a huge area. It's almost too much ground. Sentient likes North American
Nickel because it's district scale and it could, again, be a long-life,
low-cost, world-class asset. There really are not many massive nickel
sulphide projects around the world, so when you find one, you take a good
look.
TGR: Greenland doesn't have much of a history as a mining
jurisdiction. Is that a concern?
AP: I was in Greenland about four weeks ago because I wanted to see
this project firsthand. I was tremendously impressed with the attitude of the
local officials toward mining in the region. They are tremendously
supportive. There are a number of mining projects and a couple of mines. The
geology is amazing. Most of Greenland is covered by an icecap that is about 3
kilometers thick. The eastern side has a problem with ice flow but on the
western side there is clear, year-round access to Maniitsoq. In addition, it's
quite easy to identify structures through the use of typical exploration
tools like aerial electromagnetic surveys. The company has been quite
innovative about using sophisticated aerial surveys to identify additional
gossans. I was blown away with the country's potential. A lot of companies in
Greenland are struggling to raise capital. We've identified North American
Nickel as one that's worthy of investment. We're sticking with it.
TGR: You also have a position in a company that's exploring for
gold in Finland. Tell us about that one.
AP: Mawson
Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE) has some gold projects in
Finland. It's the only place I've ever seen visible gold outcropping at
surface. A couple of our geologists went there for a site visit and
identified what could truly be high-grade resources. Now, one of the problems
is that the initial areas that were being explored were coming up nuggety, so
it was difficult to piece together a decent resource. But the extent of the
gold mineralization was incredible. The company re-evaluated things and then
started looking farther east at another deposit where we think Mawson has
found something meaningful. It's near-surface mineralization, which means
it's open pittable, and high grade. I'm watching those results carefully. In
this environment, if you're going to develop a gold project, it has to be in
the lowest-cost quartile because those are the only ones that are going to
get funded.
TGR: Is it anywhere close to Agnico-Eagle Mines Ltd.'s (AEM:TSX;
AEM:NYSE) mine in northern Finland?
AP: It's a little bit further south than Kittilä. There are a few
companies operating up there. Finland is a country with tremendous potential,
and it actually has a mining history. They have been mining there for a long
time. The thing about Finland, though, is you have to be the best corporate
citizen you can be there. As with all the projects that we invest in, you
need to make sure that things are happening to the highest standards because
there are very tight environmental standards that need to be adhered to. It's
a case of being a good corporate citizen.
TGR: Can you tell us about a project in Panama?
AP: I was once on the board of Pershimco
Resources Inc. (PRO:TSX.V), which bills itself as the next gold producer
in Panama. Its project is heap leachable, and there is upside potential from
the gold oxide resource; you don't find many gold oxide resources these days.
The idea is that the existing resource could be multiplied a couple times
over just by stepout drilling on some of the additional oxide targets. It
also has the potential to host a large copper porphyry system, and a lot of work
has been done to understand the geology of that.
Pershimco still needs one significant permit and financing. If it had all
of its permits and capital, it could be in production in 12 to 18 months.
Building the mine would not take long because it's relatively small and a lot
of the infrastructure is in place. It is a near-term producer, assuming that
it has the capital and the permits.
TGR: What is one thing investors should constantly remind
themselves about in this space in this market?
AP: The big clock keeps turning, and cycle lows will turn into
cycle highs with time. World-class assets don't come around very often, so if
you're lucky enough to find one that comes with a strong management team and
decent jurisdiction, back your judgment and try to ignore the volatility.
TGR: Thank you for talking with us today, Andrew.