The Gold Report: Warren, I just got your latest partnership
numbers. It looks like you're off to a great start for the new year, up
20.38% through February. I think we first met around 2006 when you were up
121%. That was quite the year.
Warren Irwin: Yes. We have a shot at a 100% year this year, too.
TGR: Would you describe for our readers your investment approach
and what makes you different from a lot of other people?
WI: What makes us different is Rosseau Asset Management does heavy,
in-depth research for very specific events or situations that are special
within industry sectors. Because we spend so much time on the names, we run a
reasonably concentrated book. For example, we are able to go into the gold
sector and pick the top two or three situations where companies are either
drilling out properties and creating resources or making big discoveries,
something unique to the company itself rather than making a raw bet on the
price of gold.
TGR: When you say a relatively small book, during a given year, how
many positions might you have?
WI: We try to keep the number at or below 20 names. One thing that
helps us a lot, too, is our hold periods are quite long, usually three to
five years and sometimes longer.
TGR: Let's get to some of those names. What are some companies that
you are excited about?
WI: I'll start with NexGen
Energy Ltd. (NXE:TSX.V; NXGEF:OTCQX), which just put out its maiden
resource estimate. NexGen is a perfect example of an event-driven situation
in that, although the fundamentals for uranium look very good over the next
few years on a supply-demand basis, the commodity hasn't started to run yet.
What is fascinating is NexGen has managed to find a massive new uranium
discovery in the Athabasca Basin. It's very exciting and could be worth, at
the end of the day, multiple billions of dollars.
TGR: The day of the news release, NexGen had a pretty big pop on
volume, going up $0.27/share.
WI: Yes. It's a unique discovery. My original estimate from our
proprietary resource model was 200 million pounds (200 Mlb) U3O8. The NI
43-101 did indeed come in around those levels at 202 Mlb. The market was
actually expecting a lot less than that. We have long since touted 200 Mlb,
and we were right on the money with that. We plotted every single drill hole
and went very in-depth with our model to determine the size of the discovery.
Having our own model is extremely time-consuming but allows us to really
understand what the company is doing.
NexGen Energy's Athabasca Projects
The current winter drill program is underway. We believe NexGen has the
potential to add between 100 and 200 Mlb to that resource. So there is a
potential for a doubling of the resource over the winter drill program. Long
term this has the potential of being the largest uranium mine in the world.
TGR: How long have you been in this stock? When did you start
building a position?
WI: I first visited the property in 2014, and I've been watching it
ever since. We started building a position mid-year last year. Right now the
stock is extremely undervalued. It's probably trading at about a third of the
value it should, even with the run-up with the news release. Putting out more
results is not going to improve the situation. What it basically needs now is
to have more people be aware of what an extraordinary discovery this is, and
realize that it's very undervalued.
Canada is viewed by many utilities as the premier supplier of uranium to
the world, and all of Canada's three uranium mines are in the Athabasca
Basin, as is NexGen's discovery. But what's unique about NexGen is it's not
in the sandstone or at the unconformity, which is the border between the
sandstone and the basement rocks. When you're dealing with sandstone, it's
water saturated, so there are a lot of water ingress issues. But for NexGen's
deposit, it will be just regular underground mining in the basement rocks.
It's very easy to mine and very attractive. And the scale of the deposit is
clearly attracting the interest of all the global miners.
TGR: What about another opportunity?
WI: There is Canadian Overseas Petroleum Ltd. (XOP:TSX.V). I've been
in the business 30 years, and I have never seen a higher-octane, more awesome
risk/reward situation than this one, which involves the former CEO of Oilexco
Inc., Arthur Millholland. Oilexco grew to a multibillion-dollar company but
collapsed in 2008 as a result of a liquidity crunch when its bank ran into
financial difficulties. When Millholland started up a new company, Canadian
Overseas Petroleum, I was one of the first people to back him.
The company managed to obtain Block 13 in offshore Liberia, a very
lucrative oil block. Millholland put his technical team on this project, and
they found that the targets on the block are quite extraordinary. It is
exciting enough that Exxon Mobil Corp. (XOM:NYSE) paid $130 million ($130M)
to get involved in the project and, in addition, agreed to spend $120M to
drill the first few wells. It's a very strong stamp of approval, Exxon moving
forward with this project and deciding to partner with a very small junior.
Generally, juniors don't operate in the offshore realm, so Canadian Overseas
Petroleum is rare in that respect. Exxon was prepared to drill the initial
wells about two-and-a-half years ago when the outbreak of Ebola in Liberia
took place, and Exxon shut down its offices in Monrovia. We've basically been
delayed two-and-a-half to three years. Exxon mentioned in a press release
late last year it looked as if it was prepared to drill the well in late
2016/early 2017.
Canadian Overseas Petroleum Block 13 Offshore Liberia and Nearby Holdings
The market cap for Canadian Overseas Petroleum is sub-CA$20M, yet it would
participate in a well of which it would own 17%, and Exxon is prepared to
spend $120M drilling it. What's exciting is the reserve engineers are
indicating that if there is oil found in the target areas, the expected
recoverable number of barrels net to Canadian Overseas Petroleum is half a
billion barrels, worth in today's market about US$2.5 billion. So a company
trading at less than CA$20M, if successful, could be trading at multiple
billions of dollars in market cap, or several dollars per share. The
important thing to note here is that even in this terrible time with respect
to oil exploration, Exxon is still keen to move forward.
TGR: This is offshore drilling. How long does it take to do that
drilling and to get the results?
WI: It would take several months to drill the first hole. If a
discovery is made, there will also be certain production tests that Exxon
will need to do. Then once that is completed, there's also a follow-up No. 2
target. So the news will not stop. There are lots of exciting and interesting
things happening.
TGR: What sort of a depth are we talking about?
WI: Deepwater offshore in about 6,300 feet of water.
TGR: Did you have metal companies that you wanted to talk about?
WI: We're involved with GPM Metals
Inc. (GPM:TSX.V). It's a very interesting story. The company started five
years ago to acquire the rights to the Walker Gossan in northern Australia.
That was a project Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK)
has held since the early 1970s. Rio Tinto held on to this property because it
believes it's a world-class prospect, but it hasn't had any luck moving the
project forward with the traditional landowners in Australia. GPM Metals was
able to strike a deal with Rio Tinto over two years of negotiations, and then
in another two years of negotiations with the traditional landowners, it was
able to strike up an access agreement. With certain payments, GPM Metals
could earn into 75% of the project.
The majority of the large gossans in this region have turned out being
large zinc mines. Along trend with the Walker Gossan are zinc mines like
McArthur River, Mt. Isa and Century; it's the only undrilled major gossan in
that trend. It's a very good risk/reward situation. GPM Metals' CEO is Pat
Sheridan Jr., a proven mine finder. He was involved with both the discovery
and building of the Aurora mine for Guyana
Goldfields Inc. (GUY:TSX) in Guyana.
Walker Gossan Project Area
What I like about this situation is, again, we're dealing with one of the
world's largest mining companies as a partner. Rio Tinto would only have held
this project if it believed it was prospective to be a world-class discovery.
There's the possibility of a very exciting world-class discovery of zinc.
Right now zinc's fundamentals look very good. I'm told by my mining
contacts that the supply of zinc concentrate is getting very tight. I would
not be surprised to see a very strong rally in zinc before too long.
TGR: Have there been zinc mine closures?
WI: The massive Century mine has closed recently. Also, Glencore
International Plc (GLEN:LSE) has announced capacity shutdowns. The
fundamentals on the supply/demand side for zinc look very good.
TGR: What sort of timeline are we looking at for GPM?
WI: GPM has done soil sampling that indicates there's an abundance
of lead on the property. The gossans are a weathered outcrop of
mineralization. The original outcrop would probably have contained lead and
zinc, but the zinc has been weathered away over time. Finding lead at surface
on the gossan is a very good indication that there is possibly zinc
associated with the metal system. The initial geochem work has been done, and
now, over the next 12 months, there will be follow-up drilling taking place
where GPM will be testing to see if there is an economic zinc deposit there.
If there is a discovery, it will take a few years to drill off the deposit
and then years more to put the mine into production.
TGR: Could there be a revaluation of the stock based on it figuring
out if it is economic and the zinc price going up?
WI: Yes. If so, there will be a massive bump in the price of this
project. If we end up with a world-class discovery in a very strong zinc
market, this project will be worth a lot of money.
I also want to mention that these three companies are more rock 'n' roll
than blue chips, but for people who have a tolerance for high risk, they're
very good risk-reward trades.
TGR: You mentioned Guyana Goldfields. Any comment on this company?
WI: I've followed Guyana Goldfields for about 20 years and have
always been impressed with CEO Pat Sheridan Jr. I watched him from the
original discovery right through to putting the mine in operation. I've been
very impressed with Pat, and that's part of the reason I'm backing him again
with GPM Metals.
Aurora Mill, Guyana. Photo courtesy
of Guyana Goldfields.
TGR: Any last closing words to our readers on what we should look
forward to for the balance of this year, and why you think it could be a 100%
gain for your portfolio this year?
WI: I believe the bottom is in for the majority of the metals and
there is tremendous value in the mining sector. Before too long, we'll
probably start seeing a recovery in oil. Being in the resource sector is a
really exciting and interesting place to be. It's been beaten up over the
last number of years and I think the sector represents tremendous value.
TGR: Warren, I appreciate you taking the time.
Warren Irwin is president and chief investment
officer of Rosseau Asset Management Ltd. He founded the firm in 1998 after
several successful years as vice president and director of special
investments at Deutsche Bank Canada. The firm's flagship event driven hedge
fund, Rosseau LP, was established on December 31, 1998, and has since earned
a reputation for solid long-term performance earning over 50% the return of
its benchmark index. Irwin started his career as a bond analyst for Scotia
Capital Markets where he developed the Universe Bond Index, the Canadian bond
market benchmark, and shortly thereafter developed and managed Canada's first
bond index fund. He is a Chartered Financial Analyst and holds a Bachelor of
Mathematics from University of Waterloo and a Master of Business
Administration from the University of Western Ontario.
