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There's more to fertilizer than potash, according to Windermere
Capital Managing Director Brian Ostroff. He touts
the value to be found in phosphate and offers his take on how the unrest in
Africa, environmental concerns, global food prices and basic geology drive
the phosphate market in this exclusive interview with The Energy Report.
The Energy Report: Brian, please
start by sharing Windermere Capital's investment philosophy.
Brian Ostroff: Windermere
is an investment manager. We currently oversee two hedge funds with a natural
resource focus. The Breakaway Strategic Resource Fund and the Navigator
Fund are both offshore hedge funds based in the Cayman Islands. They are
open-ended funds designed for high net-worth individuals and institutional
investors. They are quoted on the Irish Stock Exchange, but subscriptions are
done directly with the fund. Most of the people here have technical
backgrounds as opposed to a financial or capital markets background. We have
two partners in our fund—Ocean Partners, which is made up of the former
ores and concentrate trading team at Pechiney and Peter Hawley and his group.
These guys have all been in the business for +30 years, building and
operating mines.
The other area where we think differently from other funds is that we
are active investors. We tend to take fair-sized stakes in the companies in
which we get involved. Then, we try to help the company going forward by
making additions on its board, perhaps helping it operationally, assessing
its assets and either helping the company divest or find other assets.
Finally, we are extremely value oriented. We tend to look at a
company and assemble a peer group. We try to understand why a given company
is trading considerably cheaper than similar operations, and then we identify
the issues and how we could close the gap. After that, we have a discussion
with management to see that we're all on the same page. Once again, we are
active—not activist. We have a meeting of the minds and when everyone
is comfortable with the business plan, we tend to make our investment.
TER: Would you tell us about the differences in
your two funds?
BO: The Breakaway Strategic Resource is mining
only. Due to the technical expertise to which I alluded, the fund can make
investments anywhere along the spectrum. Originally, we looked to buy
distressed assets, even outright buying the properties or the mines. We do
structured debt through our partners and offtake
deals all the way through outright investment in the company's equity. I like
to describe Breakaway as a complete "rocks to stocks" investor.
TER: And what about Navigator?
BO: Navigator is all natural resources. Aside
from mining, it also does energy and agriculture, paper and forest, etc. Its
investments are primarily in publicly traded equities; however, we do have
some room for near-public investments (i.e., those that we think can go
public within about six months).
TER: Aside from precious metals, does the
Breakaway Fund invest in other mining operations?
BO: We tend to have a place in our portfolios
for niche commodities, or what I call the funky metals. That would be
strategic metals, not necessarily rare earth elements (REEs) but things like
graphite or vanadium.
We've become fairly involved in phosphate, which is a necessary
component of fertilizer. Currently, potash is on the minds of most
agricultural investors as the area has done very well. I think we may be
going into a time when people will start to look at phosphate. There are a
couple of important things to understand in the world of phosphate. First,
there are two types of phosphate deposits. Most—probably 90%—are
sedimentary; the rest are igneous.
Most of the world's production comes from the sedimentary deposits.
But they tend to have a lot of nasty contaminants in them. And due to the
mineralogy of the sedimentary deposits, the concentrate that comes out is not
as high as the concentrate that you can get out of igneous deposits. That can
be a confusing factor for people who are not that familiar with the industry
and the types of deposits. People will look at a 25% sedimentary phosphate
deposit, and then look at an 8% igneous phosphate deposit and come to the
erroneous conclusion that the 25% deposit is better than the 8%.
TER: But you would make a better margin on the
igneous because you don't have to purify out all the cadmium and uranium and
such, right?
BO: Right. A sedimentary deposit might start
at a 25% grade, but when you beneficiate it, you're not going to get much
higher than the low- to mid-30% range. Whereas, because of the mineralogy,
you can beneficiate an 8% igneous deposit as high as 40% grade. What you
really have to look at isn't your starting grade, but rather what the
concentrate will be and, ultimately, the price you will be able to get for
the product.
The other interesting thing about the world of phosphate is that,
right now, China is the largest producer, but it doesn't export. The biggest
player in the world of phosphate export is Morocco. Morocco comprises roughly
35% of the entire phosphate export market, which really makes the country the
swing factor. Other players in the space include Jordan, Tunisia and Egypt.
Given the turmoil in North Africa, that could present a big problem to the
world.
Right now, North America runs a deficit in phosphate. We have to
import it now and will continue doing so for the foreseeable future. Canada,
while rich in potash, only has one operating phosphate mine—and that
mine will probably deplete within the next two to three years. The other big
phosphate areas in North America are Idaho and Florida. Both of these are
sedimentary-type deposits, which brings environmental issues into play. In
Florida, environmental problems have brought shutdown threats. One Florida
mine operated by The Mosaic Company (NYSE:MOS) was shut down. It currently has a stay of
execution, pending appeal. But, if that were to close, it would only
exacerbate the deficit that North America runs.
In terms of pricing, phosphate is very different from things like
gold and copper, which have a global price. Gold is gold and it's at or above
US$1,450/oz. everywhere in the world.
TER: You can't arbitrage gold.
BO: Correct. Gold coming out of Chile, Australia,
South America or Canada will get the same price in the open market; whereas,
phosphate is a negotiated market. Contracts and things like location,
transportation and quality of the concentrate are going to be the driving
forces. That means pricing on all phosphate is not the same. The closest
thing that we have to a benchmark is Moroccan FOB (freight on board), and
that's roughly US$150–$160 per ton.
At the end of the day, it all comes down to what's the investment
opportunity in phosphate? Our current view is that the world is quite aware
of potash; potash stories have done extremely well and are actually quite
numerous. Now, people are waking up to phosphate—and there are nowhere
near as many opportunities in phosphate as there are in potash.
As investors start to understand the importance and the dynamics of
phosphate, there will be increased investor demand. With considerably fewer
situations to look at relative to potash, even a small shift out of potash
into phosphate will have a pretty significant effect. I anticipate the
sector, as a whole, will perform quite well.
TER: It also serves as a nifty hedge against
falling dominos in North Africa.
BO: Absolutely. Supply security has become an
increasingly important investment theme. Certainly, in the case of phosphate,
it would be very important.
TER: Where does an investor take advantage of
this opportunity?
BO: There are several names in the phosphate
sector. Our fund is a large investor in a company called Ressources d'Arianne (TSX.V:DAN;
OTCBB:DRRSF; Fkft:JE9N), more commonly referred to as Arianne Resources
Inc. The company is based in Québec, so that addresses the security of
supply. And it has easy access to the deprived North American markets.
As North American phosphoric acid producers for fertilizer start to
look for more phosphate deposits in North America, Arianne will be very well
situated. It's close to infrastructure; an overload road that currently carries
timber runs right through its property. It is within easy trucking distance
of both a deep-sea port and the railway.
Arianne has an igneous deposit that yields a very pure concentrate,
near 40% grade. The company already has a scoping study and it's drilling to
expand that resource. Arianne should have its prefeasibility report out
sometime this summer and the original scoping study shows very healthy
economics on this project. Actually, we find it is more advanced than most of
the phosphate stories out there. It currently trades with just a US$60M
market cap. This goes back to the question of where Windermere finds value.
Relative to its peer group, Arianne is definitely at the bottom end with what
we consider a superior asset.
TER: How long have you owned it?
BO: We've owned it for a little less than four
months.
TER: Arianne's stock is up almost five times
over the past six months. Any stock would be due for a pullback after that.
Yet, you still see this as a value play?
BO: Absolutely. For us, value is a relative
matter. So, although the stock has performed very well and is up about
fivefold over the last few months, it also has pulled back about 40% from its
highs. Arianne has a US$60M market cap. The closest peer would be somewhere
around a US$130M market cap, ranging all the way up to about a US$300M market
cap.
TER: Arianne Resources produces many different
metals in addition to its phosphate division, but you're saying that
phosphate is the mover, the catalyst for this company.
BO: Yes, Arianne owns exploration assets in
other commodities but its main focus is the phosphate deposit. That is where
the company is focusing 100% of its energy.
TER: In the first half of February, we saw some
really unusual activity in Arianne's shares; in fact, it was so pronounced
that the company put out a press release saying it had no knowledge of any
material change. Was this a manifestation of home gamers, day traders, do you
think?
BO: No, I think what happened was that, when
the agricultural cycle started to heat up again as a whole, people started to
take a look at Arianne in light of our investment. They came to the same
determination that we had, which was, relatively speaking, this company looks
really, really cheap. As the stock started to appreciate, it gained momentum.
More people saw the name and took the time to understand the situation. That
continued to drive it.
TER: There was a lot of press at the end of
2010 and continuing into 2011 about the rising cost of food all over the
world. I know that had an effect on fertilizer stocks—both phosphate
and potash—but there was also anticipation of Lac à Paul deposit
results. Do you think that could have been part of it, as well?
BO: Certainly, Arianne put out some results.
Those numbers will be reincorporated into its resources numbers associated
with the prefeasibility study. Previous drilling in that zone had been done
only to 200 meters. The drilling that came out in February was down to the
400-meter level and showed the continuity of the deposit.
TER: Does Arianne own any of its own supply or
processing chain?
BO: No, the company is in exploration mode. I
think the prefeasibility study will start to determine what needs to be done
to put this thing into production.
TER: And therein lies
the value.
BO: Yes.
TER: Do you have another name for us in the
phosphate sector?
BO: Yes. Going a little further down the
chain, we are currently in the process of making an investment in a company
called Glen Eagle Resources Inc.
(TSX.V:GER), which is very, very early stage. Drilling on its property isn't set
to commence until sometime this summer. The company picked up a property, Lac
Lisette, which is 40 kilometers away from Arianne's
property, attached by the same main road. Preliminary results from some grab
samples seem to indicate a similar type of deposit; but, of course, until the
drilling is done, it is a bit of a question mark.
TER: Obviously, you saw something in it that you
liked. In fact, your investment philosophy is to be early.
BO: Glen Eagle's proximity to Arianne, the
fact that it is an igneous deposit in the same general macro-phosphate and
proximity to infrastructure are advantages. And given the North American deficit
in phosphate, we think there would be room for a couple of quality assets in
that area.
TER: Those are a couple of good phosphate
stories, Brian. Thanks for your time.
Brian Ostroff joined Windermere Capital, Inc. in 2009 and is a managing director. His area of focus is the junior
and mid-tier mining sector. His previous experience includes a stint as a
proprietary trader at a major Canadian bank and four years trading on his
own. He also worked at the M&A advisory firm Goodrich Capital, where he
was the Canadian managing partner overseeing mandates across a spectrum of
industries with a focus on display technologies and mining. He worked at RBC
Dominion Securities, where his focus was on smaller-cap special situations
and alternative investments. Brian is a graduate of the University of
Toronto. He can be reached at bostroff@windermerecapital.com, 514-908-4202. DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview.
She personally and/or her 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: Strathmore Minerals and Mawson
Resources.
3) Mickey Fulp: I personally own shares of
the following companies mentioned in this interview: Strathmore, Mawson and Uranium Energy. I personally am paid by the following
companies mentioned in this interview: Strathmore Minerals and Mawson Resources.
The Energy
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